The Financial Services Commission (FSC)’s draft legislation for covered bonds will be passed at the end of the year and despite some scepticism that banks are sufficiently incentivised, BNY Mellon argues that four of the country’s largest banks will issue the securities next year.
To date, state-owned Korea Housing Finance Corp (KHFC) and Kookmin Bank have issued over US$2.1 billion in covered bonds since 2009. No other issuers have followed suit due to a lack of legislation. But the FSC has issued draft legislation offering increased protection both to issuers and investors, as well as allowing banks to sell covered bonds.
The legislation is expected to come into effect at the end of December, or at the very latest at the beginning of next year. After this there will likely be a period of quiet before banks begin to issue in the second half of next year, according to Sean Suk Kyu Lim, head of global issuer services at BNY Mellon Korea.
“The banks are working closely with the government and we are sure that banks will try to issue covered bonds. After the law passes in December there will be a cold period where no one issues for three months, as they look to each other to say, who first,” he said in an interview with Asiamoney PLUS.
“From my experience in this market there will be Kookmin Bank and Woori Bank, as well as Shinhan Bank and Hana Bank, I’m sure those top banks will be definitely interested. It will reduce the cost of issuing bonds and [allow them to] be more independent from the government,” he said.
“All the banks who want to issue covered bonds based on their mortgage loans have to deal with the government to use this instrument so now they can issue by themselves, and most of these local banks are tight with local investors so they can bring more investors into these bonds.”
The only risk to this is the fact that the current government has been lobbying hard to launch the country’s covered bond market, and it will be replaced by a new government in December. But he argues that the fundamentals behind the drive for covered bonds remain the same, which provides the same incentives.
“There is a chance that the opposite side won’t push so much but this is a Korean condition that we have a high individual debt level so this will be the same problem for the new government,” he said.
In terms of other issuers, he believes that they will wait for the bigger banks to test the market first before considering issuing the debt. On the demand side, he sees few problems.
“There will be much demand from many different areas. KHFC issued two covered bonds during the past three years and they were overbooked, with investors including the Korean insurance companies as well as international investors. Not only does [Korea] have higher interest rates at the margin than many other markets it is also very safe,” he said.