South Korea: Corporate Liquidity Support Organization

Despite the recovery in the market for higher-rated corporate bonds, the market for those rated A or lower remained weak. This compelled the government to create a special-purpose vehicle (SPV) to purchase lower-rated corporate bonds and commercial paper (CP) (FSC 2020d). The asset purchase program complemented other market liquidity interventions by assisting lower-rated issuers that were excluded from participation in the bond market stabilization fund (BMSF) and other financial support programs. The BoK further emphasized that its loans to the SPV were not meant to directly support “specific or insolvent companies but to “ease credit risk aversion toward non-premium bonds and to ensure stability in the credit and securities markets” (BoK 2020c).  

In response to the rapid contraction of financial markets at the onset of COVID-19 in early March 2020, the Korean government enacted a series of stabilization measures. These interventions included a BMSF (KRW 20 trillion), a stock market stabilization fund (KRW 10.7 trillion), the Corporate Bond-Backed Lending Facility (CBBLF) (KRW 10 trillion), and support for the issuance of primary collateralized bond obligations (KRW 6.7 trillion) and corporate bonds (KRW 4.1 trillion).^FFor more information, please see the Appendix.  In addition, the government announced that it would directly support market financing by providing KRW 5 trillion in liquidity for securities companies, consisting of KRW 2.5 trillion for stock finance loans and KRW 2.5 trillion through repo market financing by the BoK, as well as KRW 2 trillion in refinancing support from the KDB^FFounded in 1954, the state-owned KDB is a policy bank that supports key public financing operations and serves as a link between the government and the private sector.  and Korea Guarantee Fund (KODIT) for corporate commercial paper and electronic short-term bonds.

The Financial Services Commission (FSC) reported in a May 20, 2020, press release that these programs had together improved market conditions and that the total amount of blue-chip corporate bonds had “rebounded” in April (FSC 2020d).

Article 79 (“Restrictions on transactions with the public”) of the Bank of Korea Act normally forbids the central bank from making loans to, or purchasing the obligations of, juridical persons or individuals other than banking institutions. However, Article 80 (“Credit to For-Profit Enterprises”) stipulates that, “when severe impediments arise to obtaining funds from financial institutions or when there is a strong likelihood of their arising,” the BoK may supply credit to any for-profit enterprise such as an SPV (BoK 2020j, 47; BoK 1950). 

The Monetary Policy Committee offered two motives to support its decision. First, despite gradual signs of improvement in the premium corporate bond and CP markets, it determined that companies with low credit ratings needed further assistance to reactivate the non-premium bond market. Second, the Committee did not expect that domestic banks would be able to meet corporate funding demands given growing corporate credit risks related to the pandemic (BoK 2020j).

In a press release dated July 17, 2020, the BoK’s Monetary Policy Committee outlined circumstances under which it would conduct an investigation into the SPV’s activities. Article 80 of the Bank of Korea Act, referencing paragraphs 3 and 4 of Article 65, stipulates that the BoK may, “when it deems necessary, check and confirm the operations and status of the assets of a banking institution in connection with its extension of credit,” and that the BoK “shall hear the opinions of the Government before making decisions on emergency credit” (BoK 1950, 20). Because the SPV held short-term debt on behalf of the central bank, the BoK took active steps to evaluate asset and portfolio risk. It was particularly concerned with the possibility of issuer default, stating that “in the event of delinquency of principal or interest” or “commencement of rehabilitation procedures,” the BoK should be “notified immediately” (BoK 2020c). The SPV would also have to comply with any BoK requests for data or other information about its operations. 

The BoK also worked to ensure that the SPV minimized losses. For example, if the SPV’s asset holdings were reduced through repayment or sale, the SPV would repay the BoK loans immediately, regardless of maturity date. In general, the BoK expected the SPV to make “every effort” to repay the BoK loans as soon as possible (BoK 2020c). If, at any point, losses were expected over the course of the SPV’s operation, the BoK would intervene to decide whether to continue the program. However, although the SPV was expected to minimize losses and discuss its operational direction with the BoK, the BoK would not discontinue the program if losses were to occur above a certain amount (Kwon 2022). Adhering to Article 80, paragraph 3, of the Bank of Korea Act, the BoK also reserved the right to assess the risks associated with individual corporate bonds and CP.

Article 96 of the Bank of Korea Act also required the BoK to prepare assessment reports on “progress in implementing monetary and credit policies and macro-financial stability conditions” (BoK 1950). These were delivered on a semiannual basis to the National Assembly, which could then summon the governor of the BoK for questioning.

The Board of the SPV was charged with making investment decisions. It was composed of three directors and was charged with management-related matters, such as approving the facility’s budget, overseeing changes to the articles of incorporation, and capital or redemption issues (Kwon 2022). 

