South Korea's financial regulator planned to expand support to bond issuance by local builders as credit conditions have worsened ahead of massive maturity of corporate bonds in 2013.

"We will support builders to issue P-CBO in a broader range," Koh Seung-beom, director general of Financial Services Commission (FCS)'s financial policy bureau, told reporters on Wednesday. " Construction firms continue to suffer from difficulties in raising funds amid the prolonged slump in the industry."

Koh said the support range will expand from the current small- and medium-sized builders to large corporations except for construction units of the country's top 10 conglomerates such as Samsung, Hyundai Motor, SK, Lotte and POSCO.

Corporate bond market conditions are favorable for large corporations with credit ratings of AA-minus or higher amid low interest rates and ample liquidity. Those for low-rated firms, especially in the construction, shipping and shipbuilding industries, are worsening after Kukdong Engineering & Construction, a midsize builder, surprisingly filed for court receivership last year.

Amid the worsening market conditions, corporate bonds worth 36. 4 trillion won (33.4 billion U.S. dollars) mature in 2013 alone, boosting concerns over credit crunch among some cash-squeezed companies.

MASSIVE MATURITY

Corporate debt sales in South Korea grew fast since 2009 amid low interest rates and ample liquidity. Bond sales rose to 58.6 trillion won (53.8 billion dollars) in 2012 after nearly doubling to 48.6 trillion won in 2009 from a year earlier.

The fast growth in issuance will inevitably bring massive debts into maturity. South Korean companies usually sell debts in a maturity of three years, and the maturity amount would continue to increase starting from 2013.

Almost half of corporate bonds that mature this year belongs to those with credit rating of A or below, according to the report by the state-run Korea Development Institute (KDI). About 8.4 trillion won is responsible for three fragile industries, including builders, shipbuilders and shipping firms.

"Default risks were materialized by court receivership filed for by LIG Engineering & Construction and Kukdong Engineering and Construction," Kang Dong-soo, a senior research fellow at the KDI, said in a report.

"Concerns over the corporate bond market stemmed from worsening

financial soundness of fragile industries and distrust in corporate credit rating assessment."

Right after filing for court receivership, credit ratings of LIG and Kukdong tumbled to D from A3-minus and A-minus respectively.

P-CBO PROGRAM

The regulator introduced the P-CBO issuance program worth 3 trillion won (2.75 billion U.S. dollars) in Aug. 2010 to help cash- squeezed small-sized builders raise funds through bond sales. The program expanded to 4.3 trillion won two years later.

A total of 719 companies, including builders and other firms, sold 2 trillion won in P-CBO as of the end of January. P-CBO is an acronym of primary collateralized bond obligation, a pool of bonds transferred by builders and other firms to a special purpose company (SPC) that consists of senior and subordinated tranches.

Builders with low credit can raise capital in an easier way by shifting their bonds to the SPC that is guaranteed by credit guarantee companies. Each small builder can issue as much as 50 billion won in the P-CBO, with the ceiling for large firms set at 100 billion won. The issuance yield varies from 4.1 percent to 6.0 percent according to their respective credit ratings.

"Issuance of P-CBO may help low-credit firms raise funds, but it is not an desirable policy because investors are dodging low- credit bonds amid uncertainties over the industry. Given the worsening business conditions, restructuring rather than liquidity support will be necessary," the KDI researcher said in the report.

South Korea's construction sector continued to be struggling. Investment in the industry declined for three years through 2012, and construction orders plunged 31.4 percent in the fourth quarter of last year after falling 10.4 percent in the previous quarter.

Confidence among local builders continued to slide to 68.9 in the fourth quarter, from 82.5 in 2009 and 71.6 in 2011.