By Industry Korean banks revolt over collateralized bond issue By Meera Tharmaratnam 28 July 2000 Korean authorities are shaken and stirred over banks' resistance to a proposed bond issue. The CBOs comprise the pooled local currency bonds of 60 medium and large-size companies, including Hansol Paper, Doosan, Asiana Airlines and Hyundai Motor, according to Yonhap, Korea's state news agency. The CBOs carry tenors between one and a half to two years. Solving the liquidity crisis Korea sees CBOs as the solution to the illiquidity in the bond market. A large number of commercial papers are maturing this year, and the government has been seeking a way of rolling over these debts without forcing a cash-crunch for Korean firms.
Banks are already refusing to give unequivocal support to Korean companies, analysts say.
The CBOs offer investors better protection against future credit losses, as they are partially guaranteed from Korea's financial guarantee agencies. In turn, the companies benefit from the access to investors who might be reluctant to buy the debt of an individual firm but would be prepared to buy debts when payments are backed by a host of companies, analysts say. As a result, the government asked banks and insurance companies to contribute to a proposed W10 trillion bond fund. In this way, the 60 companies that are pooling their assets to create the CBO would each receive funds to repay the commercial papers that are nearing maturity and the investment trusts would get business. Moreover, Korea's capital-conscious commercial banks would accept exposure to less creditworthy firms.