Korea to revitalize debt financing of SMEs

[THE INVESTOR] South Korea will seek to boost debt issues of small and medium-sized enterprises with credit ratings of below “A” through increased investor protection and opening up new channels for debt financing, the top financial regulator said July 1.

This comes as investors are becoming more risk-averse, investing only in high-grade bonds issued by Korean conglomerates amid decreasing market confidence and a global slowdown.

With its measures, the Financial Services Commission seeks to reinvigorate debt financing of small businesses in the face of growing economic uncertainties.

“Besides Brexit, uncertainties are growing over the US and Japan’s monetary policies, China’s slow growth, decreasing international oil prices and low inflation,” FSC chief Yim Jong-yong said in a meeting on financial market reforms.

He added that it needs to improve the environment where investors and small businesses can exchange capital freely under the given circumstances.

The regulator will allow companies to issue bonds, while offering their account receivables and intellectual properties as collateral as a means to boost investor protection, as well as to help those with credit ratings of “A” or lower secure funds to finance their operations.

The Korea Development Bank and Industrial Bank of Korea will launch a 100 billion-won ($87 million) fund that will help invest in bonds issued by SMEs or start-ups after the valuation of their intellectual properties.

The regulator also seeks to boost asset managers’ debt funds, which will be reviewed by credit rating agencies without charging audit fees to fund managers for about two years. Should the funds exceed standard ratings, asset managers will be allowed to expand their funds by inviting institutional investors such as pension funds and securities companies.

Furthermore, it will introduce private debt funds, enabling private equity firms to provide direct financing to small businesses. Private equity firms can now offer loans and later become shareholders of the companies.

Debt issues slid to some 10.1 trillion won in May. Corporate bond issues came to 3.5 trillion won, down 1.2 trillion won, or 25.8 percent, from April, according to the Financial Supervisory Service.

Corporate bonds with a rating of “AAA” only saw an increase in issuance, and the ratio of quality corporate bonds with a rating of “AA” or higher expanded from 76.9 percent to 81.8 percent of the total.

Debt issues of companies with ratings of below “A” fell to 34.7 trillion won last year, from 58.7 trillion won in 2012, with the ratio decreasing from 40 percent to 23 percent of the total.

Equity issues slightly decreased 1.4 billion won, or 0.8 percent, to 169.6 billion won in May.

There were two initial public offerings on the KOSPI, and equity issues through the IPOs increased 7.5 billion won, or 6.2 percent, from the previous month. Secondary offerings decreased by 8.9 billion won, or 17.2 percent.

By Park Hyong-ki (hkp@heraldcorp.com)