By Kim Da-ye
The government is mulling over limiting the issuance of foreign-currency denominated bonds known as “kimchi bonds” as domestic firms allegedly abuse them to borrow cheaply, sources said Tuesday.
Domestic businesses have increasingly issued kimchi bonds as borrowing rates for U.S. dollars have dropped thanks to the near-zero rate policy by the U.S. Federal Reserve.
The country’s financial authorities found that those bonds were bought by foreign banks’ branches here which gave out Korean won instead of foreign money through a currency swap.
As a result, the companies could borrow won at rates lower than the average lending rate for businesses that reached nearly six percent in March.
But the government last July banned Korean companies’ domestic use of borrowed foreign currencies in order to stabilize the structure of the country’s foreign debts. In other words, Korean companies can no longer borrow U.S. dollars from abroad and spend them here after changing them into won.
The government sees the recent increase in the issuance of kimchi bonds as a back-door method of ultimately borrowing in won, a Financial Supervisory Service (FSS) official said.
The volume of kimchi bond issuance dropped to $1.38 billion in 2009 from $6.34 billion in 2008, and recovered to $6.15 billion in 2010. This year, the first quarter alone recorded a volume of $3.7 billion, $2.2 billion of which was issued by private companies.
The FSS official said that the financial watchdog and the Ministry of Strategy and Finance are considering how they would regulate the issuance of kimchi bonds as they are aware that many Korean firms are circumventing regulations.
The FSS began a joint investigation into financial institutions’ management of foreign exchange with the Bank of Korea (BOK) last week. Concerned about the steep appreciation of the won, the two are focusing on financial institutions holding foreign currency-based financial derivatives such as forward exchange contracts and non-delivered forwards while looking into their buying of kimchi bonds.
Local newspapers reported that kimchi bonds were mainly bought by Japanese banks.
The government is trying to control businesses’ borrowing of foreign currencies by issuing kimchi bonds because expansion in short-term borrowing could hurt the stability of the economy.
The amount of short-term borrowing rose to a 32-month high of $6.72 billion in March ― up from $3.08 billion in February.
“The market is in good shape right now, but when the economy takes a downturn, countries with a high volume of foreign debt are attacked on the global financial market,” the FSS official said.
“When speculative forces choose a target, they often look into the structure of a country’s foreign debts including short-term borrowing, the total amount and foreign loans taken out by businesses.”
He said that Korean firms could benefit from low rates on kimchi bonds in the short term, but the government’s attempt to cool down the foreign exchange market could help their stable growth in the mid- to long-term.
Kimchi bonds are different from Arirang bonds, won-denominated securities issued by overseas institutions. They are categorized as Eurobonds, a term indicating non-native currency denominated bonds.
Kimchi bonds were first introduced in Korea in June 2006 when Bear Sterns, a U.S. investment bank bailed out during the crisis, issuing securities worth $500 million.