Dispute Over Whether Proper Explanation Was Given During Investment Attraction
Lotte Insurance's fund, in which it invested approximately 65 billion KRW through Meritz Securities, is expected to incur significant losses. Consequently, Lotte Insurance has requested the financial authorities to investigate Meritz Securities for illegal activities during the fund's sales process.
According to financial sources on the 8th, Lotte Insurance filed a complaint with the Financial Supervisory Service on the 9th, alleging that Meritz Securities' sale of the Frontera power plant-related fund was illegal and caused substantial losses to the company. Lotte Insurance stated that it invested after multiple solicitations from Meritz Securities, but Meritz Securities failed to disclose key investment risks. In relation to this, Lotte Insurance also filed a lawsuit last November against Meritz Securities and the fund manager, Hana Alternative Investment Asset Management, claiming unjust profits.
Previously, Meritz Securities established a fund worth 160 million USD (approximately 208 billion KRW) in December 2018 related to the U.S. Frontera gas combined cycle power plant. Lotte Insurance invested 50 million USD (65 billion KRW) in February 2019 in the ‘Hana Alternative Investment U.S. Power Plant Specialized Private Equity Fund No. 2’. However, the U.S. companies associated with the fund declared defaults, and the corporate rehabilitation process ended in August 2021. Lotte Insurance suffered a total loss within two years and six months of investment. Other investors in the fund, including KDB Life Insurance, Korea Exchange, Kyowon Life, and the Teachers' Pension, also incurred losses.
Lotte Insurance claims that Meritz Securities did not properly disclose the risks at the time of soliciting the fund investment. Meritz Securities assured stable sales revenue but failed to inform about the potential increase in unpaid principal and interest on loans and did not disclose the risks associated with the collateral structure. Meritz Securities, on the other hand, argues that it is unreasonable to claim that Lotte Insurance, as an institutional investor who conducted on-site due diligence, was unaware of the risks when making the investment.
Regarding this, Lotte Insurance stated, "According to the materials presented by Meritz Securities at the time of the investment decision, there was a business feasibility report indicating that 65% of the power plant's gross profit was guaranteed as the revenue structure and that cash flow sensitivity was low. However, the possibility of loss of benefit of time (EOD) due to high volatility in actual power plant operation rates and cash flow sensitivity from spark spread (the difference between electricity price and gas price) was not disclosed at all." They added, "During due diligence and investment review, Meritz Securities presented an average operation rate of 88% and a spark spread of 35 USD per megawatt-hour (MWh) for the 2019-2025 period, but in reality, the spark spread was significantly lower than expected, making principal and interest repayment impossible."
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