The Investment Management Committee’s five members included the KDB vice chairman, one private sector expert nominated by the KDB (with approval from other institutions), and one nomination each by the Ministry of Economy and Finance, the Financial Services Commission, and the BoK. As a complement to the Board’s oversight, the Investment Management Committee oversaw the SPV’s daily operations. It was also responsible for establishing investment guidelines and monitoring market conditions to decide whether to increase the availability of the fund (up to KRW 20 trillion) or extend its purchasing operations beyond the initial six months (FSC 2020d).

The BoK initially emphasized that it established the SPV to assist lower-rated companies that were having trouble accessing financing because of the lack of liquidity in short-term funding markets. In subsequent press releases announcing changes to the program, the central bank cited improved market conditions as the rationale for scaling back purchases or rebalancing the proportion of eligible assets added to its portfolio (BoK 2020d; BoK 2020e; BoK 2021a). 

In general, recognizing the need for transparency during a time of crisis, the BoK began to make a concerted effort to improve upon the quality and frequency of its public communications. It created a special menu subsection on its website entitled “Policy Responses to COVID-19,” livestreamed press conferences on monetary policy decisions, and released details on its extraordinary operations via press releases and quarterly Monetary Policy Reports (BoK 2021b).

The BoK adhered to Articles 101 and 102 of the Bank of Korea Act, requiring the publication of balance sheets on a monthly basis, monetary policy reports, and annual reports. These included information on BoK’s share of the total loan to the SPV, while program usage was periodically published in public press releases. The National Assembly Budget Office occasionally published reports on the BoK’s activities as well as press releases informing the public about operational updates. 

In a press release dated May 20, 2020, the FSC announced that the KDB would begin purchasing low-rated corporate bonds and CP prior to the creation of the SPV in order to “expedite the provision of support . . . if deemed necessary” (FSC 2020d). 
The KDB began pre-purchasing corporate bonds on June 10, 2020, to support market functioning while the National Assembly allocated budgetary resources for the SPV (Kim 2020; MoEF 2020). 

In a joint press release on May 20, 2020, the FSC stated on behalf of the BoK and KDB that future funding decisions would be made by the SPV’s initial operating committee, comprising officials from the government, BoK, and KDB (FSC 2020d; Kwon 2022). 

By the end of 2020, the volume of corporate bonds and CP purchased by the SPV had reached 2.5 trillion won (BoK 2021b). As of the end of July 2021, the SPV had purchased KRW 4.0 trillion worth of corporate bonds and CP (BoK 2021g). 

Each corporation, or group of corporations,^FThe Fair Trade Commission designates certain groups of companies as restricted groups for mutual investment (BoK 2020c). issuing debt to the SPV was subject to a purchasing limit of 2% to 3% of the total amount of support (initially KRW 10 trillion) (FSC 2020d). 

In a press release dated May 20, 2020, the FSC stated that the SPV would be established once the National Assembly passed the third supplementary budget containing a provision for a KRW 500 billion investment in the KDB. The KDB would then provide the SPV with up to KRW 1 trillion (10%) in subordinated loans and KRW 1 trillion (10%) in equity capital, while the BoK committed to issuing up to KRW 8 trillion (80%) in senior loans.

The purpose of the government’s involvement (through the KDB) was to absorb risks, while the BoK provided liquidity and the KDB established and managed the SPV (MoEF 2020). There were no loss-sharing agreements between the government and the BoK (MoEF 2020).

Figure 1 illustrates the flow of funds from various government entities to corporations.

Source: BoK 2020b, 2.

The BoK’s loans to the SPV earned an interest rate obtained by adding the average five-day spread of one-year Monetary Stabilization Bonds (MSB)^FThis is calculated based on the average of four private bond rating agencies (KIS Bond Rating, Korea Asset Rating, NISPI, and F&I) (BoK 2020c). to the BoK base rate. The SPV paid interest every three months. The loans had a maturity of one year and were collateralized by all assets of the SPV. Upon receiving the loan, the SPV issued a bill to the BoK in order to fund the purchases of corporate bonds and CP. The initial loan execution deadline was set six months from the SPV’s date of establishment (July 14, 2020).  The creditors of the SPV expected repayment in one lump sum at the time of maturity, although early repayment was also allowed (BoK 2020c).

The SPV started with KRW 3 trillion in its first round of funding on July 23, 2020. That total included KRW 1 trillion in equity capital from KDB, an initial senior loan of KRW 1.78 trillion from the BoK, and an initial subordinated loan of KRW 0.22 trillion from KDB (MoEF 2020). The BoK planned to disburse the rest of its committed loans through four separate capital calls (BoK 2021b).

