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RPT-Fitch Affirms Small Business Corporation at 'AA-'; Outlook Stable
September 11, 2013 / 7:39 AM / 4 years ago

RPT-Fitch Affirms Small Business Corporation at 'AA-'; Outlook Stable

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Sept 11 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings-Hong Kong- Barcelona- Seoul 11 September 2013: Fitch Ratings has affirmed Small Business Corporation’s (SBC) Long-Term Foreign Currency Rating at ‘AA-', Long-Term Local Currency Rating at ‘AA’, and Short-Term Foreign Currency Rating at ‘F1+'. The Outlook on the Long-Term Ratings is Stable. Fitch has also affirmed SBC’s senior unsecured bond of USD400m (ISIN: XS0262227613) at ‘AA-'.

KEY RATING DRIVERS

SBC’s ratings are linked to the ratings of Korea (‘AA?'/Stable/‘F1+') due to its strong ties to the sovereign and a high probability of extraordinary government support, in case of need. Fitch has classified SBC as a dependent public-sector entity. The company’s strategic policy is dictated by and closely monitored by the government of Korea. Fitch has applied a top-down approach in its analysis of SBC.

The entity has a mandate to implement government policies and programmes to support the development and growth of small and medium entities (SMEs) in Korea.

SMEs lacking of collateral and with short track records usually face difficulty getting funding from the private sector. SBC’s policy fund is a dominant provider of funding for SMEs not served by private-sector financing channels.

SBC loans are intended to supplement commercial loans but they are of longer maturities and provided at below-market interest rates. In addition, SBC supports SMEs by providing non-financial assistance.

SBC’s main policy role is to manage and operate the SME Start-Up and Promotion Fund (SME Fund) and act on behalf of the SME Fund (e.g. bond issuance) under its corporate status. SBC does not have a separate account other than the SME Fund and all expenses incurred by SBC are included in the SME Fund. Based on the above factors, Fitch views SBC and the SME Fund as a single unit.

SBC is wholly owned by the state, and operates under the aegis of Small and Medium Business Administration under the Ministry of Trade, Industry & Energy, which is heavily involved in SBC’s annual budget supervision and performance evaluation. SBC’s management is appointed by the government. SBC is subject to checks by the government auditor and the external auditor of the SME Fund is also appointed by the government. In addition SBC receives regular capital injections from the government.

Under Article 66 of the SME Promotion Act, the government is required to replenish the SME Fund deficits when the fund’s reserves are not sufficient to absorb its losses. State support is also evidenced by the annual capital contribution by the government, which helps the fund to partially cover operating losses arising from the negative interest rate spread. Fitch expects losses to remain around KRW200bn per annum over the medium term.

As a frequent issuer, SBC’s strong liquidity and funding channels are backed by its quasi-government status. Its bond issuance is classified as quasi-government securities. SBC’s bonds can achieve a more favourable pricing as they benefit from zero-risk weighting under Basel regulation.

SBC grants both direct and indirect loans. Indirect loans are granted via commercial banks and the credit risk is borne by the banks. SBC’s loan book contracted by 2.3% in 2012 and Fitch expects it will further decrease slightly in the next one to two years, mainly driven by the repayment of loans extended during rapid expansion in 2008-09. Asset quality remains strong as problem loans averaged 2.9% of the total at end-2012. Fitch expects SBC to continue to report an operating loss as long as it provides loans to SMEs at interest rates below its funding cost. Nevertheless, Fitch believes that the government subsidy will be forthcoming if the SME Fund’s reserves are insufficient to cover the loss incurred.

RATING SENSITIVITIES

A positive rating action on the sovereign, in conjunction with continued strong support from the state, would result in a similar change to SBC’s ratings.

A downgrade of Korea, significant changes leading to a dilution in state ownership and state control, or weakening in SBC’s links with the government, including the importance of the entity’s public-policy role and budgeting relationship, could trigger a downgrade. This is because SBC, under these circumstances, would no longer be classified as a dependent public-sector entity and, therefore, no longer be credit-linked to the sovereign ratings.

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