Raem Fund Can Prioritize Recovering 670 Billion KRW from 1.6 Trillion KRW TRS Securities Company

Photo by Asia Economy DB

[Asia Economy Reporter Kum Bo-ryeong] Among the 1.6 trillion KRW worth of Lime Asset Management private equity fund assets whose redemptions were suspended last year, about 670 billion KRW can be taken preferentially by securities firms that have entered into total return swap (TRS) contracts with Lime Asset Management, ahead of general investors.

According to financial authorities and the financial investment industry on the 27th, Lime Asset Management signed TRS contracts worth 670 billion KRW with three securities firms?Shinhan Financial Investment, KB Securities, and Korea Investment & Securities?regarding the three parent funds whose redemptions were suspended. Shinhan Financial Investment is reported to have about 500 billion KRW, KB Securities about 100 billion KRW, and Korea Investment & Securities about 70 billion KRW.

A TRS contract is an agreement where an asset management company receives fees in exchange for purchasing assets on behalf of the fund. It helps improve fund returns by leveraging (borrowing). Under the contract, if the fund assets are disposed of, the TRS holders can recover funds ahead of general investors.

If the three securities firms?Shinhan Financial Investment and others?take the 670 billion KRW first after due diligence and asset disposal, the fund assets worth 1.6 trillion KRW, whose redemptions were suspended last year, will eventually decrease to about 900 billion KRW. Lime Asset Management suspended redemptions worth 1.5587 trillion KRW for the three parent funds last year due to a liquidity shortage crisis.

The problem is that if Lime Asset Management disposes of non-performing assets after Samil Accounting Corporation releases its due diligence results on the three parent funds, the 1.6 trillion KRW worth of assets with suspended redemptions could shrink further. For example, if it is concluded that only about 70% of the assets of the three parent funds with suspended redemptions are recoverable, the fund assets will decrease to about 1 trillion KRW, and if the three securities firms take 670 billion KRW first, only about 300 to 400 billion KRW of fund assets will remain. However, the figures may vary depending on the due diligence results from Samil Accounting Corporation and the write-down scale by Lime Asset Management.

As concerns over large-scale investment losses grow, Lime Asset Management, the three TRS securities firms, and the fund distributors plan to form a consultative body to discuss issues such as fund asset recovery soon.

The Financial Supervisory Service has ordered consultations, stating that since the amount general investors can receive decreases if TRS securities firms recover funds first, it is necessary to discuss the responsibility of TRS securities firms before the due diligence results are released.