Volume No. 44 December 21, 2002 Weekly Newsletter FSC/FSS to Amend Settlement Date in the OTC Bond Market and Allow Securities Firms to Lend ETF Shares for Trading Revision of Criteria for Specialized Bond Dealers After-Hours Block Trading at KSE and KOSDAQ to Be Allowed With FSC Approval FSC/FSS Releases Analysis of Audit Opinions on Financial Statements Closed in 2001 Foreign Portfolio Investment in November 2002 Direct Corporate Financing for January-November 2002 (Appendix) 1. Major Financial Statistics 2. Daily Trends -1-
FSC/FSS to Amend Settlement Date in the OTC Bond Market and Allow Securities Firms to Lend ETF Shares for Trading The FSC/FSS approved amendments to the Regulation on Supervision of Securities Business on December 13 that will change the settlement date for bond transactions in the domestic OTC market from the current T+0 T+14 to T+1 T30 (from T+0 to T+1 for the KSE market) effective June 1, 2003, and allow securities firms to lend exchange-traded funds (ETFs) to investors for trading effective immediately. With the customary T+0 settlement date, the market-making ability of bond dealers and the pricing of bonds, including the forward pricing, are hampered, and the likelihood of failure to settle after a trade is executed is always present. Foreign investors have also faced difficulties fully participating in the domestic OTC bond market because of T+0 settlement date. The amended OTC bond settlement date is intended to make the OTC bond market more liquid and efficient by encouraging the market to move away from the customary practice of settling bond transactions on the day of the trade (T+0) to at least (T+1). Trading of repurchase agreements (repo), trading up to 5 billion won by retail investors individuals and companies, excluding institutional investors and money market funds (MMF) are exempted from the amended settlement date and may continue to be settled at T+0. The amended regulation also allows securities companies to lend ETF shares to investors for trading effective December 16 as a way to promote more active participation of institutional and foreign investors in the ETF trading. The provisions for the valuation and custody of borrower collateral in the amended Regulation on Supervision of Securities Business is identical to those for KSE- and KOSDAQ stocks. Revision of Criteria for Specialized Bond Dealers On December 13, the FSC/FSS revised the Enforcement Rules for Supervision on Securities Business to facilitate a more active specialized bond dealer (SBD) system by -2-
modifying the designation and maintaining criteria for SBDs. With the exception of the maintaining criteria, the revised rules will go into effect beginning January 1, 2003. SBDs refer to financial institutions that are specially designated by the FSC/FSS to act as market makers by displaying bid and offer prices to buy and sell marketable bonds. The less-than-satisfactory market-making performance of SBDs, exhibited by their low bond trading value, called for a revision of the SBD rules. In consideration that the marketmaking capacity of an SBD is dependent on its holding bond size when debt and equity markets are not yet matured, under the revised rules, SBDs will be classified into three categories according to their asset size. Currently, the SBD designation criteria require financial institutions to uniformly hold a daily average bond balance of at least 20.0 billion won for market-making during the six months prior to their application. However, the new designation criteria require that the bond dealing department of each financial institution has the available funds equivalent to at least three times the minimum daily average of holding bonds needed for market-making for its category. Moreover, the FSC/FSS will continue to evaluate SBDs on a semi-annual basis to decide whether or not financial institutions may maintain their SBD status by meeting the minimum daily average of holding bonds and the trading value requirement for their categories. Market-making Criteria for Maintaining SBD Status Minimum Daily Average of Holding Bonds Minimum Trading Value Old 20.0 billion won 10.0% of the largest trading SBD New Asset size of less than 500 billion won 500-1,000 billion won 1,000 billion won or more 10 billion won 1.0% of the total trading value of all SBDs 20 billion won 1.5% of the total trading value of all SBDs 30 billion won 2.5% of the total trading value of all SBDs -3-
