[High-Interest Business]② IB and PEF, Extinguishing Urgent Fires and Building Strong Relationships

IB Industry Expands PF Normalization Fund Formation
Meritz Securities Achieves High Returns with 900 Billion KRW Support for Lotte Construction
Market Interest Rate Stabilization Reduces 'Low-Risk High-Yield' Opportunities

Editor's NoteFinancial companies are fully leveraging corporate liquidity crises as high-yield opportunities. They provide funds to companies in urgent need of cash to resolve liquidity risks, earning interest or fee income in return. From the perspective of financial firms engaged in investment institutions or investment banking (IB) operations, they take on the role of partners to companies during uncertain times, capturing two benefits: profits and strengthened relationships with those companies.

[Asia Economy Reporter Lim Jeong-su] The investment banking (IB) industry is increasing the profitability (ROE) of their own capital by providing funds to companies or construction project financing (PF). The strategy is to support high-interest short-term funds to companies or project-based businesses to gain immediate profits while seeking additional business opportunities with those companies or projects. This also helps prevent loan defaults on the loans extended to companies or projects.

IB Industry Provides High-Interest Liquidity to Construction Firms and PF for High Returns

KB Securities is currently promoting a plan to raise a fund worth 200 billion to 300 billion KRW to acquire bridge loans for real estate development sites. The plan is to select development sites at the bridge loan stage that have not yet moved to the main PF, provide the main PF to proceed with the project, and complete sales. SK D&D, a large corporation-affiliated developer, is mentioned as a corporate partner in this plan.

A bridge loan is a loan borrowed by a developer to secure land or operating funds before obtaining construction permits. If the main PF loan is blocked and construction does not proceed, the bridge loan becomes non-performing with principal and interest repayments not properly made. To normalize this, financial companies must lend the main PF to allow construction to proceed and increase sales performance to recover the loan.

During the fund formation process, KB Securities is expected to provide senior loans to the fund, while partner construction companies or developers will bear subordinated loans. The plan is to use fund capital to support the normalization of the development site to prevent the developer from becoming non-performing immediately. KB Securities is also considering leading or lending the main PF in this process. Depending on the project, interest or fee income of around 10% or more is expected.

Previously, Meritz Securities earned significant profits by supporting Lotte Construction's funds. Meritz Securities provided 900 billion KRW in senior loans to a fund established to purchase Lotte Construction guaranteed PF-ABCP worth 1.5 trillion KRW. The remaining 600 billion KRW was supported subordinately by Lotte Group affiliates.

Meritz Securities reportedly earned over 150 billion KRW in profit from this single transaction. They may also earn more profits through additional PF loans to Lotte Construction projects. An IB industry insider said, "The interest rates on main PF loans remain quite high, so additional loans to relatively sound projects can increase profitability."

Private Equity Funds Also Engage in Lending Business... Risk Burden Increases

Private equity funds (PEFs) have also profited through high-interest private loans. Private loans refer to funds raised from institutional investors to form funds that invest in loans or interest-type alternative investment products, unlike public corporate bonds.

Global private equity firm Kohlberg Kravis Roberts (KKR) recently lent 400 billion KRW to the Taeyoung Group at an interest rate of 13%. This was done by acquiring 400 billion KRW worth of private bonds issued by the group's holding company, TY Holdings. TY Holdings used the funds raised from KKR to support Taeyoung Construction, which has significant contingent liabilities in construction. KKR earned approximately 52 billion KRW annually in interest income from this transaction.

Other private equity funds are also aiming for high returns through private debt funds (PDFs). Some PEFs are preparing 'special situation funds' to support funds suffering losses due to the sluggish real estate market. A PE industry insider explained, "Until mid-last year, expected returns on private loans were around 5-10%, but since the end of last year, they have risen significantly to double digits. If risks related to defaults are well controlled, stable high returns can be achieved."

However, as market interest rates stabilize, high-yield opportunities are gradually decreasing. An IB industry insider evaluated, "After the Legoland incident, liquidity crisis concerns spread, causing overall market funding rates to rise, resulting in many relatively less risky high-interest opportunities. However, recently, as careful selection by company and project is underway, obtaining high-interest returns now requires bearing corresponding risks."