OREANDA-NEWS. Fitch Ratings has affirmed Small Business Corporation's (SBC) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-', Long-Term Local Currency IDR at 'AA', and Short-Term Foreign Currency IDR at 'F1+'. The Outlooks on the Long-Term IDRs are Stable. Fitch has also affirmed SBC's senior unsecured bond of USD400m at 'AA-'.

The IDRs and senior debt ratings have been affirmed because SBC continues to be a quasi-government financial institution acting as a development arm of the government, and it is 100% owned by the state.

KEY RATING DRIVERS
SBC's ratings are equalised with the ratings of South Korea (AA-/Stable) due to its strong links to the sovereign and high probability of extraordinary government support, if needed. The entity's policy is dictated and closely monitored by the government of Korea. Under Fitch's public-sector entities rating criteria, SBC is classified as a credit-linked entity.

The entity's main policy role is to manage and operate the Fund for Establishment and Promotion of SMEs (SME Fund) and act on behalf of the SME Fund (for example, issuing bonds) under its corporate status. The state is by law required to replenish deficits in the SME Fund when the fund's reserves fall short. State support is also evident in the annual capital contributions by the government, which help the fund to partially cover operating losses arising from a negative interest-rate spread.

SBC has a mandate to implement government policies to support the development and growth of SMEs, including start-ups, small businesses and new technology developers, in Korea. SMEs lacking in collateral and with short track records may find it difficult to get funding from the private sector. The SME Fund provides funding for SMEs not served by private-sector financing. SBC loans are intended to supplement commercial loans, have longer maturities, and are provided at below-market interest rates. SBC also supports SMEs by providing non-financial assistance.

SBC is wholly owned by the state, and operates under the aegis of the Small and Medium Business Administration (SMBA), which is heavily involved in SBC's annual budget supervision and performance evaluation. SBC's management is appointed by the government. The entity is subject to checks by the government auditor, while a government-appointed external auditor conducts checks on the SME Fund.

SBC is a frequent issuer. Its quasi-government status underpins the strong liquidity in its debt and its diverse funding channels. Its bond issuance is classified as quasi-government securities. SBC's bonds achieve more favourable pricing as they benefit from zero-risk weighting under Basel regulations.

SBC had KRW16.4trn of assets at end-2014, of which KRW14.3trn, or 87.5%, was loans to SMEs. SBC is non-profit organisation and historically recorded losses, which were covered by state contributions. However, SBC improved its performance over the last four years and recorded a KRW23.1bn net profit in 2014. Fitch expects the company to continue to break even.

RATING SENSITIVITIES
A positive rating action on the sovereign, in conjunction with continued strong support from the state, would lead to a similar change in SBC's rating.

A sovereign downgrade, significant changes that would lead to a dilution in state ownership and public control, or evident weakening of links with the government, including erosion of the importance of the foundation's public-policy role and budgeting relationship with the government, could trigger a downgrade.