S&P: "Despite Heungkuk Life Incident, Korean Banks and Insurance Have Call Option Flexibility"

[Asia Economy Reporter Park So-yeon] Despite the 'Heungkuk Life Insurance incident' last month, the international credit rating agency Standard & Poor's (S&P) Global Ratings evaluated that Korean banks and insurance companies have flexibility in exercising the call option for early redemption of hybrid capital securities.

On the 7th, S&P Global Ratings stated in a report, "Despite the reversal of non-exercise of the call option by Heungkuk Life Insurance, we have decided to maintain our assessment regarding the recognition of capital for hybrid capital securities issued by Korean banks and insurance companies to which we assign ratings."

Heungkuk Life Insurance postponed the exercise date of the call option ahead of the early redemption date of its foreign currency hybrid capital securities in early last month, but reversed the decision to exercise the call option again as the investment sentiment toward Korean bonds weakened and aftershocks in the financial market intensified.

The report mentioned, "There were questions about the discretion of domestic banks and insurance companies issuing hybrid capital securities to coordinate refinancing schedules through non-exercise of call options."

However, it was judged that "it is still premature to conclude that domestic banks and insurance companies do not have sufficient flexibility to refrain from exercising the call option on hybrid capital securities."

Regarding the financial authorities' response, it was evaluated that "the approval of the call option exercise was made considering Heungkuk Life Insurance's ability to strengthen solvency and to mitigate the sharp volatility expansion in bond prices," and "this was due to exceptional circumstances and does not indicate a change in the regulatory direction on capital management."

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However, it added, "Domestic banks and insurance companies should have the flexibility to adjust refinancing schedules and decide on exercising call options as needed even under market stress situations," and "we will continue to monitor the status of domestic hybrid capital securities."