German Heritage DLS Issuer Declares Bankruptcy... How to Recover 530 Billion Won Principal (Comprehensive)

Over 200 Billion Won in Unrepaid Investments... Possibility of Fire Sale if Bankruptcy Confirmed
Shinhan Investment Corp Holds Board Meeting to Discuss Priority Relief Measures for Investors
Concerns Over Domino Effect of Investment Product Defaults Amid Signs of COVID-19 Induced Global Economic Perfect Storm

[Asia Economy Reporters Haeyoung Kwon, Minyoung Kim] As the principal repayment of German Heritage Derivative-Linked Securities (DLS) sold for more than 500 billion KRW in South Korea is delayed, bankruptcy proceedings have begun against the German developer that invested the funds in local development projects. With the rapid emergence of a 'perfect storm' (simultaneous occurrence of multiple economic adversities) in the global economy due to fluctuations in stock prices, exchange rates, and oil prices caused by the novel coronavirus disease (COVID-19), concerns over domino losses in financial investment products are increasing. In particular, as a downturn in the overseas real estate market?an alternative investment destination? is expected, warnings have been raised that loss incidents like those involving German Heritage DLS could occur in a chain reaction.

According to financial authorities on the 11th, Singapore-based Banzaran Asset Management has initiated bankruptcy proceedings against German Property Group (GPG), the local developer that received investment funds from German Heritage DLS.

German Heritage DLS is a product that invests in projects purchasing German cultural assets such as barracks, monasteries, and castles to develop them into luxury residential facilities. In South Korea, securities firms and banks sold approximately 530 billion KRW worth of these products. However, due to difficulties in the developer’s local projects, repayments have been repeatedly delayed, causing unpaid investment funds to swell to over 200 billion KRW. Banzaran Asset Management attempted to conclude a comprehensive power of attorney (PoA) agreement to broadly transfer authority, including asset sales, from the developer but failed to reach an agreement, leading to the initiation of bankruptcy proceedings against the developer.

A Shinhan Investment Corp. official explained, "The asset manager tried to conclude a comprehensive power of attorney (PoA) with the German developer to proceed with asset sales but failed to reach an agreement. The asset manager applied for the developer’s bankruptcy proceedings, and if the developer does not agree to the PoA by the final deadline on the 17th, the bankruptcy process will proceed as planned."

If the bankruptcy of GPG is confirmed, concerns over principal losses for German Heritage DLS investors are expected to grow further. While the asset manager can maximize asset sale value by directly handling sales, bankruptcy trustees appointed by the court are generally more passive in maximizing sale value. In this regard, Shinhan Investment held a board meeting on the 9th to discuss measures prioritizing relief for German Heritage DLS investors. It is reported that they discussed a plan to compensate up to 50% of the losses to investors who have not received repayments even at maturity.

Within the financial sector, warning signs have begun to appear across various financial investment products, including German Heritage DLS and last year’s overseas interest rate-linked derivative-linked funds (DLF), prompting close monitoring. Especially as the global economy slows not only in South Korea but worldwide, and with the COVID-19 pandemic expected to cause a sharp contraction in the global economy, overseas asset defaults are anticipated to intensify. There are concerns that losses could rapidly increase in derivative products linked to fluctuations in underlying assets such as stocks, bonds, and commodities, as well as in real estate investment products.

Professor Sangbong Kim of Hansung University’s Department of Economics said, "The rapid global spread of COVID-19, conflicts among oil-producing countries, and the re-election issue of U.S. President Donald Trump are all contributing to a sharp increase in global economic volatility. Losses on overseas stock and asset-based direct and indirect products, including derivatives based on overseas assets, could expand, so thorough risk management is necessary."

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