Hanwha·Ebest Securities Lose 2nd Trial Over Chinese SOE ABCP

Partial Loss in Lawsuit Related to China CERCG Bankruptcy
2nd Trial Court: "Must Pay Half of the 113.5 Billion Won Claim Amount"
Appeal Planned... Final Judgment at the Supreme Court

[Asia Economy Reporter Lim Jeong-su] Attention is focused on whether Hanwha Investment & Securities and Ebest Investment & Securities will have to pay large compensation amounts to financial companies such as Hyundai Motor Securities and BNK Investment & Securities. Although the final decision is not yet confirmed, a ruling in the second trial related to asset-backed commercial paper (ABCP) linked to a Chinese state-owned enterprise has recognized a significant portion of the compensation liability of Hanwha and Ebest Investment & Securities.

According to the investment banking (IB) industry on the 16th, Hanwha Securities and Ebest Investment & Securities recently lost part of a lawsuit demanding the return of unjust enrichment related to the default of China National Energy Chemical Group (CERCG). The lawsuit claim amount totals 113.5 billion KRW invested by Hyundai Motor Securities, BNK Investment & Securities, KB Securities, Busan Bank, and KEB Hana Bank. In the second trial ruling, the liability ratio was split 50-50, so unless the Supreme Court overturns the decision, Hanwha and Ebest Investment & Securities will have to pay about 56 billion KRW.

The CERCG incident dates back five years. CERCG’s subsidiary, CERCG Capital, privately issued dollar-denominated bonds worth 150 million USD (approximately 180 billion KRW) in May 2018. Hanwha Investment & Securities and Ebest Investment & Securities acquired foreign currency bonds issued by CERCG through a special purpose company (SPC) called Geumjeong Je12cha, and then issued ABCP backed by these assets.

Hyundai Motor Securities (50 billion KRW), BNK Investment & Securities (20 billion KRW), KB Securities (20 billion KRW), Busan Bank (20 billion KRW), KTB Asset Management (20 billion KRW), Yuanta Securities (15 billion KRW), Shin Young Securities (10 billion KRW), Golden Bridge Asset Management (6 billion KRW), and KEB Hana Bank (3.5 billion KRW) purchased a total of 164.5 billion KRW worth of ABCP, which they then sold to other institutions and individual investors as trust products and others.

However, shortly thereafter, an offshore subsidiary of CERCG failed to repay bonds worth 350 million USD, which were guaranteed by CERCG, causing a cross default on ABCP invested in by domestic institutions. Financial companies that sold ABCP to individual investors had to refund part of the sales amount due to incomplete sales and had to write off most of the investment as a loss.

Subsequently, financial companies that purchased ABCP filed civil lawsuits claiming that Hanwha and Ebest Investment & Securities did not properly fulfill their due diligence responsibilities. Hanwha and Ebest Investment & Securities argued that they were merely arrangers and that the transactions were between professional investors, so they bore no responsibility. In the first trial, the Seoul Southern District Court ruled in favor of Hanwha and Ebest Investment & Securities, stating they were not required to compensate investor losses. The financial companies appealed, and the result was reversed in the second trial.

Hanwha and Ebest Investment & Securities plan to first pay 56 billion KRW as an advance payment and then appeal to the Supreme Court. A Hanwha Securities official stated, "We plan to make the advance payment first to reduce the burden of delayed compensation interest and other costs."