Of the initial KRW 3 trillion, KRW 2.5 trillion (82.4%) had been exhausted by December 24, 2020. The SPV raised KRW 2 trillion in a second capital call on January 12, 2021, including another KRW 1.78 trillion in senior loans from the BoK and KRW 0.22 trillion in subordinated loans from KDB. By the end of January 2021, the SPV had purchased KRW 2.5 trillion worth of corporate bonds and CP (BoK 2021c).

After the second capital call, the BoK determined that conditions in the corporate bond and CP markets had stabilized. It announced it would no longer make new loans to the SPV and would keep the loan execution deadline set to July 13, 2021. The SPV could have re-loaned funds that borrowers had already repaid from the initial round of loans, but ultimately it did not do so (BoK 2021a).

Because domestic financial institutions had access to other sources of funding and operated according to their own risk management frameworks, the BoK excluded them from eligibility (BoK 2020j). Companies that had had an interest coverage ratio of 100% or less for two consecutive years (pre-COVID-19) were also barred from participation (BoK 2020c).

International companies were not eligible for participation in the program (Kwon 2022). 

The SPV carried out purchasing operations as funding from capital calls became available.

The program allowed lower-rated companies to issue corporate bonds, CP, and short-term bonds to the publicly funded facility.

The SPV accepted short-term bonds with maturities of up to three years.^FShort-term bonds, as defined by the Capital Markets Act, were essentially the same as CP but were issued and distributed electronically according to standardized procedure to increase market transparency and investor protection. They were formerly referred to as “electronic short-term bonds” (Kwon 2022).  The BoK required issuers to be investment grade (rated at least BBB) before April 22, 2020, focusing mostly on A-rated bonds. However, it also committed to lend to “fallen angels,” that is, issuers whose credit ratings were downgraded to junk status (BB) after April 22, 2020, because of the COVID-19 crisis. Ratings were based on those provided by domestic Korean rating agencies (Kwon 2022). The SPV also accepted CP issued by corporations rated A1 to A3.

The BoK instituted portfolio allocation targets by credit rating. It announced in a July 17, 2020, press release that the proportion of holdings “should not deviate significantly” from the following: “30% or more of AA grade (including A1 grade), 55% of grade A (including A2 grade), and 15% or less of BBB grade or lower (including A3 grade)” (BoK 2020c). The central bank sought to balance the SPV’s holdings by selling debt in accordance with these guidelines after six months of the facility’s establishment.

Citing both improved conditions in the corporate bond market and the need to better support CP issuance, the BoK announced on December 24, 2020, that it would rebalance its allocations. It reduced the proportion of premium bond (AA) purchases from 30% to 25% while expanding the share of non-premium bonds (A to junk) from 70% to 75% (BoK 2020e).

The BoK ultimately never ended up purchasing short-term bonds (Kwon 2022).

The BoK privately determined purchase prices by adding penalty spreads to market rates depending on the credit ratings of the assets (Kwon 2022). According to the FSC, this pricing scheme was intended to “encourage” business to raise funding on the capital markets (FSC 2020d).

Haircuts apply only to programs that involve lending to counterparties.

Interest rates apply only to programs that involve lending to counterparties.

Sources consulted did not describe any administrative or participation fees.

This refers to the loan maturity and applies only to programs that involve lending to counterparties.

In its initial press release announcing the establishment of the SPV on April 22, 2020, the FSC stated that the government would promote “a certain level of employment for a specific period of time” if the number of entities issuing to the SPV exceeded a particular threshold (FSC 2020c). Subsequent press releases and other sources consulted did not specify whether this was a formal stipulation that had ever been imposed during the SPV’s operations.

Participation in the program did not entitle eligible issuers to regulatory relief.

The SPV was a domestic program that did not necessitate international coordination.

The facility was originally scheduled to operate for a total of four years from its date of establishment: six months for purchases, three years for holding assets, and six months for resolution.

The initial press release dated April 22, 2020, announced that the SPV would conduct purchases for six months from the date of establishment on July 14, 2020, “with the possibility of extension based on market conditions” (FSC 2020d).

On December 24, 2020, the BoK, the government, and the KDB jointly decided to lengthen the purchasing timeframe by six months, to July 13, 2021, while also expanding the share of non-premium bond purchases. In announcing the extension, which also prolonged the holding and resolution timeline, the BoK cited its intention to continue supporting low-rated companies “facing difficulties from the prolonged COVID-19 pandemic” (BoK 2021c, vi).

On June 30, 2021, the BoK announced that it had again extended SPV purchasing operations, this time until December 31, 2021. However, the central bank did not extend the duration of a new loan provision to the SPV beyond July 13, 2021, citing improved market conditions and the belief that the SPV would be sufficiently funded through the end of the year (BoK 2021a).