"Estimated 867 Billion KRW Recovery from Securities Firms' TRS in Lime Fund"

Korea Ratings Report on 'Impact of Lime Fund Redemption Suspension Incident on Securities Firms' Credit Ratings'

As Lime Asset Management halted redemptions of funds worth 1.67 trillion won, estimates emerged that securities firms have a total return swap (TRS) loan amount of 867 billion won that they can withdraw first from these funds.

Korea Ratings announced a report titled "Impact of Lime Fund Redemption Suspension on Securities Firms' Credit Ratings" on the 20th. According to the report, Shinhan Financial Investment and Korea Investment & Securities have TRS contract amounts (including sub-funds) related to four Lime redemption suspension mother funds of 600.5 billion won and 156.7 billion won, respectively. NH Investment & Securities has 9.8 billion won. KB Securities did not submit data, but Korea Ratings said it is reported to be around 100 billion won.

When combining the TRS amounts of the four securities firms, the total reaches 867 billion won. This is about 200 billion won more than the previously known 670 billion won.

Korea Ratings stated, "Regarding the TRS contracts of 'Pluto FI D-1' and 'Thetis 2,' considering the level of margin already received, the estimated residual value scale versus TRS exposure ratio, and the senior repayment structure, it is expected that securities firms will have no or minimal losses." However, it analyzed, "Regarding 'Pluto TF-1 (Trade Finance Fund),' the residual value of the fund's underlying assets is estimated to be about 50% based on Lime's current announcement, but if the actual recovery level falls short, significant losses may occur on assets purchased under the TRS contract."

TRS is a loan where securities firms purchase assets on behalf of others and receive fees in return. Securities firms hold the status of first-priority creditors and can recover the amount invested in the fund before investors. Investors share the remaining money in the fund after the TRS loan is recovered, which increases their losses.

Regarding the impact of TRS contracts with Lime on securities firms' credit ratings, Korea Ratings said, "According to data presented by related securities firms, for two mother funds (Pluto, Thetis), the TRS trading securities firms may start to bear losses once the loss rate exceeds 50% of the nominal amount," but added, "Considering the currently announced residual value, TRS trading losses are expected to be none or minimal for each securities firm."

It added, "It is difficult to predict the possibility of losses due to incomplete sales at this stage, and if the compensation ratio is set high, the operating performance of securities firms with large sales volumes could significantly deteriorate this year."