Kyobo Asset Trust Issues Private Bonds and Loans in Succession
Shinhan Asset Trust Improves Financial Ratios by Issuing Perpetual Bonds
Hanjasin and Hantosin Also Increase External Borrowing
Funds Injected into Default-Guaranteed Trusts by Borrowing Money
Real estate trust companies are increasing their external fundraising. As the ‘trust account loans’?funds lent from proprietary accounts to trust accounts to cover project financing (PF) defaults?increase, the demand for funds has grown. It appears to be a vicious cycle of increasing internal borrowings to cover trust account defaults. Some trust companies are employing various methods to secure external funds, such as issuing high-interest new capital securities (perpetual bonds) to reduce the rising debt ratios caused by defaults.
According to the investment banking (IB) industry on the 22nd, Kyobo Asset Trust received a 20 billion KRW one-year private loan with Hanyang Securities as the lead manager. A special purpose company (SPC) created by Hanyang Securities lent to Kyobo Trust, and the SPC raised loan funds by issuing securitized notes backed by the loan principal and interest as underlying assets.
Kyobo Asset Trust, which had maintained a no-borrowing policy, began increasing external borrowings starting last year. As the burden of bad debt expenses related to trust account loans expanded, it recorded an operating loss of 37.5 billion KRW last year. To cover the financial structure deterioration caused by the large loss, Kyobo Life Insurance, which holds 100% of the shares, injected 150 billion KRW through a paid-in capital increase.
However, funding needs continued this year, leading to ongoing external borrowings. In March, Kyobo Asset Trust issued 72 billion KRW of private bonds with call options, with Samsung Securities as the lead manager. Kyobo Asset Trust holds the call option (early redemption right) to redeem early after 3 months and 6 months from issuance. Subsequently, it issued additional private bonds worth 28 billion KRW in June and 50 billion KRW in July.
Kyobo Asset Trust is not the only trust company increasing external borrowings through trust account loans. Shinhan Asset Trust is lowering its debt ratio by issuing high-interest perpetual bonds. Shinhan Asset Trust issued 150 billion KRW of perpetual bonds in May and another 50 billion KRW last month. Perpetual bonds are recognized as capital in accounting, so they are expected to improve financial structure. Earlier, it also conducted a 100 billion KRW paid-in capital increase targeting Shinhan Financial Group.
KB Real Estate Trust also issued 170 billion KRW of perpetual bonds in June. The bonds carry a high interest rate of 7.80%, and if the call option is not exercised for early redemption after 5 years, an additional 2 percentage points are added to the interest payment. In September, it issued 25 billion KRW of private bonds with an interest rate in the 6% range.
South Korea’s largest real estate trust companies, Korea Land Trust and Korea Asset Trust, are also continuing external borrowings. Korea Land Trust issued a total of 150 billion KRW of public corporate bonds in two rounds in February and August this year, with KB Securities and Korea Investment & Securities as lead managers. Korea Asset Trust issued 100 billion KRW of public bonds in April and recently received a 100 billion KRW loan from securities firms.
The increase in fundraising by real estate trust companies is due to the growth of trust account loans. When the PF projects in trust accounts face difficulties such as defaults or when contractors struggle to meet completion deadlines, trust companies inject trust account loans to finance the project costs. Especially in the case of responsibility-guaranteed trusts where the trust company guarantees completion, the trust company bears the ultimate responsibility, resulting in significant financial burdens. If the money lent to the trust account is not recovered due to subsequent PF project defaults, the loss is recognized by the trust company.
An IB industry official said, "Large trust companies or trust companies affiliated with financial holding companies and large financial firms have relatively strong support and can raise external funds, but other small and medium-sized trust companies find it difficult to attract funds externally." The official added, "As trust account loans increase, external fundraising by trust companies is expected to continue for some time."
A credit rating agency official said, "Although some trust companies are improving their financial structure through paid-in capital increases and perpetual bond issuances, the expansion of PF defaults is likely to further deteriorate their financial structure," adding, "The vicious cycle of borrowing funds to cover trust defaults will continue until the PF market stabilizes."
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