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| The headquarters of Heungkuk Life Insurance in central Seoul / Yonhap |
Analysts unsure about effect on already deteriorated market sentiment
By Anna J. Park
In less than a week since Heungkuk Life Insurance decided to delay the exercise of a $500 million call option on its dollar-denominated perpetual bonds, sending a shockwave to Korean companies' dollar bonds market, the life insurer reversed its position in a move to calm and rectify souring investment sentiment in Korean companies' bonds markets.
The company released an official statement Monday evening ― two days before the originally set date for the exercise of the call option ― that it decided to redeem the $500 million call option on the firm's perpetual bonds as scheduled in order to stabilize market turmoil.
Taekwang Group, the parent company of Heungkuk Life, also vowed to financially support its affiliate due to its social responsibility. In the statement, the life insurer apologized for the confusion it created in the financial markets. The firm's perpetual bonds were issued back in November 2017.
"Heungkuk Life Insurance's profitability, liquidity and financial soundness remain in a good condition, and the firm plans to strengthen its capital soundness through additional capital expansion. The firm delivers an apology over the confusion caused by the company's previous decision, and will do its best in stabilizing the markets and protecting consumer interests," the life insurer's press statement reads.
The firm's filing to the Singapore Exchange (SGX) on the same day also stated that the life insurer's decision to cancel its previous attempt of postponement of the call option and to stick to its original plan to repay the callable bonds aimed at mitigating market anxieties surrounding dollar bonds issued by Korean companies.
"Following the postponement notice of optional redemption given by the issuer, unnecessary concerns over the financial solvency of the issuer have been raised, which would result in some shrinkage of investment sentiment in the Korean market and churning of insurance policy holders. For the purpose of dispelling these concerns and fulfilling the social responsibilities of the issuer from a medium to long-term perspective, the affiliates of the issuer and others have determined to support the capital expansion of the issuer," the filing stated.
The capital for the call option redemption is expected to be jointly raised through funding from Taekwang Group, loans from other insurers, as well as 400 billion won ($288 million) worth of repurchase agreements (RP) sold to major local lenders.
Late move to remedy market sentiments over Korean commercial papers
Aiming to minimize the negative market shock, other financial companies are also following suit as they stick to their original repayment plans. DB Life Insurance, which also decided to delay its optional repayment last week, also reversed its position, saying that it will carry out its call option on Nov. 13, as originally scheduled. Hanwha Life and KDB Life will also exercise their call option redemption, which is scheduled for the first half of next year.
As the companies reversed their moves, in order to stick to their previously-agreed commitment, (on their perpetual bonds) so as not to cause any more shockwaves to the already fragile markets, market watchers say it remains to be seen as to whether investment sentiment regarding Korean commercial papers would be repaired soon.
Following the postponement decisions last week, the prices for perpetual bonds issued by local banks and insurers immediately plunged. Shinhan Financial Group's perpetual bonds, slated to be redeemed in August next year through a call option, fell by 8.9 percent in just a week. Woori Bank's perpetual bonds also fell by 11.1 percent, while Tongyang Life Insurance's price nosedived by 37.2 percent.
"Unlike stocks, bonds are assets that are mainly built on market trusts. The biggest problem with the Heungkuk Life incident is that the rule has been broken," Kim Myong-sil, a bond analyst at HI Investment & Securities, pointed out. "Despite the call option redemption by capital raised through RP, it won't be easy to turn back the already worsening market sentiment," the analyst predicted.
Another analyst agreed that the step seems like a late move, although a late move may be better than nothing.
"I don't think risk factors are gone, just because the postponement on call options was withdrawn," said Oh Chang-seop, an analyst at Hyundai Motor Securities. "The situation could seem better than not carrying out the call option obligation, yet its effects are not guaranteed," he added.
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