Surging Non-Performing Loans... NPL-Specialized Companies on the Rise

Why Has NPL Disposal Surged?
Most NPLs on the Market Acquired by Specialized Firms
Every NPL-Specialized Company Bond Issuance Achieves 'Overbooking'
Rapid Growth Fuels Strong Demand for NPL-Specialized Corporate Bonds

Non-performing loans (NPLs) refer to loan receivables handled by financial institutions that are classified as "substandard," "doubtful," or "estimated loss." The criterion for "substandard" applies when the delinquency period exceeds three months and there is a significant risk to the recovery of the receivable. When assessing the asset soundness of financial institutions, the "substandard and below loan ratio" is commonly used. In most sectors of the financial industry, this ratio has been rising since 2022. In the first quarter of this year, the substandard and below loan ratios were 0.42% for commercial banks, 7.19% for mutual finance, 10.16% for savings banks, 0.91% for insurance, 5.24% for securities, and 2.36% for specialized credit finance companies.

On September 3, iM Securities published a report titled "Highlighting the Growth Potential of the NPL Market," stating that as the scale of non-performing loans expands and the trend toward strengthening asset soundness among financial institutions continues, the growth of NPL-specialized companies is expected to persist.

Why Has NPL Disposal Increased Rapidly?

The volume of NPL acquisitions reached approximately 2 trillion won at the end of 2022 and then grew rapidly to over 8 trillion won by the end of last year. The prolonged high interest rate environment and sluggish business conditions for small and medium-sized enterprises have led to an increase in non-performing loans. At the same time, mounting pressure on financial institutions to maintain asset soundness has resulted in more NPL disposals, driving the growth of the NPL market. In addition, non-performing assets from real estate project financing (PF) businesses, which had been maintained through maturity extensions and interest deferrals, have also come onto the market, further fueling the expansion of NPLs.

As the NPL market has grown rapidly, asset management companies and capital firms have been pushed out of the NPL acquisition market. The share of NPL-specialized companies surged from 60.9% at the end of 2016 to 98.7% at the end of last year. NPL-specialized companies generate profits by purchasing non-performing loans from financial institutions at discounted prices, improving recovery rates through communication and repayment programs with debtors, and then recovering principal through revaluation of asset values (in the case of collateralized NPLs, through increases in collateral value) and resale.

Every NPL-Specialized Company Bond Issuance Sees 'Overbooking'

With the growth of the NPL market, domestic NPL-specialized companies are diversifying their funding channels. On July 30, United Asset Management raised 600 billion won through a public corporate bond offering. The simple competition ratio reached 15.14 times, resulting in successful overbooking. In February, United Asset Management also achieved a simple competition ratio of 17.75 times when issuing 500 billion won in public bonds. Lee Seungjae, an analyst at iM Securities, noted, "NPL-specialized companies such as Daishin F&I, Hana F&I, and Kiwoom F&I have all issued public bonds and achieved overbooking, indicating that institutional investors' sentiment toward NPL-specialized companies is very favorable."

It is expected that NPL-specialized companies will increasingly issue public corporate bonds to support business growth. In the first quarter of this year, the amount of non-performing loans written off or sold by domestic banks reached 2.6 trillion won, an increase of 900 billion won compared to the same period last year. Since financial institutions tend to increase NPL disposals toward the end of the year for soundness management, the acquisition volume of NPL-specialized companies is also expected to rise. Meanwhile, regarding project financing, the financial authorities have announced that, for the remaining non-performing PF loans totaling about 11.3 trillion won after the first half of the year, restructuring will be concentrated among financial institutions with high delinquency rates.