KDB¡¯s buying weak bonds criticized

Foreign financial institutions severely criticized the Korea Development Bank¡¯s undertaking of corporate bonds floated by ailing companies, saying that the step is against the financial restructuring.

The state-run bank¡¯s financial supports to ailing companies will delay the financial restructuring and result in the additional injection of public funds eventually, among other side effects.

¡°The government¡¯s step late last year to order Korea Development Bank (KDB) to undertake 80 percent of matured bonds issued by financially distressed companies is an example of delaying financial restructuring,¡± Credit Lyonnais Securities Asia reported Wednesday in a report. ¡°Remember Daewoo Motor?¡±

Jardine Flemming Securities also expressed deep concern in a report issued the same day: ¡°If the KDB¡¯s undertaking of corporate bonds fails to help relevant ailing companies revive, it will result in the delay of bankruptcy of ailing companies.¡±

Deutche Bank also pointed out, ¡°The step might help Hyundai Electronics Industries escape from the short-term liquidity crisis, but it could not reduce the Hyundai¡¯s overall debt volume.¡±

An official of the bond business team of Good Morning Securities Co. pointed out, ¡°The purchase of corporate bonds floated by ailing large companies would bring in worse results than the government¡¯s step in August 1999 to guarantee 50-95 percent of the principal for customers of funds comprising bonds floated by Daewoo Group.¡±

A president of a securities company said: ¡°The KDB¡¯s purchase of 20 trillion won worth of bonds floated by ailing companies means that the government will settle the problem with taxes collected from the people if the purchased bonds are dishonored. In case of unavoidable undertaking of bonds, accordingly, KDB should differentiate the undertaking ratios based on the credit status and self-rescue efforts by the floated companies.¡±

In the meantime, KDB has decided to Friday undertake about 300 billion won worth or 80 percent of Hyundai Electronics-issued corporate bonds that mature before the end of this month.

It is the first major move since the Ministry of Finance and Economy announced Dec. 26 to ease liquidity problems of enterprises through the state-run KDB.