Recovery Rate of 'Lime Fund' at Half Level... Dramatic Reversal Like DLF Difficult

Pluto FI D-1 and Thetis 2... Samil Accounting Proposes 50% and 60% Respectively
29 Mother Funds Bundled via TRS...'Worst' Ordinary Investors Feared Empty-Handed
Structure Differs from DLF with Varying Yields Due to Interest Rate Changes

[Asia Economy Reporter Park Jihwan] The recovery rate of fund assets managed by Lime Asset Management, which caused a private equity fund redemption suspension crisis worth up to 1.6 trillion KRW, is expected to be as low as half in the worst-case scenario. The loss rate for fund investors will ultimately be determined by the possibility of disposing of investment assets, debt collection, and litigation outcomes.

According to the financial investment industry on the 10th, Samil Accounting Corporation, which conducted the fund due diligence, presented in a report delivered to Lime Management on the 7th that the expected recovery rate range for the mother funds 'Pluto FI D-1' and 'Tethys 2' are 50% and 60%, respectively. Considering that the redemption suspension scale of the two funds is 900 billion KRW for Pluto and 200 billion KRW for Tethys, in the worst case, Pluto can recover only 450 billion KRW and Tethys 120 billion KRW.

Greater losses are expected for 'Pluto TF1' (trade finance fund), whose due diligence results are expected by the end of this month. This is because the global trade finance specialist investment firm IIG, which was entrusted with 240 billion KRW out of the total 600 billion KRW investment in the fund, had its registration canceled due to Ponzi fraud allegations, and the related fund assets are currently frozen.

The problem is that out of Lime's total redemption suspension amount of about 1.67 trillion KRW, total return swap (TRS) loans account for 680 billion KRW, about 40%. A TRS contract is a type of loan where a securities company receives collateral margin and purchases assets on behalf of the fund in exchange for fees. When disposing of fund assets, they can recover funds ahead of general investors. Among the 173 sub-funds with suspended redemptions, 29 used TRS. Assuming a 50% recovery rate, Shinhan Financial Investment, Korea Investment & Securities, and KB Securities can recover 680 billion KRW first out of 835 billion KRW, reducing the amount returned to customers to about 160 billion KRW.

A securities industry official predicted, "Individual investors' loss rates will vary significantly depending on the mother fund structure and the proportion of sub-funds that leveraged using TRS." In fact, Pluto, which mainly holds private bonds, was estimated to have a recovery rate about 10% lower than Tethys. Pluto's main investments are in real estate project financing (PF) loans or private bonds issued by small and medium enterprises, whereas Tethys invests in convertible bonds (CB) of KOSDAQ-listed companies, which are considered more recoverable.

Unlike the derivative-linked fund (DLF), which caused a large principal loss controversy last year but recovered principal and even yielded over 2% returns within about two months, such a scenario is unlikely in the current Lime redemption suspension crisis. DLF returns vary with interest rate fluctuations, and last year, investors maturing in late August or late September to early October, when major countries' government bond yields hit bottom, suffered significant losses.

The worst case was the DLF linked to German government bond yields maturing on September 26, sold by Woori Bank, which had a loss rate of 98.1%. An investor who entrusted 100 million KRW received only 19 million KRW back. However, those maturing after November recovered their principal and earned over 2% returns. While DLF returns vary with interest rate changes, Lime funds' returns depend on the value of illiquid assets invested by the mother fund. This is why Lime fund recovery rates depend on the recoverability of assets invested by the mother fund. An asset management industry official explained, "The future recovery rate of Lime funds depends on how much the principal recovery amount can be increased through the possibility of disposing of assets currently difficult to recover, debt collection, and litigation."

Whether securities companies reduce TRS fees or interest, which generate profits, will also somewhat affect investor recovery rates. Securities companies earned 12 billion KRW annually in fees and interest income through TRS.

Additionally, how Lime Management reflects the results of this accounting due diligence in the fund's net asset value is also crucial. Lime plans to inform investors through distributors after adjusting the valuation prices by asset, setting fund asset valuation standards, and scheduling asset recovery and redemption expectations.

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