KDB underwriting to trigger trade friction

The government¡¯s latest money market stabilization measure, which calls for the state-run Korea Development Bank (KDB) to reimburse corporate bonds floated by cash-laden companies instead of the ailing firms, is showing signs of becoming a trade issue.

However, KDB underwrote corporate bonds issued by Hyundai Electronics Industries (HEI) and Korea Industrial Development Monday as earlier planned.

According to a Monday report by www.ebnews.com, the Internet site providing economic news related to the United States' information technology (IT) industry, Micron Technology of the United States requested that the U.S. Congress and U.S. Trade Representative (USTR) work out countermeasures to the move. The company said the KDB's underwriting of HEI-issued corporate bonds by the stage agency violated World Trade Organization (WTO) regulations.

Arguing that HEI is unfit to float corporate bonds based on its own credit, Idaho Boise, a spokesman for Micron Technology, said the KDB¡¯s purchase of the corporate bonds was a violation of WTO rules that prohibit governments from granting subsidies to private companies that are unable to mobilize adequate funds in the market.

Responding to the claim, a KDB official said the WTO regulations banning the subsidy only apply in cases where the supporting entity is a specific enterprise and the supporting terms and conditions provide better benefits than commercial standards.

The KDB¡¯s underwriting of the corporate bonds should be a non-issue, the official said, noting that the step includes other companies besides HEI and that it carries an interest rate 0.4% point higher than the market interest rate.

KDB underwrote 80% of 200 billion won worth of corporate bonds floated by HEI and 17.1 billion won worth of corporate bonds issued by Korea Industrial Development on the same day. The applicable interest rate was set at an annual 11.05% for HEI (BBB-) and 12.91% for Korea Industrial Development (BB+), which added 0.4% point to the basic interest rate (the remaining period of less than one year) of publicly subscribed corporate bonds on Jan. 5.

However, financial sources analyzed that the interest rates for a conversion issue should be 1-2% point higher, taking into account market conditions. KDB is this month planning to underwrite a total of 1.052 trillion won worth of corporate bonds floated by six companies -- HEI, Korea Industrial Development, Hyundai Engineering & Construction, Hyundai Merchant Marine, Ssangyong Cement, and Sungshin Cement.