The first deal from South Korea's primary CBO program was issued in early August, in a W1.55 trillion ($1.4 billion) transaction arranged by LG Securities (ASRI 7/3/2000 p.1 7/17/2000 p.2 and 7/31/2000 p.3).

The deal is backed by corporate bonds issued by 60 companies and forms part of the Korean authorities efforts to funnel money to medium-sized Korean companies which are struggling with a credit crunch.

The Korean bond markets have been shut to second-tier firms after the troubles at various corporates and chaebols left investors nervous and many firms are dangerously exposed as they are unable to roll over their liabilities.

To overcome what they believe to be a temporary confidence problem, the government and the local financial watchdog, the Financial Supervisory Service, have convinced banks and insurance firms to set up a fund that will buy corporate bonds, package them into CBOs and then sell them to end investors. The fund is worth W10 trillion, with half of that earmarked for the CBOs.

This transaction is the first issue from that program. It is split into three senior tranches. The first tranche has a maturity of 1.5 years, triple-A ratings from local agencies and priced at 30 basis points over the local benchmark (the corporate bond yield) for a coupon of 8.7%. The second piece is also triple-A rated, has a two year maturity and pays 8.88%. The third tranche also has a two-year maturity, is rated double-A, and offers a yield of 9.08%.

The paper was sold to 12 investment management companies, with a proportion retained by the arranger, according to an LG official. The official declined to say how much LG had retained.

The deal had originally been scheduled to launch in July, but was postponed after a lackluster response from investors. That reticence forced LG to rejig the portfolio in order to increase the yield paid to investor. It also upped the amount of the deal that was covered by a guarantee from two Korean monoline insurers from 24% to 25%.

Other securities firms are planning to follow suit by arranging more CBOs. Daewoo Securities plans to issue a deal worth W440 billion next week, while Hyundai Securities will follow with a W500 billion issue the week after, sources in Seoul said. Later in the month and in September, these should be followed by a joint issue by SK Securities and Tong Yang Merchant Bank, plus deals from Korea Investment Trust & Securities, Hanwha Securities and Daeshin Securities.

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