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Bond Rush Seen as Korea Offers Help on Record Household Debt

Bond Rush Seen as Korea Offers Help on Record Household Debt

(Bloomberg) -- South Korea is taking steps to prevent households from getting hurt by the record debt they owe, and that’s prompting the issuance of a flood of top-rated won bonds to help finance the policy.

The government is encouraging low-income home owners to tap state-backed Korea Housing Finance Corp. to refinance their loans. Borrowers can apply to shift into fixed-rate loans from floating rate so they aren’t burned if interest rates rise, and get into amortized debt whose interest and principal are paid at the same time. KHFC plans to sell as much as 20 trillion won ($18 billion) of bonds backed by such debt from this month.

Bond Rush Seen as Korea Offers Help on Record Household Debt

It’s another effort by Korea to limit the damage from the nation’s 1,573 trillion won in household borrowing, which is fueled by an overheating real-estate market. While Korea Housing Finance will screen the loan applicants, the government will take on increased risk by lending at low interest to borrowers who are less certain to be able to repay, and guaranteeing bonds backed by such debt.

KHFC, the country’s sole issuer of residential mortgage-backed securities, said it plans to offer 40 trillion won to 50 trillion won of bonds backed by home loans next year, the most since 2015. This year’s issuance will total 27 trillion won, and almost all of the RMBS have AAA debt ratings.

Read more: Korea’s Move to Cool Housing Frenzy Spurs Covered Bond Rush

Home owners that refinance their mortgages by getting the low-interest loans from KHFC will be able to reduce their borrowing costs, especially those that were paying high rates to non-bank financial companies, said Kim Min-jeong, credit analyst at Hanwha Investment & Securities Co. in Seoul.

The government’s policy “will improve the quality of nation’s household debt,” Kim said.

Bond Rush Seen as Korea Offers Help on Record Household Debt

Korea Housing Finance will adjust the timing of debt sales so that the increase in supply will only have a limited impact on the market, said Park Hee-won, head of securitization issuance team.

To help the market absorb the increasing deals, KHFC has said it will try to attract foreign investors for its RMBS next year. As part of its efforts to increase overseas interest in its securities, the firm is also planning what would be its biggest euro-denominated covered bond deal next year.

To contact the reporter on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum, Beth Thomas

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