It is expected that companies having trouble in raising funds will be able to issue corporate bonds with favorable conditions by combining tangible and intangible assets such as factory sites, machinery and facilities and goodwill as early as in the second half of this year. Investors in corporate bonds will be able to demand that the company buy their corporate bonds if an M&A deal changes large stockholders.
According to financial regulators and the financial industry, the Financial Supervisory Commission will announce a corporate bond market normalization plan with such contents next month. This measure includes the enhancement of corporate capabilities to issue corporate bonds and the reinforcement of investor protection which aim to ease the tightened corporate bond market.
Financial regulators are planning to lower barriers against fund raising by companies with low credit ratings by expanding the scope of collaterals of secured corporate bonds. The current Secured Corporate Bond Trust Act stipulates that collaterals are chattels, real estate, bonds and stocks only. But collaterals are limited and already secured when companies borrowed money from financial institutions, impeding the promotion of the secured corporate bond market.
Last year, newly issued unsecured bonds added up to 41 trillion won while newly issued secured bonds reached a mere 65 billion won. Accordingly, the government is actively considering expanding collaterals into intelligent property rights such as patents, lease rights, brand value and goodwill and other intangible assets.
Furthermore, financial regulators are considering introducing company-backed bonds, a new corporate bond which recognizes all tangible and intangible corporate assets as collaterals. This bond recognizes expanded corporate value since it evaluates factories and their related assets such as machines at the factories unlike the current system that separately evaluates assets. Compared to unsecured corporate bonds, credit ratings rose by one to two notches, lowering interest rates when company-backed bonds are issued. Company-backed bonds account for most of unsecured corporate bonds in developed countries such as the US, Japan and the UK.
“The promotion of the secured corporate bond market will help companies, which cannot issue corporate bonds due to poor credit ratings, raise funds,” a government official said. Investor protection will be further strengthened. The government is studying the introduction of Change of Control (CoC) put options used in the US. This right enables corporate bond investors to demand that the company buy back the corporate bonds when the company’s major shareholders are changed.