4 Trillion Operating Loss from Jeonse Fraud... HUG to Issue Up to 700 Billion Won in New Capital Securities

Accidents Involving Jeonse Deposit Return Guarantees Total 4.0291 Trillion KRW from January to October This Year
Number of Accidents Reaches 18,687 Cases

Continued Deficits Reduce Capital and Cause Guarantee Limit Issues
Capital Expansion Through Issuance of New Hybrid Capital Securities

Yonhap News

The Housing and Urban Guarantee Corporation (HUG), which has suffered operating losses in the trillions of won for two consecutive years due to returning jeonse deposit guarantees to tenants instead of landlords in cases of jeonse fraud and "empty jeonse" (Kkangtong Jeonse), is set to issue bonds worth up to 700 billion won by the end of this month. According to HUG on the 17th, the amount of jeonse deposit return guarantee claims from January to October this year reached 4.0291 trillion won, with 18,687 cases reported.

This year's guarantee claim amount is expected to surpass last year's record high of 4.3347 trillion won. The monthly guarantee claim amounts have been on a downward trend: 422.7 billion won in July, 349.6 billion won in August, 306.4 billion won in September, and 291.3 billion won in October.

Jeonse guarantee is a product where HUG pays tenants first from its own funds when landlords fail to return the jeonse deposit, then recovers the amount over 2 to 3 years through auctions or other means. The amount HUG has paid on behalf of landlords to tenants who requested returns on jeonse deposits insured by HUG from January to October this year (subrogation payment) reached 3.3271 trillion won.

HUG's subrogation payments were 504.1 billion won in 2021, then increased to 924.1 billion won in 2022, and surged to 3.5544 trillion won in 2023. Despite the sharp rise in subrogation payments, the recovery rate from landlords has actually decreased to the 8% range as of August this year. Accordingly, HUG forecasts an operating loss of 3.9911 trillion won this year, similar to last year's operating loss of 3.9962 trillion won.

Due to large-scale deficits, HUG's equity capital is expected to shrink from 6.8 trillion won in the first quarter to 2.68 trillion won in the fourth quarter of this year. If this happens, various guarantees performed by HUG, such as jeonse guarantees and pre-sale guarantees, could be suspended because HUG's guarantee limit is linked to its capital.

HUG can only guarantee up to 90 times its capital. As of the end of September this year, the guarantee balance was 634 trillion won, and the guarantee balance after deducting collateral deposits was 361 trillion won.

Therefore, HUG plans to issue hybrid capital securities worth between 500 billion and 700 billion won to increase its capital. Hybrid capital securities with maturities of 30 years or more are classified as perpetual bonds in accounting and can be recognized as capital. The public offering target interest rate during demand forecasting is 3.5% to 4.1% per annum.

The Financial Services Commission halted HUG's bond issuance at the end of last month citing "investor protection," but after consultation with the Ministry of Land, Infrastructure and Transport, it was decided to proceed as planned. On the 14th, HUG submitted a securities registration statement to financial authorities and plans to conduct investor demand forecasting on the 19th and issue bonds on the 26th.

Before this bond issuance, the government’s investment in HUG over four years amounted to 5.4739 trillion won. The Housing and Urban Fund's investments in HUG were 390 billion won in 2021, 384.9 billion won in 2023, and 700 billion won this year. This year also saw a 4 trillion won in-kind contribution of Korea Expressway Corporation shares.