Seoul considers $10 billion bond sale Cash for borrowers gauged at risk of default

Pacific Rim

December 13, 1997|By BLOOMBERG NEWS

SEOUL -- South Korea may attempt to raise as much as $10 billion in a first-ever international sale of government bonds to provide cash to corporate borrowers that a U.S. rating firm says are at risk of defaulting on their debts.

"The risk has increased significantly in the last few days that a [debt] moratorium is possible, but it is not the most likely scenario," said Vincent Truglia, managing director and co-head of sovereign risk at Moody's Investors Service, in a conference call with investors yesterday.

The sale, part of which could come this month, is intended to replenish foreign reserves and funnel funds to companies whose short-term debts are coming due, the government said.

Completion of the bond sale would be a crucial test of investor confidence just nine days after the International Monetary Fund arranged a record $60 billion bailout of the country's crippled financial industry.

U.S. aid promised as part of the IMF package won't be released early, a U.S. Treasury official said yesterday.

The official wouldn't confirm reports from South Korean news services that the Asian nation had asked the United States and Japan to provide early disbursement of the assistance the two countries promised as a back-up to the $35 billion in aid pledged by the IMF, World Bank and Asian Development Bank.

Under that agreement, Japan promised to provide Korea with up to $10 billion in assistance, while the United States pledged $5 billion and a group of European countries and Australia said it would provide at least another $5 billion.

Concern that the international assistance won't arrive soon enough is rattling investors.

South Korea's benchmark KOSPI stock index tumbled another 7 percent yesterday to an 11-year low and its currency, the won, fell to record lows against the dollar.

The South Korean central bank bought up to $1 billion of won yesterday in a bid to halt the currency's plunge.

The won is now at about 1,650 to the dollar, up from 1,685 yesterday. Still, the won has lost 42 percent of its value against the dollar in the past month alone.

The South Korean government will ask Japan for $5 billion in a bridge loan to stabilize the foreign exchange market, the state-run Yonhap News Agency reported, quoting an unidentified official of the Finance and Economy Ministry.

The won's decline makes it more expensive for South Korean companies and agencies to fund their foreign debt payments. And that could lead to a suspension of payment of interest and principal by Korean companies to their creditors, a so-called debt moratorium, if investor confidence in the country isn't restored and creditors refuse to lend new money, according to Moody's.

That's why the government has little choice in putting its economic reputation on the line by attempting to sell sovereign government debt. State-owned institutions on which it has previously relied to borrow can't lure investors at a price they deem acceptable.

It's not clear that the bond sale will attract private investors, however.

Even if it is offered at a yield premium of 800 or 900 basis points above risk-free U.S. Treasury securities, "I still don't think there's a buyer at that level," said Bob Attridge, who manages $50 million in emerging market bonds at Old Mutual Asset Managers (UK) Ltd.

"No one still is sure quite how much short-term debt needs rolling over," Attridge said. "People aren't going to lend until they're sure the crisis is under control. I don't think the coupon offered on any bond will be important."

If that sentiment is widespread, it could force the South Korean government to ask Japan, the United States and other countries to buy the bonds. U.S. Treasury Secretary Robert Rubin said yesterday that no formal request for expedited aid had reached his desk, and Treasury officials haven't returned calls seeking comment.

About $20 billion of foreign currency debt needs to be covered this month, and many creditors are unwilling to refinance loans. Finance and Economy Minister Lim Chang Yuel said South Korea had $10 billion of usable foreign exchange reserves as of yesterday and is trying to have some participants in the IMF bailout dispatch funds ahead of schedule.

The IMF's first installment of $5.6 billion reached South Korea last Friday. Another $3.6 billion is scheduled to be delivered Thursday -- the same day as presidential elections -- if the fund's first review shows progress being made in reform programs.

A third disbursement of approximately $2 billion would be available Jan. 8, 1998, after a second review by the IMF.

The government has said it will guarantee all foreign currency debt to prevent defaults, and the Bank of Korea said it will inject a total of 11 trillion won ($5.8 billion) of emergency funds into the banking system to ease liquidity shortages.

Pub Date: 12/13/97

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