Fears grow over liquidity crisis at brokerages, insurers

S&P warns of worsening funding conditions for local firms

By Yi Whan-woo

Concerns of a possible crisis at non-bank financial firms are growing as local insurers and brokerage houses are suffering from a liquidity shortage that is feared to send shock waves through the entire financial market here.

Korean securities firms and insurers are coping with a mounting refinancing burden in the wake of lost confidence in the debt and short-term money markets following a Gangwon provincial government-backed developer's failure to repay bonds and Heungkuk Life Insurance's unusual delay in exercising its perpetual bond repayment option.

The Gangwon provincial government promised later to fulfill a payment guarantee for the developer of Legoland Korea Resort by mid-December, but many securities firms have been struggling to refinance real estate project financing (PF).

The Legoland fiasco dented the fund-raising capacities of securities firms, because they are obligated to make repayments for the developer's bonds worth 205 billion won ($145.2 million) in case of a default.

Against this backdrop, global credit rating agency S&P assessed in a Nov. 3 report that “The liquidity crunch is building for Korea's securities industry.”

It said the default has “further weakened investor sentiment in the domestic debt capital market at a time when domestic interest rates have rapidly increased and the property market is weak.”

It warned the small and mid-size stand-alone securities firms generally have weaker access to the debt capital market and that their funding and liquidity profiles will “face more pressure, especially compared with major domestic peers.”

Heungkuk Life announced on Nov. 1 that it will postpone exercising a call option, originally scheduled on Nov. 9, for its dollar-denominated perpetual note worth $500 million.

This is the first time since 2009 _ when the country was in the midst of the global financial crisis _ that a domestic insurer postponed a planned security issuance that would have repaid the bonds.

The midsize insurer cited market conditions and noted it plans to exercise the call option, which it can do once every six months, in the future after issuing dollar securities.

The delay does not result in legal or regulatory consequences for Heungkuk Life Insurance.

But according to S&P, investors generally expect issuers to redeem on the first optional call date.

The rating agency said in its Nov. 4 report that the delay “will likely weigh on funding conditions for Korean insurers.”

“Taking this into account, I'd say a revival of a financial crisis can be possible if the credit crunch continues to spread and the economic situation gets worse,” said Joo Won, deputy director of the Hyundai Research Institute.

He noted the possibility of a credit crisis looms as corporate bonds in Korea are suffering from the most rapid selloffs ever in the past three months amid the Bank of Korea's (BOK) steep rate hike.

Such a hike is prompted by the sharper-than-expected benchmark rate increase by the U.S. Federal Reserve, which delivered a 75 basis point rate hike for the fourth time on Nov. 2.

“The rate increase is likely to go in tandem with the Fed's tight monetary policy,” Lee In-chul, director of the Real Good Economic Institute, said, adding, it may be offset by the impact of the government's 50 trillion won liquidity aid program introduced to quell the bond market concerns after the Legoland crisis.

In a Facebook posting on Sunday, main opposition Democratic Party of Korea (DPK) Chairman Lee Jae-myung called on the government to take preemptive steps to avoid corporate bankruptcies in the foreseeable future.

“The incidents surrounding the Legoland project and Heungkuk Life Insurance indicate corporations are increasingly exposed to liquidity risks day after day,” Lee said.

He urged the government and the ruling People Power Party to take measures focusing on the long term, arguing that the government's liquidity aid program is short-sighted and therefore will have limited impact.