[Distressed Debt Market Stirring] ② Active Issuance of Corporate Bonds and CP for NPL Investment, Fund Formation in Full Swing

NPL Investment Firms Significantly Increase Corporate Bond and CP Issuance
PF Normalization Funds and Private Equity Funds Also Set Up Continuously

Financial companies are increasingly raising funds and securing external financing to invest in non-performing loans (NPLs) they are selling. Investors purchase NPLs at significantly discounted prices from the principal and interest amounts of the bonds, then increase the recovery rate to generate profits. For example, buying a loan with a principal and interest of 100 billion KRW for 60 billion KRW and recovering 70 billion KRW results in a profit of 10 billion KRW.

Bank-sector NPLs are mainly acquired by private NPL specialized investment firms. Representative private NPL investors include Union Asset Management Company (UAMCO), established jointly by policy banks and commercial banks, bank-affiliated firms such as Woori Financial F&I (Woori F&I) and Hana F&I, and securities-affiliated firms like Daishin F&I and Kiwoom F&I, all competing in the market. Asset management companies such as Aegis Asset Management and Koramco Asset Management form related funds to primarily acquire project financing (PF) and real estate-related loans.

NPL Investment Firms Continue Fundraising

Union Asset Management, the top NPL investor, conducted a demand forecast targeting institutional investors last month to issue 200 billion KRW worth of corporate bonds. The demand forecast was conducted for 3-year bonds worth 120 billion KRW and 5-year bonds worth 80 billion KRW, attracting funds of 900 billion KRW and 510 billion KRW respectively. Union Asset Management increased the 3-year bonds to 240 billion KRW and the 5-year bonds to 160 billion KRW, raising a total of 400 billion KRW. Earlier in January, they also attempted to issue 70 billion KRW in public bonds, which was increased to 100 billion KRW to secure funds.

Daishin F&I, Hana F&I, and Woori Financial F&I are also continuing to raise external funds. In July, Daishin F&I raised corporate bonds worth 80 billion KRW, which was increased to 145 billion KRW. Earlier in May, Hana F&I issued 150 billion KRW in corporate bonds, which was increased to 294 billion KRW. Woori Financial F&I is currently pushing to issue 80 billion KRW in corporate bonds to participate in NPL sale bids. If investment demand surges, they plan to increase bond issuance up to 150 billion KRW.

NPL investors are also actively increasing the issuance of commercial paper (CP), a short-term funding instrument with maturities under one year, including electronic short-term bonds. Union Asset Management did not issue CP until February this year but started increasing issuance from March, raising the balance to 810 billion KRW by September. Daishin F&I’s CP balance rose from 700 billion KRW at the beginning of the year to over 1 trillion KRW recently. Hana F&I also increased its CP balance from the 100 billion KRW range to around 800 billion KRW.

An investment banking industry official observed, "Private NPL investors appear to be expanding fundraising from the second half of this year to increase investments in NPLs and corporate restructuring, after completing sales of held companies, equity acquisitions, and corporate investments." The official added, "To improve profitability, investors need to minimize funding costs, and there is growing demand to refinance some high-interest borrowings with lower-interest loans."

Fund Formation Active... Fierce Competition for NPL Acquisition

Fund formation for NPL investment is also gaining momentum. Korea Asset Management Corporation (KAMCO) has completed forming a ‘Real Estate PF Project Stabilization Support Fund’ exceeding 1 trillion KRW. The entrusted asset managers selected include real estate alternative investment specialists Aegis Asset Management and Koramco Asset Management, as well as KB Asset Management, Shinhan Asset Management, and Capstone Asset Management. These managers will pursue NPL acquisition and normalization.

Hana Financial Group is actively forming PF investment funds at the financial holding company level, including a 200 billion KRW fund through its affiliated asset managers. The PF stabilization funds led by KAMCO and financial holding companies seek to normalize projects by acquiring bridge loan PFs at the pre-construction stage where progress is slow, then supporting the main PF.

Private equity funds investing in NPLs are also increasing. Aegis Asset Management, a leading domestic real estate asset manager, recently formed a 60 billion KRW private equity fund to acquire senior secured loan claims for an officetel development project in Seongnae-dong, Gangdong-gu, Seoul. Earlier in April, they created a 40 billion KRW NPL fund to invest in senior secured loan claims backed by a used car sales complex. It is also reported that they are planning to form a 300 billion KRW NPL 4th fund soon.

However, as the number of investment institutions increases, bidding competition has intensified, raising concerns that NPL investment profitability may not be as high as before. An official from an investment institution said, "NPL investment profitability depends on lowering purchase prices, but as bidding competition intensifies, profitability for investors may decline," adding, "Since the risk of investment loss is relatively high, a cautious approach is necessary."