After-Hours Block Trading at KSE and KOSDAQ to Be Allowed With FSC Approval The FSC/FSS approved on December 16 amendments to the Regulation on Securities Issuance and Disclosure that will authorize the FSC to allow KSE- and KOSDAQ-listed companies to acquire their own shares during the after-hours trading through block purchases without being subjected to the daily price ceiling. Prior to the amendment, block purchase of their own shares by companies during the after-hours trading was allowed only from government-controlled or owned (more than 50%) companies. FSC/FSS Releases Analysis of Audit Opinions on Financial Statements Closed in 2001 The FSC/FSS posted on the FSS website the analysis of audit opinions on individual (8,883 firms) and consolidated (675 parent companies) financial statements closed in 2001. Of companies that submitted individual financial statements of 2001, 88% received an unqualified audit opinion, up 1.6 percentage points from 2000, while 8.2% received a qualified opinion, down 1.2 percentage points from the previous year. Moreover, 1.0% were considered adverse and 2.8% were given disclaimer opinions, both showing little change from a year ago. In addition, among firms that received outside auditing for two consecutive years, the percentage that received downgraded opinions dropped from 5.9% (1999-2000) to 3.1% (2000-2001). Of the firms that received adverse or disclaimer opinions, the primary cause in more than 50% of these cases has consistently been the doubt of these companies as going concerns, with 53.6% in 1999, 57.4% in 2000, and 53.8% in 2001. The main cause for these percentages remaining above 50% has been the strengthened auditing in evaluating firms as going concerns as a result of the 1997 economic crisis that caused the bankruptcy of many companies. -4-
Audit Opinions on Individual Financial Statements 1999 2000 2001 Unqualified 5,748 (87.9%) 5,808 (86.4%) 7,820 (88.0%) Qualified 599 (9.1%) 635 (9.4%) 725 (8.2%) Adverse 44 (0.7%) 90 (1.3%) 89 (1.0%) Disclaimer 150 (2.3%) 192 (2.9%) 249 (2.8%) Total 6,541 (100%) 6,725 (100%) 8,883 (100%) Of the 675 submitted consolidated financial statements, 89.6% received an unqualified audit opinion in 2001, up 4.5 percentage points from the previous year, while 10.3% received a qualified opinion, down 3.0 percentage points from 2000. Moreover, the average number of domestic subsidiaries included in each parent company s consolidated financial statement increased to 1.7 in 2001 from 1.6 in 2000, while that of overseas subsidiaries was 1.5 in 2001, showing little change from 2000. Foreign Portfolio Investment in November 2002 The total number of FSS-registered foreign investors at the end of November 2002 stood at 14,061 (9,048 institutional and 5,013 individual), indicating an increase of 80 (69 institutional and 11 individual) from the previous month. For the month of November, foreign investors purchased stocks worth 7.9 trillion won and sold 6.3 trillion won on the Korea Stock Exchange (KSE), ending the month as net buyers of 1.5 trillion won. The total market value of foreign investors KSE stockholdings increased to 106.8 trillion won (35.9% of market capitalization) from 94.8 trillion won at the end of October. Much of the increase in the market value of foreign investors KSE stockholdings resulted from the net purchase of 1.5 trillion won for the month of November and a 10.00% increase in the KSE composite stock index since the end of October. On the KOSDAQ, foreign investors purchased 473.6 billion won and sold 399.6 billion won in November, thus ending the month as net buyers of 74.0 billion won. The total market value of foreign investors KOSDAQ stockholdings increased to 4,580.6 billion won (10.6% of market capitalization) from the October total of 3,925.1 billion won, -5-
