[Focus] KDB bond purchase will have side effects

As the Korea Development Bank (KDB) on Jan. 8 began purchasing corporate bonds issued by non-blue chip companies, domestic firms have been handed a moral hazard to postpone restructuring and just wait for government aid.

In this connection, the government and KDB are struggling to work out screening criteria, but it is almost impossible to find a solution to totally eliminate the adverse effects.

"Following the announcement of the system for prompt undertaking of corporate bonds, even those companies that do not need financing or insolvent firms that are not subject to the financing have begun lobbying for a free ride," Oh Kyu-Won, director of KDB, said.

Some blue-chip companies and venture companies are contacting their creditor banks in order to reissue corporate bonds that are to mature this year, thereby taking advantage of the government measure. It is because the measure allows them to reissue in the frozen bond market and to apply lower interest rates than the market otherwise would demand.

KDB is to undertake Hyundai Electronics Industries' bonds Jan. 8 at an annual interest rate of 11.1, which is far lower than the benchmark rate of 14 percent. As a result, Hyundai will be able to reduce annual interest payments by 52 billion won.

What is worse, the motivation for restructuring among companies that are required to pursue self-rescue plans stridently under the financial improvement agreement with creditors seems to be fading.

An official at one of the nation's top 30 business groups said that the biggest topic of talk among company executives in charge of financing is how to obtain financial aid from KDB. He added that the companies tend to postpone their self-rescue plans and try to take advantage of the government aid.

An official at a domestic bank also pointed out that corporate restructuring can hardly be carried forward properly if the government helps Hyundai Electronics Industries so easily, noting that even Hyundai Engineering and Construction, which suffered from a liquidity problem for about a year, refused to carry out internal restructuring.

Market analysts paid attention to the fact that the new system of undertaking corporate bonds by KDB included the nation's top four chaebol groups. It is because their corporate bonds will account for a substantial portion of bonds that KDB will buy.

In fact, Hyundai Group affiliates, including Hyundai Electronics Industries, Hyundai Engineering and Construction and Hyundai Merchant Marine, account for 86 percent of 840 billion won worth bonds that KDB is expected to undertake during January. For this reason, financial sources wonder whether the measure is designed specifically to keep Hyundai Group companies afloat.

In particular, Hyundai Electronics Industries, Hyundai Engineering and Construction and Hyundai Merchant Marine are expected to see 6.4 trillion won of bonds mature this year. Also, Ssangyong Group is to see 1.21 trillion won of bonds mature this year. If the financial support is concentrated on large companies only, about 235 target companies are likely to benefit from the measure. The Ministry of Finance and Economy said Jan. 4 that KDB would take over a total of 5-10 trillion won worth bonds.

Likewise, if the market massively absorbs bonds issued by some large corporations, it would force domestic financial institutions undertake corporate bonds issued by blue-chip companies.

"Whatever the selection criteria is, the question of selecting target companies will remain controversial," said Hong Wan-Sun, director of Aliantz Investment Trust.

Park Hyeon-Jin witness@donga.com