[Corporate Financing] Meritz Financial Group Issues First Perpetual Capital Securities Worth 100 Billion KRW

Preparing Emergency Funds for Affiliates Due to COVID-19 Crisis
Also Aiming to Defend Financial Ratios Such as Double Leverage Ratio

[Asia Economy Reporter Lim Jeong-su] Meritz Financial Group has issued perpetual bonds (hybrid bonds) worth 100 billion KRW for the first time since its establishment. This move aims to respond to the emergency fund demands of its affiliates without damaging its financial structure. By issuing perpetual bonds and investing in affiliates, it can prevent deterioration of the financial structure such as an increase in the double leverage ratio.

According to the investment banking (IB) industry on the 28th, Meritz Financial Group issued 100 billion KRW worth of 30-year perpetual bonds on the same day. The issuance interest rate is 4.20%, more than twice the existing corporate bond issuance rate in the low 2% range. It is also known to have a step-up structure where the interest rate rises if Meritz Financial Group does not exercise the call option to redeem early within five years.

Meritz Financial Group’s perpetual bond issuance was conducted through a private placement without a demand forecast. Therefore, investors are limited to some institutional investors, and trading in the secondary market is also restricted. It is reported that KB Securities has fully underwritten the perpetual bonds and plans to sell them down to investors.

This is the first time Meritz Financial Group has issued perpetual bonds. Its affiliate financial company, Meritz Securities, issued 200 billion KRW worth of perpetual bonds at the end of last year to expand its capital. Meritz Fire & Marine Insurance has mainly managed its Risk-Based Capital (RBC) ratio by issuing subordinated bonds. In February, it also issued subordinated bonds worth 100 billion KRW to improve its RBC.

The IB industry expects that Meritz Financial Group will use the funds raised through the perpetual bond issuance to invest in its affiliates. There is an analysis that the affiliates’ demand for investment is likely to arise due to COVID-19. An industry insider said, "Meritz’s major affiliates, Meritz Fire & Marine Insurance, Meritz Securities, and Meritz Capital, all have significant project financing (PF) exposure, so the burden from contingent liabilities is expected to increase amid the tightening of the financial market caused by the COVID-19 crisis."

Meritz Financial Group has so far invested in affiliates using funds raised through borrowings such as corporate bond issuance. The issuance of perpetual bonds this time is interpreted as a measure to manage financial ratios such as the double leverage ratio. Perpetual bonds are recognized as capital in accounting, which has the effect of increasing capital.

The double leverage ratio is the total amount of investments in subsidiaries by a financial holding company divided by its equity capital. The higher this ratio, the more the holding company has invested in subsidiaries through borrowings. Financial authorities recommend that financial holding companies maintain the double leverage ratio below 130%. Ratios below 120% are classified as grade 1, and those below 130% as grade 2.

As of the end of last year, Meritz Financial Group’s double leverage ratio was 125.29%. The total amount of investments in subsidiaries remained unchanged at 1.5015 trillion KRW, but the total equity capital decreased somewhat in the second half of last year, causing the ratio to rise by about 3 percentage points. A credit rating agency official evaluated, "Depending on the performance of affiliates, the double leverage ratio can increase relatively significantly."

A Meritz Financial Group official explained, "Due to the prolonged tightening of the financial market caused by the COVID-19 crisis, emergency fund demands from affiliates may arise. In preparation for this, we issued perpetual bonds that do not damage financial ratios."