[Shaking Secondary Finance]② Even Funding is Uncertain... "Need for Structural Reform"

Concerns Rise Over Non-Bank Real Estate PF Defaults
High Interest Rates Lower Investor Sentiment for Corporate Bonds... Funding 'Uncertain'
Need to Unleash Tied Hands and Feet Like Rent Asset Securitization

Amid ongoing issues with real estate project financing (PF) defaults, specialized credit finance companies are still facing bleak funding conditions. Since the beginning of this year, tightening policies by central banks worldwide, including the U.S. Federal Reserve (Fed), have not eased, and with the prospect of prolonged high interest rates causing a sharp rise in government bond yields, there has been a resurgence of funding difficulties, especially among small and medium-sized specialized credit finance companies in the second half of the year, according to industry sources. There are calls for not only temporary measures to put out the urgent fire but also structural improvements.

Difficult to Recover Funds... Even Fundraising is 'Bleak'

According to the Korea Financial Investment Association on the 10th, the net issuance amount (issuance amount minus redemption amount) of other financial bonds (such as card and installment finance bonds) in August was 743.1 billion won, down 81.6% compared to the same period last year (4.0415 trillion won). Last month, the net issuance amount further decreased to 298.2 billion won. Cumulatively, until the 14th of last month, before the Financial Services Commission announced it would review the real estate PF situation, there was even a net redemption trend of -174.1 billion won.

An official from the financial sector said, "Bank bond yields have risen to nearly 5%, and the interest rates on regular deposits (1-year maturity) at commercial banks and secondary financial institutions are also around 4-5%, so it is true that interest in specialized credit finance bonds, which carry relatively higher risk, has somewhat declined."

This pain seems to be spreading from small and medium-sized companies. Large financial groups or specialized credit finance companies affiliated with large corporations can relatively easily raise funds through capital increases or credit enhancements backed by their parent companies. However, small and medium-sized companies without such backing are struggling to issue specialized credit finance bonds, their only means of fundraising. In fact, a mid-sized specialized credit finance company with an A- credit rating recently planned to issue new bonds but withdrew the plan after predicting insufficient demand.

Accordingly, small and medium-sized specialized credit finance companies are increasingly dependent on short-term funding. According to a report released by Korea Ratings on the 14th of last month, the proportion of short-term funding (CP, electronic short-term bonds, borrowings) for A-rated capital companies reached 58% as of the end of June, up 17.8 percentage points from 40.2% in 2021. For specialized credit finance companies without deposit-taking functions, a shortening of funding channels is interpreted as a negative signal.

A representative from a specialized credit finance company said, "Even card companies, which have more capacity than capital companies, are rushing to issue short-term bonds, indicating that the fundraising atmosphere is not good," adding, "With the expansion of PF loan defaults and maturity extensions blocking fund recovery, and now fundraising becoming difficult, it is a dilemma with no way out."

High-Risk Investment Assets Also a Time Bomb... Need to Seize the 'Golden Time'

The investment assets of capital companies themselves can also be a time bomb. To offset high funding costs, they have concentrated on high-yield, high-risk assets such as bridge loans, mezzanine and subordinated loans, and real estate financing in non-metropolitan and non-residential sectors. According to a survey by NICE Credit Rating of the actual real estate financing exposure of 26 major capital companies as of the first half of this year, companies like Kiwoom Capital, Korea Investment Capital, and DB Capital, whose real estate financing ratio exceeds 20% of total assets, had real estate financing ratios amounting to 158.2% of their equity capital. This far exceeds the overall average of 89.9%. All risk indicators, including the proportion of bridge loans, mezzanine loans, non-metropolitan exposure, and non-residential exposure within real estate financing assets, also exceeded industry averages.

An executive from a capital company said, "Performance evaluations usually conclude around November, followed by book closing, and considering the extended Chuseok holiday, there is practically only about a month left this year," adding, "To prevent a recurrence of last year's Legoland incident, which was a case of using a shovel to stop what could have been stopped with a hoe, more proactive and preemptive responses are necessary."

Need to Free Bound Hands and Feet... Structural Improvements Required

There are voices calling not only for one-time measures to extinguish the fire but also for structural improvements to the funding environment. A representative example is the need to improve regulations on asset securitization of automobile rental assets in the capital industry. The current Enforcement Decree of the Specialized Credit Finance Business Act restricts specialized credit finance companies to issuing ABS only with assets from their core businesses such as installment finance and leasing. Rental is classified as an ancillary business and cannot be used to issue ABS. This regulation, established 18 years ago in 2005 to protect small and micro rental car companies, limits short-term rental businesses of credit finance companies. Ironically, the rental car industry is dominated by large corporations such as Lotte Rent-a-Car and SK Rent-a-Car.

Professor Seo Ji-yong of the Department of Business Administration at Sangmyung University explained, "ABS are securities issued backed by accounts receivable, loan receivables, etc., and can offer lower issuance rates and relatively long-term funding compared to the highly competitive specialized credit finance bonds in the market," adding, "As the capital industry polarizes, practical measures are needed to help small and medium-sized capital companies overcome the crisis."