Warning on Securities Firm Loan Recovery... Will It Work?

Redemption Suspended from Lime to Alpenroot... Asset Managers Facing Domino Crisis
Government Urges Restraint on Unilateral Recalls, Asset Management Industry Prepares Joint Response

[Asia Economy Reporters Koh Hyung-kwang and Park Ji-hwan] Following the suspension of redemptions for Lime Asset Management funds worth around 1.6 trillion KRW, Alpenroute Asset Management has also decided to halt redemptions for its private equity funds, accelerating responses from regulatory authorities and the asset management industry. Financial regulators have requested securities firms to refrain from abruptly recalling loans related to total return swaps (TRS), which are at the center of this crisis. The asset management industry has also agreed to form a consultative body for joint action. Currently, 19 asset management companies have received funds through TRS contracts from major domestic securities firms, with the total amount reaching around 2 trillion KRW, leaving a significant risk of large-scale fund redemption delays.

According to financial authorities on the 29th, Son Byung-doo, Vice Chairman of the Financial Services Commission, held a financial situation review meeting the previous day and pointed out, "The termination of securities firms' TRS contracts is spreading redemption demands among investors even to funds with normal assets unrelated to asset deterioration, which could burden the companies invested in by the funds."

Vice Chairman Son criticized, "The role of securities firms' prime brokerage services (PBS) is to support private equity fund management and incubation, but contrary to its original purpose, it is rather amplifying market concerns about fund liquidity, which is undesirable." His remarks are interpreted as a warning from financial authorities against the recent unilateral loan recalls by securities firms.

Alpenroute, which mainly invests in promising unlisted companies such as open market Market Kurly and smart farm startups like CEA, recently decided to delay redemptions totaling 110.8 billion KRW across three funds: Alpenroute Atri No.1 Fund, whose redemption schedule had arrived; Alpenroute Vitri Fund No.1, which received additional redemption requests; and Alpenroute Public Offering No.2 Fund. Assuming an extreme maximum scenario, Alpenroute explained that the number of funds potentially subject to redemption suspension by the end of next month, including the three already delayed, is 26 funds totaling 181.7 billion KRW.

Alpenroute's consideration of this large-scale redemption suspension stems from securities firms that signed TRS contracts suddenly requesting fund recalls, causing liquidity issues. Additionally, as securities firms withdrew, investors continued to request fund redemptions. From the asset manager's perspective, the redemption volume has grown to a level that is difficult to manage.

On the same day, the Financial Supervisory Service held an emergency meeting with executives from six securities firms and issued a strong warning regarding TRS contract terminations. The FSS urged, "Unless there are unavoidable reasons such as asset deterioration from assets acquired through TRS contracts, please hold close prior consultations with related asset managers before early termination of TRS contracts to prevent market disruption and protect investors."

However, it remains uncertain whether these measures will be effective. Securities firms attending the meeting reportedly stated that "apart from Alpenroute, there are no plans to recall TRS loans in the near term," but they are currently reducing PBS operations and lowering the proportion of related loan funds. There is also concern that securities firms could recall TRS loans at any time, and legally there is no basis to prevent this, leaving persistent uncertainty.

In addition, the FSS plans to investigate whether there are any issues with asset soundness related to Alpenroute's fund redemption suspension. They intend to examine the status of fund distributors and individual investors, as well as the underlying assets acquired through the funds and their soundness. If other reasons such as asset deterioration at Alpenroute beyond the securities firms' fund recalls are found, the FSS plans to immediately initiate a formal inspection. An FSS official stated, "This is to prepare for various possibilities, whether the liquidity problem arose solely from the sudden fund recalls by TRS securities firms or if there are other reasons."

The asset management industry has also prepared for joint action. There is concern that if the recent situation is not resolved early, it could escalate into a 'fund run' scenario. Recently, multiple hedge fund managers and fund distributors have agreed to form a provisional 'Private Equity Fund Management and Sales Council' and are discussing detailed matters. The aim is to disclose fund structures, investment assets, and the basis for net asset value calculations to alleviate investor concerns.

This content was produced with the assistance of AI translation services.