[Q&A] Kwon Daeyoung "Mugunghwa Trust to Prepare Third-Party Sale Plan"

Financial Services Commission Imposes Management Improvement Order on 27th
Below NCR Standard... Highest Level Among Timely Measures
Obligation to Submit Management Improvement Plan by January 24 Next Year

Kwon Dae-young, Secretary General of the Financial Services Commission, is announcing the future policy direction for an orderly soft landing of real estate PF at the Government Seoul Office in Jongno-gu, Seoul on the 13th. Photo by Jo Yong-jun jun21@

On the 27th, Kwon Dae-young, Secretary General of the Financial Services Commission (FSC), stated regarding Mugunghwa Trust, which was imposed with a management improvement order, "Since sufficient time has been given, we expect them to prepare a plan for a third-party sale."

Secretary General Kwon made these remarks during a briefing held at the Government Seoul Office after the regular FSC meeting that afternoon.

Secretary General Kwon explained, "The main content of the management improvement order is a broad framework of 'normalize on your own through capital increase or subsidiary restructuring.' If self-normalization is difficult, the plan is to establish and implement measures such as mergers, incorporation of subsidiaries into a financial holding company, or third-party acquisition, meaning transferring management rights to allow another major shareholder to come in."

At the regular meeting that day, the FSC resolved to impose a management improvement order on Mugunghwa Trust, which includes self-normalization efforts such as capital increase and third-party acquisition. The management improvement order is the highest level of corrective action among timely corrective measures imposed by financial authorities on financial companies whose financial soundness has deteriorated below certain standards. According to the Financial Supervisory Service's inspection, Mugunghwa Trust's Net Capital Ratio (NCR) as of the end of September was 69%, falling short of the 100% threshold for the management improvement order. This is significantly lower than the previously disclosed 125%.

Mugunghwa Trust must submit a management improvement plan, including measures such as self-capital increase or third-party sale, by January 24 next year, 60 days later, and obtain FSC approval. If the FSC does not approve, the company may be designated as a failing financial institution and its license could be revoked.

Below is a Q&A with Secretary General Kwon Dae-young.

- Is this the first timely corrective action due to the real estate market downturn following the PF crisis since 2022?

▲ It is difficult to say whether this is the first case related to PF or not. Recently, there was a timely corrective action on a capital company, and there are still some additional cases. There is talk about one or two savings banks as well, but please understand that these are processes to induce management improvement and normalization, not just clearing up bad debts.

- The management improvement order includes self-normalization efforts and establishing and implementing a third-party acquisition plan. If normalization is possible, does that mean mergers are not necessary?

▲ These are all possible options. It would be ideal if the major shareholder could increase capital or invest their own money, but if that is difficult, they are advised to sell their shares. From the major shareholder's perspective, they would prefer to raise funds through capital increase or subsidiary restructuring, but since subsidiary sales or capital increases are difficult in the short term, third-party acquisition might carry more weight. The two options can be different.

- Considering the company sale process, subsidiary sales by January 24 next year seem practically impossible. What will you do if the plan is deemed unfeasible?

▲ We have already received subsidiary restructuring plans in advance; one has only selected a sales agent, and the other two have not even selected sales agents. We judged that sales would not happen in the short term under these circumstances, which led to the timely corrective action. I believe considerable efforts are still being made for third-party sales. The key is to quickly establish an independent due diligence entity to conduct due diligence and resolve legal and financial risks. I think 40 days should be sufficient. Even if the full payment is not completed, if a deposit is made or a binding acquisition contract exists, we can approve it. In the past, when improving management of failing financial companies, we typically allowed about 40 days. Extending the period too long raises concerns about deferred bad debts, so 40 days should be enough.

- The average NCR ratio of other real estate trust companies is very high (537.3%). Is their business model different from Mugunghwa Trust?

▲ They mainly engage in general management-type operations. Since there is little risk, fees are about 20 to 30 basis points (bp), less than 1%. In contrast, responsibility completion guarantees are joint guarantees with fees up to 2%, so Mugunghwa Trust increased its guarantees to 1 trillion KRW in 2022. When the market was rising, guarantees would decrease, but now they are stuck. The excessive guarantees and indiscriminate PF guarantees seem to be the core issues.

- Originally, Mugunghwa Trust disclosed an NCR ratio of 125%, but it was confirmed to be 69%. Why is there a discrepancy?

▲ This needs to be reviewed during the Financial Supervisory Service's inspection, but for example, if there are receivables, there may be differences in how risk is assessed. When explicit standards for risk assessment and provisioning are lacking, more lenient standards may be applied subjectively. The supervisory authority has long managed these risks and provisions, so they manage the risks accordingly.

- Are there similar NCR discrepancies in the other 13 companies?

▲ According to the Financial Supervisory Service's confirmation, no such cases have been found.