“It was much worse than what we expected,” Financial Services Commission (FSC) Chairman Kim Joo-hyun told parliament Monday when asked about the insolvency of a Iwon Jeil Cha, a special purpose company that was created to fund the development of Legoland Korea Resort in Gangwon.
Iwon Jeil Cha was listed as insolvent on Oct. 4 after failing to repay 205 billion won ($144.7 million) in asset-backed commercial paper. A response from the government didn’t come until Sunday after the government realized that the situation in the corporate bond and commercial paper market had become “very severe.”
It pulled out all the stops, committing a minimum of 50 trillion won to supply liquidity to the market and prevent a full meltdown.
“Why was the government late to respond?” Yoo Dong-soo, a Democratic Party lawmaker asked. “Like the situation with the Inflation Reduction Act, our government seems to be a step behind.”
The government told lawmakers not to worry as it is taking the necessary action.
“We didn’t know it ahead of time,” Finance Minister Choo Kyung-ho told the National Assembly on Monday when asked about the Legoland Korea situation. “But since then we have been monitoring the situation.”
The FSC’s Kim said that while the trigger may have been the amusement park, other factors, such as the strengthening dollar, were also relevant.
“We had been preparing on the expectations that the market situation would get worse considering the international situation,” he said.
Shares rose Monday, the day after the promise of the massive intervention by the government, with the Kospi rising 1.04 percent, though the won fell.
According to the Korea Financial Investment Association, a total of 13.9 trillion won of corporate bonds will mature by the end of the year. By June 2023, a total of 54 trillion won will mature.
In the first half of the year, companies were able sell about 8 trillion won of bonds a month. In August and September they sold an average of 5.3 trillion won per month. So far this month, only 1.4 trillion won of corporate bonds have been sold.
AAA-rated Kepco, the state-owned power supplier, tried to sell 400 billion won of bonds on Oct. 17 at 5.9 percent. It was only able to sell 280 billion won of debt.
Korea Express tried to sell 100 billion won of two-year bonds on the same day but pulled the issue due to low demand.
The Gangwon municipal government, which owns 44 percent of Legoland Korea’s developer, has sent mixed messages on its guarantee of the debt sold by the special purpose company, saying that it would apply for the rehabilitation of the developer despite the promises to backstop the debt.
In Korea, 125.5 trillion won of commercial paper is outstanding, and of that 11.3 trillion won is from special purpose companies supporting project finance.
“While the recent short-term liquidity crunch was triggered by the Legoland crisis, the true essence is that a market run happened in the course of an austerity,” said Jeong Dae-ho, KB Securities analyst. “The market’s concerns on the uncertainties amid excessive debt has cascaded.”
Choo told the National Assembly that flooding the markets with support will not fuel inflation and that the government is not working at cross-purposes with the Bank of Korea, which is aggressively tightening monetary policy.
BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
