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| Finance Minister Hong Nam-ki, left, speaks during an emergency economy meeting at the Government Complex in Seoul, Wednesday. Yonhap |
By Lee Min-hyung
The government, the Bank of Korea (BOK) and a state-run bank will establish a 10 trillion won ($8.13 billion) special purpose vehicle (SPV) to purchase corporate bonds and commercial papers from COVID-19 hit companies with low credit ratings, the finance ministry and the central bank said in a joint press release Wednesday.
The decision is seen as an additional governmental step to expand market liquidity as the global pandemic shock is bringing longer-than-expected economic turmoil here.
The BOK and the Korea Development Bank (KDB) will provide 8 trillion won and 1 trillion won, respectively, via loans. The remaining capital will be funded by the government. The Ministry of Finance and Economy said the size of the SPV could double in accordance with how the virus aftermath unfolds and affects the local financial industry.
Under the initiative, the SPV will purchase corporate bonds mostly in the AA-rated category as well as some BB-rated bonds if their rating was downgraded in the aftermath of the coronavirus shock, the central bank said. The SPV will be run for six months.
This is a noteworthy difference between the SPV and a 20-trillion won bond market stabilization fund set up in March.
The latter only purchased A-rated bonds, in what some critics argued said was a move not in the right direction, as companies in more desperate need of financial support were not eligible.
However, the SPV is expected to help companies more vulnerable to the virus shock.
"The vehicle was established to back up companies in a financial blind spot and is primarily aimed at purchasing corporate bonds and commercial papers with low ratings," Financial Minister Hong Nam-ki said during an emergency economy meeting, Wednesday.
"We are going to place an upper limit on purchases of certain companies' bonds and commercial papers, so the fund is not seen as helping a specific firm or industrial category," he said.
Market insiders welcomed the decision, saying the move sends a clearer and more symbolic message to the market that the government is building a better defensive shield for sagging companies than its previous market stabilization steps.
"My view is that the scale of the vehicle is not that important, as the gist of the policy is to show the market that the government is willing to support more financially-vulnerable virus-hit companies," Korea Capital Market Institute economist Baek In-seok said.
"The government appears to be building a minimal level defense shield for companies suffering virus setbacks," he said. "We cannot jump to the conclusion that the 10-trillion won vehicle is not big enough to tackle the ongoing economic turmoil here. The government is leaving open the possibility of expanding the scale down the road."
The local investment industry also remained optimistic over the introduction of the SPV.
"This is theoretically a step in the right direction at this time of financial uncertainty, as this will help boost market liquidity," an official from the industry said. "The scale of the vehicle is not that big, but while at the same time, it cannot be considered small enough to ignore," the official said.
"The general outlook from the industry is that this will help temporarily relieve the financial burden of virus-hit firms, but we still have to wait and see how much of an effect it will have on the market."
