37 Institutions' Prime Lease Bonds Securitization
Bond Yields Rise Due to Asset Quality Deterioration
Cost Reduction in Fundraising Through Securitization
Lotte Capital, an installment leasing company affiliated with Lotte Group, raised 180 billion KRW by securitizing lease receivables held from 37 government agencies. This move is interpreted as an effort to lower funding costs through asset securitization.
According to the investment banking (IB) industry on the 28th, Lotte Capital, with Meritz Securities as the lead manager, securitized the lease receivables it held. The process involved transferring lease receivables worth 194.8 billion KRW, where government agencies are the debtors, to Hana Bank Trust, then issuing securitized bonds worth 180 billion KRW backed by trust beneficiary certificates as collateral.
The assets transferred by Lotte Capital to the special purpose company (SPC) for funding are lease receivables from government agencies. These include lease fee receivables, statutory damage claims, compensation claims, and delayed damage claims. When the debtor government agencies repay the principal and interest of the debt, the funds are used to repay the principal and interest of the securitized bonds.
Lotte Capital is known to have securitized its assets to lower its overall funding costs. The interest rates on capital bonds have been rising due to market interest rate increases and concerns over asset deterioration, and its credit rating has dropped from AA- to A+ due to declining asset soundness.
Lotte Capital’s credit rating declined due to the deterioration of household credit loans, which account for one-third of its operating assets. As of the end of September last year, the proportion of non-performing loans (NPLs) overdue by more than three months increased to 4.2%. The ratio of watch-list assets overdue between one and three months was high at 6.8%. Since watch-list assets can become NPLs if overdue further, the default ratio is estimated to have increased further by the end of last year.
There are also concerns about defaults in the corporate finance sector, including project financing (PF). Real estate-related loans, including bridge loans, total 1.5406 trillion KRW, accounting for 20.4% of total operating assets. Among these, main PF loans amount to 1.1397 trillion KRW, and bridge loans are 400.9 billion KRW, with the proportion of higher-risk bridge loans not being very high.
An IB industry official said, "The lease receivables held by Lotte Capital from government agencies have high repayment stability, making them among the high-quality assets held. These high-quality assets serve as collateral, significantly lowering funding costs."
Lotte Capital’s bond funding interest rate remained in the 2% range until February 2022 but rose to the mid-5% range by November last year. Recently, as market interest rates have somewhat stabilized downward, bonds are being issued at interest rates in the low 5% range.
A bond market official said, "As the asset soundness of capital companies has generally deteriorated, many companies have seen their funding costs rise significantly or have faced difficulties raising funds. Cases of securitizing relatively high-quality lease assets or deteriorated NPLs are increasing."
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