[Edaily Marketin, Reporter Heo Ji-eun] Fear in the credit market has reached a fever pitch following the domino-effect court receivership filings by #JR Global REIT and the Joongang Group at the start of the year. While the entire sub-investment-grade bond market has ground to a halt as companies that once served as the backbone of the BBB-rated segment have collapsed in a chain reaction, both the policy safety net designed to support them and the private sector’s last line of defense are maintaining a conservative stance. Concerns are mounting that companies unable to demonstrate liquidity on their own will effectively be forced out of the corporate bond market in the second half of this year.

Currently, the primary policy tool that corporate bond issuers in the non-investment-grade sector can rely on is the Korea Credit Guarantee Fund’s Primary Collateralized Bond Obligation (P-CBO). The government issues P-CBOs worth trillions of won annually with the aim of helping small and medium-sized enterprises (SMEs) and mid-sized companies secure funding. However, there is widespread criticism that this program is “a pie in the sky” for BBB-rated companies that are desperately in need of funding.

A credit analyst at an asset management firm explained, “The Credit Guarantee Fund’s P-CBO sets the eligibility threshold extremely high for companies showing signs of distress—whose financial condition has already reached a critical juncture—citing concerns over deteriorating asset quality,” adding, “A structural paradox is emerging in which the companies on the brink—those most in need of support—are being excluded from the benefits of policy-based financing.”

While the government’s policy support has failed to take hold, even the private sector’s end-users have shut their doors. This is because even high-yield funds—which had previously sought high-risk, high-return investments by purchasing non-investment-grade bonds rated BBB or below—have begun to adopt a more conservative approach to portfolio management for risk management purposes. No matter how high the interest rates offered by companies rated BBB or below, there are few institutions willing to take the risk given the increased uncertainty surrounding principal recovery.

Despite signs of a liquidity crunch in the market, monetary authorities remain cautious about active intervention. At a press briefing last month, Bank of Korea Governor Shin Hyun-song, when asked about the effectiveness of bond market stabilization measures, stated, “Regarding bond market stabilization measures, the market should fundamentally find its own balance among market participants.” He added, “In principle, we should intervene when market mechanisms fail to function, but we judge that this is not the case at present.” This effectively makes it clear that the central bank has no intention of playing cards such as repurchase agreement (RP) purchases or expanding eligible collateral for loans, as it did during the past Legoland crisis.

Credit experts point out that in the BBB-rated market during the second half of the year, a strategy of simply offering high interest rates will no longer work. This is because the three pillars—government policy, the central bank, and private-sector demand—have all simultaneously stalled. Some observers note that unless companies can demonstrate concrete self-rescue liquidity plans through their own resources—such as the sale of core assets or capital increases led by major shareholders—raising funds in the corporate bond market will be virtually impossible.

A credit industry official stated, “The funding environment for independent BBB-rated companies without the backing of a major corporate group is deteriorating to its worst level,” adding, “The second half of this year will be a turning point that determines whether non-investment-grade companies can survive on their own or will be forced out of the market.”