South Korea's asset-backed commercial paper (ABCP) market may face growing risks of default in accordance with the real estate market slump, a report by the central bank showed Thursday.
According to the report by Bank of Korea (BOK)'s economists, real estate-linked project financing (PF) loans in Seoul have high probabilities for becoming sour as the loans depend completely on the projected cash flows from the real estate development projects.
Many of the country's PF loans have been securitized by issuing short-term ABCP with the long-term PF loans as collateral. Outstanding ABCP, including PF ABCP, reached 55 trillion won (50 billion US dollars) as of the end of June, accounting for half of the total asset-backed securities (ABS) market.
Among the total, outstanding PF ABCP based on commercial law amounted to 19.9 trillion won as of end-June. PF ABCPs based on the capital market act are subject to tight regulations such as eligible issuer, eligible assets, issuance procedures and disclosure, but the domestic commercial law does not stipulate any specific rules on private placement of ABCP.
The report cautioned that ABCP had short maturities compared with the real estate development projects, saying that the papers may face refinancing risks in times of market tension.
Local builders expanded ABCP to raise short-term funds with long-term projects as collateral. The PF ABCP has been mainly sold to retail investors who pursue high-yield assets. Following a series of court receivership recently filed for by several builders, market confidence among retail investors extremely aggravated, raising refinancing risks among small builders.