'Big Businesses' Lotte and Daewoo E&C Also Tap P-CBOs for Funding; Support Criteria Under Scrutiny Amid KODIT’s Growing Default Burden [fn Market Watch]

[Financial News] Primary collateralized bond obligations (P-CBOs), a policy-financing tool that supports corporate bond issuance by small and midsize companies, are also being used as a funding channel by affiliates of large conglomerates, sparking debate over whether the support is appropriately targeted. Two Lotte Group affiliates raised 90 billion won in a single day, and major construction companies such as Daewoo E&C also participated in the issuance. There are concerns that providing policy guarantees to affiliates of large conglomerates—which have potential backing from their parent companies and relatively varied funding options—could reduce the support available to small and midsize companies with limited access to the corporate bond market.
According to investment banking (IB) industry sources on the 29th, a total of 11 companies issued P-CBOs worth 270 billion won on the 26th. All were three-year notes maturing on October 26, 2029, with annual coupon rates of 4.424% to 6.029%.
Lotte Energy Materials raised 50 billion won at an annual rate of 4.673%, while Korea Seven raised 40 billion won at 5.118%. The two Lotte Group affiliates issued a combined 90 billion won, accounting for 33.3% of the total. Daewoo E&C issued 16.45 billion won at 4.773%, and Kolon Global issued 20 billion won at 6.029%. Other participants included Socar (34 billion won), ISU Chemical (32 billion won) and Dongbang (20 billion won).
P-CBOs are structured so that asset-backed securities are issued using corporate bonds and other instruments issued by companies as underlying assets, with the Korea Credit Guarantee Fund (KODIT) and others providing credit enhancement. They support funding for small and midsize companies that have difficulty issuing corporate bonds directly, while also serving a market-stabilization function by helping large companies refinance when the corporate bond market tightens.
The problem is that the burden of defaults is also accumulating as funding support through P-CBOs expands. According to data obtained from KODIT and released by Park Sung-hoon, a member of the National Policy Committee of the National Assembly of the Republic of Korea, a total of 661 cases of default were recorded after inclusion in P-CBOs between 2022 and August this year.
Of these, 546 defaults occurred after refinancing support, accounting for 82.6% of the total. The number of defaults rose from 16 in 2022 to 115 in 2023, 199 in 2024 and 232 last year. There were 99 cases through August this year. However, it should be taken into account that refinancing also makes up a large share of overall P-CBO support.
KODIT’s burden from paying out guarantees on borrowers’ behalf is also growing. According to KODIT’s financial data, its P-CBO subrogation payments rose from 34.6 billion won in 2023 to 137.1 billion won as of the end of October 2025. Subrogation occurs when a guarantor repays a company’s debt on its behalf; the ultimate loss depends on subsequent recoveries.
Controversy over P-CBO support for large companies also arose in 2013. At the time, financial authorities supported the refinancing of corporate bonds issued by Dongbu Steel, Hyundai Merchant Marine, Hanjin Shipping and others through measures to normalize the corporate bond market. But as several companies subsequently fell into financial distress, critics argued that policy financing was delaying corporate restructuring and increasing KODIT’s losses.
An industry source said, “It’s like twisting KODIT’s arm to support large companies,” and criticized the practice, saying, “If it ultimately leads to losses, it’s a waste of taxpayers’ money.”
Criticism is also mounting that as policy-financing support expands to affiliates of large conglomerates with potential backing from their parent companies and access to a range of funding options, the guarantee capacity available to small and midsize companies with limited access to capital markets could shrink.
[email protected] Kim Hyun-jung Reporter