(Repeat for additional subscribers)
Sept 11 (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
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
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.