primarily as a result of the 74.0 billion won in net purchase and the 8.01% rise in the KOSDAQ index for the month of November. Foreign Equity Investment: November 2002 (In billions of won) KSE KOSDAQ 2002 Net Purchase 1 Market Value of Foreign Stockholdings 2 Net Purchase 1 Market Value of Foreign Stockholdings 2 October 539.7 94,798.5 (35.2%) 20.3 3,925.1 (10.0%) November 1,533.1 106,778.4 (35.9%) 74.0 4,580.6 (10.6%) Note: 1) For the entire month 2) As of the end of the month 3) Figures in parentheses indicate portion of stockholdings of foreign investors In the domestic bond market, foreign investors were net buyers of 100.0 billion won in November. The total value of foreign investors bond holdings rose 44.0 billion won to 650.0 billion won (0.12% of total bond holdings) from 606.0 billion won at the end of October. Specialized bonds and government bonds each accounted for 35.9% and 35.4%, respectively, of foreign investors bond holdings. Foreign Bond Investment: November 2002 (In billions of won) 2002 Net Purchases 1 Market Value of Foreign Bond Holdings 2 October 104.8 606.0 (0.11%) November 100.0 650.0 (0.12%) Note: 1) For the entire month 2) As of the end of the month 3) Figures in parentheses indicate portion of bond holdings of foreign investors In the KOSPI200 futures market, foreign investors traded 1,086,940 (11.6%) futures contracts in November, while in the KOSPI200 options market, foreign investors traded 32,992,033 (7.9%) options contracts. -6-
2002 Foreign KOSPI200 Futures & Options Trading: November 2002 KOSPI200 Futures Buying Selling Total Foreigner s Trading Portion KOSPI200 Options Buying Selling Total (Number of contracts) Foreigner s Trading Portion Oct. 590,008 577,309 1,167,317 10.5% 19,817,287 19,837,117 39,654,404 8.2% Nov. 542,127 544,813 1,086,940 11.6% 16,743,600 16,248,433 32,992,033 7.9% Note: 1) For the entire month; 2) As of the end of the month. Direct Corporate Financing for January-November 2002 Direct financing by domestic companies through debt and equity from January to November 2002 reached 77.95 trillion won, down 3.9% from 81.08 trillion won recorded for the same period a year ago. When compared to the same 11-month period of 2001, equity financing fell 10.2% to 8.59 trillion won from 9.57 trillion won and debt financing decreased 3.0% to 69.37 trillion won from 71.52 trillion won. If financial bonds - bonds issued by financial institutions and reported to the FSS since July 2001 - are excluded, the total amount of debt financing falls 30.5% from a year ago. Direct Corporate Financing: January-November 2002 (In billions of won) Jan-Nov 2001 Jan-Nov 2002 % Change Stocks 9,565.5 8,587.6-10.2% Bonds 71,517.1 69,366.4-3.0% ABS 33,139.4 24,094.8-27.3% Financial Bonds 6,126.0 23,940.4 - Others 32,251.7 21,331.2-33.9% Total 81,082.6 77,954.0-3.9% Equity Financing Although equity financing by domestic companies during the first 11 months of the year fell 10.2% compared to a year ago, the figure climbs 40.9% if the 3.4 trillion won in new -7-
stock offerings by Korea Telecom ICOM and SK IMT in 2001 are excluded. The 119 initial public offerings in the KSE and KOSDAQ totaled 1.66 trillion won for the period, marking a 64.9% increase from the same period a year ago, while the 220 stock offerings by listed and unlisted domestic companies amounted to 6.93 trillion won, indicating a 19.1% decrease when compared to a year ago. Initial Public Offerings Stock Offerings Equity Financing: January-November 2002 (In billions of won) Equity Markets Jan-Nov 2001 Jan-Nov 2002 % No. of No. of Amount Amount Change Offerings Offerings KSE 1 40.2 8 594.6 1,379.1% KOSDAQ 122 967.2 111 1,066.6 10.3% Sub-total 123 1,007.4 119 1,661.2 64.9% KSE 74 3,596.4 109 5,644.8 57.0% KOSDAQ 98 765.2 93 486.3-36.4% Other 36 4,196.5 18 795.3-81.0% Sub-total 208 8,558.1 220 6,926.4-19.1% Total 331 9,565.5 339 8,587.6-10.2% Debt Financing Bond issuance excluding ABS and financial bonds during the 11-month period fell 33.9% to 21.33 trillion won from a year ago as a result of improved liquidity of many domestic companies, less investment by companies, and a lower demand for roll-over issuances. The net bond issuance amount the amount issued less the amount matured also fell during the period as the maturing amount exceeded the issuing amount by 0.51 trillion won. More favorable cash flow conditions as well as lower investments by companies most likely contributed to the drop. Financial bonds reached 23.94 trillion won for the period, while ABS accounted for 24.09 trillion won, down 27.3% from a year earlier because of a drop in primary CBOs and CLOs and fewer NPLs held by financial institutions. However, ABS issuance backed by future receivables and other assets of non-financial companies surged during the period. Especially, ABS issuance backed by credit-card receivables increased because they were preferred over credit card bond issuance. -8-
