South Korea's primary CBO program has hit problems before it has even got going. The program is intended to use funds committed by banks and insurance companies to purchase corporate bonds issued by second-tier firms and parcel them into CBOs for sale to both the government organized fund and other end investors.

It is part of the government's efforts to aid medium-sized firms who have been hit by a credit crunch and are unable to rollover their liabilities, leaving them dangerously exposed.

The inaugural deal, which had been scheduled to launch in mid-July (ASRI 7/17/2000 p.2), has now been postponed until August 2, sources in Seoul said, as investors have proved wary.

The deal - managed by LG Securities - parcels bonds issued by several medium-sized companies specifically to be put into a CBO and is worth W1.55 trillion ($1.38 billion). It has received triple-A and double-A ratings for the senior tranches from local agencies, in part thanks to a guarantee of 25% of the total from two local monoline insurers, Korea Credit Guarantee and Seoul Guarantee Insurance Co.

However, ABS experts in Seoul said that the fact that the guarantee doesn't cover the whole of the issuance has left investors nervous and demanding higher coupons to buy the paper.

That in itself has proved a problem, as the bonds that LG had earmarked for the CBO may not provide enough spread to pay the return that investors want. It is thought that LG may have to rejig the portfolio by including some higher yielding paper, bankers explained.

The deal had originally planned to pay a yield of 20 basis points over the corporate bond reference, but this has now been upped to 30 basis points over. The bonds feature maturities ranging from one and a half to two years.

The news will come as a blow to the government and the financial supervisory bodies who had hoped to corral investors into buying the CBOs in the hope of overcoming what the government believes is a temporary dislocation of the local bond market.

Securities and insurance firms have agreed to provide W10 trillion for investment in local securities, with at least half of that figure intended for buying bonds to packaged into CBOs.

"The fund is not as popular as we had thought, but when primary CBOs are issued banks and insurance companies will soon join in the fund raising," a Financial Supervisory Service official said.

Of the W10 trillion only W687 billion has been invested in corporate bonds so far, the local financial regulator, the , the FSS said.

If LG's second attempt is a success, it is likely to be followed by Hyundai Securities and Daewoo Securities, both of which are planning CBOs worth W500 billion.

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