Financial Services Commission Imposes Management Improvement Order on Mugunghwa Trust at Regular Meeting on 27th... Highest-Level Corrective Action Among Appropriate Timing Measures... Obligation to Submit Management Improvement Plan by January 24 Next Year
Mugunghwa Trust, ranked 6th in the real estate trust industry, has received a management improvement order from financial authorities. This is the first case of insolvency among trust companies since the real estate project financing (PF) crisis was triggered in 2022. The financial authorities have also responded swiftly to prevent concerns from spreading to the real estate market.
Self-normalization Efforts Including Capital Increase... Third-party Acquisition Also Recommended
On the 27th, the Financial Services Commission announced at its regular meeting that it had imposed a management improvement order on Mugunghwa Trust, which includes efforts for self-normalization such as a capital increase and third-party acquisition. A management improvement order is the highest level of corrective action issued by financial authorities to financial companies whose financial soundness has deteriorated below a certain standard.
Kwon Dae-young, Secretary General of the Financial Services Commission, emphasized again at a briefing immediately after the regular meeting, "Please understand this as part of the orderly soft landing of real estate PF promoted by the government since 2022 and the process of resolving insolvency," adding, "Overall PF is being managed well within a predictable range."
The reason for this emphasis lies in the characteristics of the real estate trust business. Generally, the proprietary accounts and trust assets of real estate trust companies are insulated from bankruptcy. The authorities explained that even if Mugunghwa Trust pursues management normalization, the impact on the trust business will be limited. For most of the trust projects Mugunghwa Trust is pursuing, unless there is a separate decision by stakeholders such as the entrusting real estate owners, beneficiaries like lending institutions and construction companies, or sales contract holders, the projects can proceed and be maintained as before. This is similar to how Taeyoung Construction restructured individual projects centered on the main lenders of each special purpose company (SPC). The authorities also left open the possibility of utilizing 'PF Normalization Funds' and 'PF Syndicated Loans' under certain conditions during the project restructuring process.
The financial authorities will also protect sales contract holders. Currently, there are 26 projects with sales contract holders among the borrowing-type and responsibility-completion-type projects under construction by Mugunghwa Trust, totaling 1,378 units. Of these, 22 are residential and 4 are non-residential. Five of these projects are covered by HUG sales guarantees. For the remaining 21 projects, construction and completion will be pursued individually, and efforts will be made to protect the rights of sales contract holders to the maximum extent possible within the scope of related legal principles and trust asset responsibilities.
Rapid support for construction companies and partner firms will also be provided. Among 415 subcontract contracts signed by partner firms, 139 (33%) have subcontract payment guarantees. This means subcontract payments can be received through guarantee institutions. The authorities plan to provide financial support through a fast-track program in the financial sector for prime contractors or partner firms facing temporary liquidity shortages.
Following the imposition of the management improvement order by the Financial Services Commission, Mugunghwa Trust must pursue self-normalization such as capital increases, mergers, incorporation into financial holding companies, or third-party acquisitions in accordance with relevant laws and regulations, and submit a management improvement plan reflecting these by January 24 next year. They have been given about two months. Acts that reduce net operating capital are also restricted. New borrowing-type and responsibility-completion-type land trust businesses will be suspended for six months from 3 p.m. on the day of the order until midnight on May 26, 2025. Existing businesses can continue as usual.
Mugunghwa Trust Fails to Meet 100% NCR in Financial Supervisory Service Inspection
Since the second half of 2022, Mugunghwa Trust has been classified as the most vulnerable trust company in the financial authorities' monitoring and periodic stress tests of real estate trust companies. According to the Financial Supervisory Service inspection conducted from August 29, as of the end of September, Mugunghwa Trust's Net Capital Ratio (NCR) was 69%, falling short of the 100% threshold required for a management improvement order.
This is a result of correcting asset soundness reclassification and underestimation of market risk amounts from the previously disclosed NCR of 125%. If the NCR falls below 150%, a management improvement recommendation is issued; below 120%, a management improvement request; and below 100%, a management improvement order is imposed.
However, the financial authorities concluded that the company did not deliberately inflate the NCR to deceive regulators. Secretary General Kwon Dae-young said, "The NCR is calculated according to the Financial Investment Association's supervisory regulations, and there are no detailed standards for each company's characteristics. It is difficult to judge this case as evasive in nature, but please understand that the company did not accumulate as much as the standards we apply." Kwon Young-bal, Director of the Financial Investment Inspection Division 2 at the Financial Supervisory Service, also explained, "It is difficult to definitively say this case is evasive. Please understand that the disagreement arose because the company did not accumulate as much as the standards expected by the supervisory authorities."
Meanwhile, the Financial Supervisory Service conducted a full survey of the remaining 13 trust companies but did not find any cases with NCR ratios differing like Mugunghwa Trust.
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