[Big Market, Non-Performing Loans]② Can Securities Firms Recover Losses from PF by NPLs... Everyone Securing Ammunition

Active Fundraising Including Paid-in Capital Increase
Hantoo Securities Preparing to Enter NPL Market Since Last Year
Low-Price Buying May Be Difficult If Competition Heats Up

In preparation for a large influx of non-performing loan (NPL) volumes related to real estate project financing (PF) in the second half of the year, more companies are securing funds. Some projects that had been barely surviving on interest payments without even breaking ground are now facing forced sales of some lands through public auctions as financial authorities push for restructuring. Accordingly, NPL fund operations are expected to become more active. However, if prime projects are bundled with distressed ones, companies may be forced to take on projects that are practically difficult to recover funds from, and if competition for prime projects overheats, the discount rate on assets may be minimal, contradicting the investment intent of buying cheaply to generate profits.

Planning_Yeouido Securities District, Park One, LG Twin Towers. Photo by Hyunmin Kim kimhyun81@

According to the industry on the 10th, Yeonhap Asset Management recently confirmed a 500 billion KRW fundraising through corporate bond issuance, while Hana F&I is raising 200 billion KRW (up to 400 billion KRW) through corporate bonds. Woori Financial F&I expanded its capital through a 120 billion KRW paid-in capital increase. Kiwoom F&I also raised 100 billion KRW through corporate bonds, and Daishin F&I is expected to issue corporate bonds as well.

These moves appear to be securing ammunition in anticipation of an influx of related NPL volumes into the market due to PF restructuring. NPL investment involves purchasing distressed loans at a low price and generating profits by completing projects through subsequent normalization processes. Previously, real estate PF projects extended maturities by several years to hold out, so NPLs did not appear as market listings, but as NPL sales increase, companies competing to purchase them are rapidly increasing their fundraising.

A representative from a domestic NPL investment firm said, "Until the year before last, after COVID-19, NPL volumes that should have normally appeared did not come out," adding, "Since the second half of last year, suppressed volumes have surfaced, and possibly due to the increase in new distressed loans, we have been carefully reviewing the investment feasibility of NPL sales volumes exceeding 1.5 trillion KRW each quarter since last year. We are spending busy times conducting due diligence and investment reviews on distressed loan volumes nationwide to identify the most attractive investment proposals and calculate appropriate prices."

Securities Firms Focus on 'Securing Funds' in NPL Investment Planning

Securities firms are also joining the race to attract funds. Korea Investment & Securities established a special situations fund book in February, targeting distressed real estate PF assets and others. The special situations fund invests in all special assets with excellent profitability, including real estate and infrastructure investments, private loans, and equity investments. Korea Investment & Securities had mainly handled high-risk PF deals such as down payment loans and bridge loans, but as the real estate PF market declined, it shifted its focus to NPL investment. In April, it signed a business agreement with TPG Angelo Gordon, an alternative investment specialist of the global private equity firm Texas Pacific Group (TPG), to discover undervalued projects in the domestic real estate finance market.

A representative from Korea Investment & Securities' PF Business Division said, "Since last year, we have been preparing for the NPL market through business agreements. As market prices of real estate assets are falling significantly, opportunities are expected to increase, but it is necessary to approach with a thorough analysis of the macro environment," adding, "All investments inevitably consider the macro environment, and we structure exit plans through bond preservation to invest."

NH Investment & Securities also launched a 200 billion KRW real estate institutional private equity fund (PEF), and Meritz Securities plans to establish a PF loan fund. Daishin Securities, which owns Daishin F&I, Korea's first private bad bank, is actively targeting the market this year with NPL investment in mind as a new growth engine. A Daishin F&I official said, "Ultimately, the key is to strategically acquire high-quality bonds with good business potential," adding, "Good assets mean those whose intrinsic value is lower than the market price, and from the investment review stage, we strive to realize this through strategic investments based on thorough risk management and over 20 years of accumulated diverse portfolio investment know-how."

Need to Find Prime Assets... Caution for High-Difficulty Investments

However, there are warnings that companies’ low-price purchase competition could lead to a cutthroat battle. NPLs are structured to generate profits by purchasing loans deemed distressed at low prices and recovering them, so the purchase price of assets is crucial. It is also necessary to judge whether the discounted loans can be recovered. This means buyers will inevitably flock to relatively good assets, making it difficult to purchase at planned low prices.

For PF-related distressed loans, it is also important to check whether they are sold individually or bundled. Senior researcher Lee Joo-hyun of Gigi Auction explained, "If loans are sold individually, there is no problem, but if bonds based on good projects are bundled with bonds secured by projects with confirmed losses, buyers may be forced to take on projects that cannot be rehabilitated," adding, "If distressed loans related to multi-family housing are purchased and the project is completed with funds recovered through sales, the real estate market conditions must be considered."

Considering that it usually takes 2-3 years from groundbreaking to sales, there is a possibility that the currently severely deteriorated sales market may recover, but the problem is that surrounding costs such as labor and materials show no signs of falling. This causes soaring sales prices, which also make sales difficult. In other words, even if undervalued assets are purchased, recovering funds may be difficult.

Some compare finding prime assets in the NPL market to picking pearls from a pile of scrap. A representative from a domestic savings bank said, "You need to check whether the developer has the capacity to repay when requesting fund recovery, and investment firms specializing in NPLs pick up distressed loans and offset losses from other distressed loans if a so-called lottery hits," adding, "NPL investment is a high-difficulty investment, and selecting assets that can be recovered and yield profits is like finding a needle in a haystack."