Direct Financing by Large Companies and SMEs Large companies raised 27.60 trillion won through debt (excluding ABS and financial bonds) and equity during the period, down 29.3% from a year ago. Small and mediumsized enterprises (SMEs) raised 2.32 trillion won, a drop of 15.8% from a year ago. Debt and Equity Financing by Large Companies and SMEs (In billions of won) Jan-Nov 2001 Jan-Nov 2002 Change (% Change) Large Companies 39,061.0 (92.2%) 27,597.4 (92.2%) -11,463.6 (-29.3%) SMEs 2,756.2 (7.8%) 2,321.4 (7.8%) -434.8 (-15.8%) Total 41,817.2 (100.0%) 29,918.8 (100.0%) -11,898.4 (-28.5%) Corporate Bonds by Credit Ratings Excluding ABS and financial bonds, corporate bonds with credit rating of A or higher amounted to 12.84 trillion won (down 36.3% from a year ago), BBB-rated bonds totaled 6.80 trillion won (down 18.9%), and BB or lower bonds totaled 871.7 billion won (down 63.5%). The relatively modest drop in BBB-rated bonds was mostly caused by a slower pace of high-rated bond issuance and low interest rates. The drop in BB- or lower-rated bonds is a result of an unusually large amount of bonds issued a year earlier by domestic companies facing liquidity squeeze. Corporate Bonds by Credit Rating (In billions of won) Jan-Nov 2001 Jan-Nov 2002 Change (% Change) A or higher 20,176.8 12,842.7-7,334.1 (-36.3%) BBB 8,391.6 6,801.9-1,589.7 (-18.9%) BB or lower 2,387.4 871.7-1,515.7 (-63.5%) Total 30,955.8 20,516.3-10,439.5 (-33.7%) -9-
(Appendix) 1. Major Financial Statistics Equity Indexes (point) Interest Rates (percent) Exchange Rates KOSPI KOSPI 200 KOSDAQ 3-Year Corp. Bond Yield 3-Year Gov t Bond Yield 1-Day Call Rate 91-Day CD Yield Won/ USD Won/ 100 JPY May 796.40 100.80 69.78 6.90 6.14 4.17 4.83 1,233.3 998.50 June 742.72 93.69 60.85 6.59 5.66 4.35 4.91 1,201.8 1,004.51 July 717.99 90.16 58.62 6.42 5.54 4.27 4.84 1,197.0 994.35 Aug. 736.40 92.55 59.11 6.23 5.45 4.27 4.80 1,200.5 1,013.94 Sep. 646.42 81.37 46.71 6.00 5.30 4.27 4.86 1,225.5 998.37 Oct. 658.92 83.10 48.05 5.95 5.33 4.28 4.94 1,233.4 1,003.54 Nov. 724.80 92.05 51.90 5.96 5.35 4.27 4.90 1,208.0 986.28 Dec. 12 715.38 90.81 53.38 5.90 5.30 4.29 4.90 1,215.8 982.98 13 708.13 89.81 53.54 5.87 5.27 4.30 4.90 1,212.1 988.30 14 - - - - - - - 1,209.0 1,003.40 16 692.42 87.72 52.25 5.87 5.27 4.30 4.90 1,209.0 1,001.70 17 704.49 89.37 52.72 5.88 5.28 4.30 4.90 1,202.2 990.16 18 709.22 90.05 52.43 5.87 5.27 4.25 4.90 1,200.7 987.42 Note : End of Period -10-
2. Daily Movement 1) KOSPI 723 715 707 700 692 684 2) KOSDAQ Index 54.0 53.6 53.1 52.7 52.2 51.8 3) 3-Year Corporate Bond Yield % 5.91 5.90 5.89 5.88 5.87 5.86 4) 3-Year Government Bond Yield % 5.31 5.30 5.29 5.28 5.27 5.26-11-
5) 1-Day Call Rate % 4.32 4.30 4.28 4.27 4.25 4.23 6) 91-Day CD Yield % 4.93 4.92 4.91 4.90 4.89 4.88 7) Won/US Dollar 1,221 1,216 1,211 1,206 1,201 1,196 8) Won/100 Japanese Yen 1,010 1,003 996 990 983 976-12-
Financial Supervisory Service Main Office 27, Yoido-dong, Youngdeungpo-gu, Seoul 150-743, Korea Tel: 82-2-3771-5114; Fax : 82-2-3771-5985 Http://www.fss.or.kr Overseas Offices New York 14 th Floor, 780 Third Avenue, New York, NY 10017, U.S.A. Tel: 1-212-350-9388; Fax: 1-212-350-939 E-mail: newyork@fss.or.kr Washington, DC 1001 Connecticut Avenue NW, Washington, DC 20006, U.S.A. Tel: 1-703-407-3928; Fax: 1-703-533-6634 E-mail: washington@fss.or.kr London 3 rd Floor, 1 Minster Court, Mincing Lane, London EC3R 7AA, U.K. Tel: 44-207-621-8490; Fax: 44-207-929-1677 E-mail: london@fss.or.kr Frankfurt Feuerbachstr. 31, 60325 Frankfurt am Main, Germany Tel: 49-69-7953-9911; Fax: 49-69-7953-9920 E-mail: frankfurt@fss.or.kr Tokyo Yurakucho Denki Bldg., South Kan 1051, 7-1, Yurakucho 1-Chome, Chiyoda-ku, Tokyo, Japan Tel: 81-3-5224-3737; Fax: 81-3-5224-3739 E-mail: tokyo@fss.or.kr Hong Kong Room 1208-9, Alexandra House, 20 Chater Road, Central, Hong Kong Tel: 852-2526-6508; Fax: 852-2868-5276 E-mail: hongkong@fss.or.kr Please forward all questions, suggestions, and comments regarding the Weekly Newsletter to the International Cooperation Office (Tel: 82-2-3786-7911; Fax: 82-2-3786-7899; E- mail: cylee@fss.or.kr), Financial Supervisory Service. -13-
-14- Financial Supervisory Service