[Edaily Marketin, Reporter JI YEONG-EUI ] A plan to issue won-denominated securitized securities worth 10 to 20 billion won, based on credit default swaps (CDS) for U.S. Big Tech firm Meta, is under consideration in South Korea. While rumors circulated about a won-denominated bond issuance of at least 1 trillion won, the transaction currently under concrete review is not a bond through which Meta would directly raise won, but rather a product in which a domestic institution assumes Meta’s credit risk and earns revenue from the CDS premium. Given the costs and demand, analysts assess that the likelihood of a direct won-denominated bond issuance is low. As Big Tech’s borrowing increases due to expanded investment in artificial intelligence (AI), concerns have been raised that the associated credit risk could be transferred to investment products offered by domestic institutions.

“Meta’s 1 Trillion Won Bond Rumor”: Actual Review Focuses on Securitization Product in the 10 Billion Won Range

According to investment banks (IBs) and credit rating agencies on the 6th, the domestic securities industry is reviewing a won-denominated securitization transaction based on Meta CDS. A plan is being discussed in which a special purpose company (SPC) would issue private asset-backed securities (ABS) or asset-backed short-term bonds (ABSTB).

Meta is not the issuer raising funds but rather the reference entity whose credit events are assessed. Domestic institutions earn returns in exchange for assuming Meta’s credit risk. This is not a transaction in which investment funds flow into Meta.

It is also reported that a “zero recovery” condition—where the recovery rate is set at 0% in the event of a credit event—is being considered. Even if Meta bonds have residual value, the loss rate under the CDS contract could reach 100%. The safety of the securitized securities is not guaranteed solely by Meta’s credit rating, which is AA- according to S&P. Actual losses depend on the notional amount of the CDS, the collateral, the seniority structure, and the counterparty arrangements.

According to securities industry analysts, the likelihood of Meta issuing won-denominated bonds directly in the near term is limited. Since Meta has no large-scale won-denominated expenditures in Korea, it would need to convert the proceeds into dollars. There would be an incentive to choose the Korean market only if the total funding cost—reflecting the won-denominated bond issuance rate and swap costs—is lower than that of dollar-denominated bonds.

Kim Jun-soo, an analyst at NH Investment & Securities, assessed, “Since domestic institutional investors are unlikely to offer a significant premium, there is little compelling reason to choose won-denominated bonds.” Based on Meta’s credit rating, the interest rate for won-denominated bonds is estimated to be in the mid-to-high 4% range annually. Analysts suggest that when swap costs are factored in, the economic viability could be lower than that of dollar-denominated bonds.

The mentioned 1 trillion won is approximately $700 million, which is smaller than the scale of recent overseas local-currency funding by Big Tech companies. The assessment is that there is limited incentive to enter a new market while bearing the associated costs. However, analysts note that the possibility of long-term issuance remains open if demand for won-denominated bonds and swap conditions improve after Korea’s inclusion in the World Government Bond Index (WGBI) is completed this November.

Surge in AI Bonds… Credit Risk Shifting to Domestic Institutions

Behind Meta’s plan to issue won-denominated bonds lie Big Tech companies’ AI investments and expanded borrowing. As of July 7 of this year, Meta, Amazon, Alphabet, and Oracle had issued $194 billion in corporate bonds—79% more than their total issuance for all of last year. According to Apollo Global Management, the subscription multiple for these hyperscalers’ corporate bonds fell from around 5x in February to below 2x in July.

Meta issued $30 billion in corporate bonds last October and $25 billion in April of this year. Its capital expenditure plan for this year ranges from $130 billion to $145 billion. In the second quarter, 98% of operating cash flow was allocated to capital expenditures and principal repayments on finance leases, causing free cash flow to decline by 91% compared to the same period last year.

The risk premium demanded by the credit market has also risen. According to Bloomberg, Meta’s 5-year CDS premium rose from 56 basis points at the end of last year to around 99 basis points at the end of July. While a rise in the CDS premium increases the expected return on securitized products, it also represents the cost of bearing Meta’s credit risk.

Given the scale currently being discussed and Meta’s creditworthiness, analysts assess that the likelihood of this spreading to the broader domestic financial market is limited. There is also a positive aspect in that investment opportunities in high-quality overseas companies are expanding. However, if this extends to CDS-linked products of other Big Tech companies, the related credit risk exposure of domestic institutions could accumulate. Some observers point out that the structure and risks of the products actually under consideration should be examined first, rather than focusing on speculation about won-denominated bond issuances.