State-run Bank to Buy Risky Corporate Bonds

Korea Development Bank will buy one trillion won (747 billion U.S. dollars) worth of “BB” grade or higher corporate bonds issued by small and medium-size companies to help them raise funds.

Finance officials said yesterday that the state-run bank will accept applications from the companies and purchase a combined one trillion won worth of the bonds.

Corporate bonds are rated from “AAA” to “D” according to credit risk. Those rated “BBB” and over are considered qualified for investment and those rated “BB” and under are viewed as speculative bonds.

The bank seeks to help smaller companies having difficulty getting loans and issuing bonds due to low credit ratings. The bond market this year has seen a small number of “BBB” bonds and fewer “BB” bonds.

The Bond Market Stabilization Fund worth five trillion won (3.7 billion dollars) was set up in December last year to purchase risky corporate bonds, but has been of no help to “BB” companies since the fund is geared toward those with a “BBB” rating and higher.

The bank is expected to announce a plan to inject 100 billion won (747 million dollars) in restructuring funds to take over three or four smaller companies on the brink of bankruptcy.

After the takeover, CEOs of the companies will remain for three years. If the companies are revived, the bank will pay the executives with stock options in return for their good performance and resell remaining shares at a premium.

Unlike court receivership under which CEOs are forced out, the takeover by the restructuring fund gives them an opportunity to turn their companies around.

If the fund raises up to one trillion won (747 billion dollars) from the private sector, the bank can take over around 100 insolvent enterprises.

legman@donga.com jaeyuna@donga.com