Securities and Asset Management Firms Expand Capital with Perpetual Bonds... Enhance Loss Absorption Capacity for PF and Alternative Investments

Issuance of 370 Billion KRW Over 2 Weeks
Defense Measures Against Deterioration of Financial Ratios Like NCR
IB Industry "Increase in Perpetual Bond Issuance by Financial Investment Firms"

Financial investment companies such as securities firms and asset management companies are continuously raising capital by issuing new types of capital securities (perpetual bonds). This is to improve financial ratios such as the net capital ratio (NCR) for business operations, which have deteriorated due to project financing (PF) defaults and alternative investment losses. Perpetual bonds are recognized as capital under International Financial Reporting Standards (IFRS), and companies mainly use them as a way to increase capital without issuing new shares.

Aegis Asset Management, KB Securities, Meritz Securities Issue 370 Billion KRW Worth in Half a Month

According to the investment banking (IB) industry on the 27th, Aegis Asset Management issued 48 billion KRW worth of perpetual bonds with Yuanta Securities as the lead manager. The maturity is 30 years, with possible extensions. However, for 18 billion KRW worth, if the call option (early redemption right) is not exercised after 1 year and 6 months from issuance, and for 30 billion KRW worth, if not exercised after 2 years, interest costs will sharply increase. The additional interest rate applied at this time is called a step-up.

If the call option is not exercised within the period, an additional 250 basis points (bp) (1bp = 0.01 percentage point) interest is added, and thereafter 50bp is added annually. Considering that the issuance interest rate of the perpetual bonds is in the low 8% range, if the call option is not exercised, the interest can easily exceed 10% per year. The perpetual bonds issued by Aegis Asset Management were underwritten by Yuanta Securities, BNK Investment & Securities, and Korea Investment & Securities, among others.

KB Securities issued a total of 130 billion KRW worth of perpetual bonds on the 21st. The call option can be exercised from 5 years after issuance, and if not redeemed early, an interest rate of 200bp will be added thereafter. The initial issuance interest rate is 5.22%. It is known that KB Financial Group acquired about 100 billion KRW of the total issuance amount.

Meritz Securities also issued 190 billion KRW worth of perpetual bonds on the 13th. For 7 years, it pays an interest of 6.5% annually, and from the 7th year, it pays interest calculated by adding 3.158 percentage points to the 10-year government bond rate at that time, plus an additional 2 percentage points for the step-up interest due to failure of early redemption. Earlier in February, its parent company Meritz Financial Group issued 200 billion KRW worth of perpetual bonds.

Defending Against PF and Alternative Investment Losses and Financial Ratio Deterioration

The reason financial investment companies are continuously issuing perpetual bonds is to defend against the deterioration of financial ratios caused by PF and alternative investment losses and the setting of bad debt provisions.

Aegis Asset Management issued 60 billion KRW worth of corporate bonds in February to early redeem 60 billion KRW worth of perpetual bonds issued in 2021. The issuance of corporate bonds increased borrowings and reduced equity capital, worsening financial ratios such as the debt ratio. To compensate for this, they issued 48 billion KRW worth of perpetual bonds this time. Due to the recent rise in interest rates, the perpetual bond interest rate has increased from the previous 4.5% to about 8.2%.

KB Securities and Meritz Securities are known to have issued perpetual bonds to increase their equity capital and manage NCR. NCR is a key indicator showing the financial soundness of securities firms, similar to the BIS ratio for banks. The figure improves when profits or equity capital increase, and worsens when the total risk amount of investment assets increases.

An IB industry official explained, "Financial investment companies have seen an increase in the total risk amount of investment assets due to PF and alternative investment defaults, and profits have significantly decreased last year due to the setting of bad debt provisions and confirmed losses," adding, "They are issuing perpetual bonds to increase capital in order to sufficiently secure loss absorption capacity." The official predicted, "Since PF and alternative investment defaults are ongoing, the trend of raising capital through perpetual bonds will continue for some time."

Meanwhile, Daishin Securities plans to issue 230 billion KRW worth of redeemable convertible preferred shares (RCPS) to enter the category of ‘Comprehensive Financial Investment Business Operators (CFIBOs)’ with equity capital exceeding 3 trillion KRW. Adding this to Daishin Securities’ equity capital of 2.8531 trillion KRW at the end of last December will far exceed 3 trillion KRW. Obtaining the CFIBO license will allow expansion of IB operations such as corporate credit extension.