15% of Securities Firms' Overseas Alternative Investment Assets May Have Principal and Interest Delinquency Risk

[Asia Economy Reporter Eunmo Koo] As the low interest rate trend continues for a long time, securities firms' overseas alternative asset investments have steadily increased, but the scale of assets with potential principal and interest delinquencies accounts for about 15% of the total.

According to the Financial Supervisory Service on the 4th, the scale of overseas alternative investments by securities firms (22 companies) totaled 48 trillion won (864 cases), with 23.1 trillion won invested in real estate (418 cases, as of the end of April last year) and 24.9 trillion won in special assets (446 cases, as of the end of June last year). Among these, 31.4 trillion won was resold to investors, and 16.6 trillion won was directly held.

Overseas alternative investments by securities firms have rapidly increased since 2017 but showed signs of stagnation last year due to the impact of COVID-19 and other factors. By investment region, investments are mainly made in developed countries such as the United States (17.7 trillion won, 37%), the United Kingdom (5.2 trillion won, 11%), and France (4.2 trillion won, 9%). By investment target, in real estate, investments were mainly in offices (12.2 trillion won, 53%) and hotels/condominiums (4.5 trillion won, 19%), while in special assets, investments were mainly in power plants (10.1 trillion won, 41%) and ports/railroads (4.3 trillion won, 17%).

The average maturity of overseas alternative investments is 6.8 years, and as full-scale investments began in 2017, most maturities (86.5%) are due after 2022. Also, investments held for more than six months without resale despite being made for resale purposes by securities firms amounted to 3.6 trillion won.

The amount classified as non-performing and watch-listed by securities firms themselves was 7.5 trillion won (4 trillion won in overseas real estate, 3.5 trillion won in overseas special assets), accounting for about 15.7% of the total investment scale (48 trillion won). Among the securities firms' directly held portion (16.6 trillion won), the non-performing and watch-listed amount was 2.7 trillion won (16.0%), and among the resale portion to investors (31.4 trillion won), it was 4.8 trillion won (15.5%). In particular, the scale of non-performing and watch-listed assets in derivative-linked securities (DLS) issued based on offshore funds among the resale portion reached 2.3 trillion won (68% of the total DLS issuance). Meanwhile, due to the prolonged COVID-19 situation and reduced trade between countries, there is also a possibility of additional deterioration in investments related to hotels, aircraft, and trade finance bonds in the future.

Accordingly, securities firms have completed self-inspections. Previously, securities firms (22 companies) conducted self-inspections on the actual status of overseas alternative asset investments and resales from June to August last year, and reported the inspection results to each securities firm's board of directors. The inspection revealed that some work procedures need improvement, such as inadequate local due diligence reporting systems and insufficient risk verification procedures when issuing DLS based on offshore funds. Therefore, the relevant securities firms were requested to promptly supplement the necessary improvements in overseas alternative investment-related work procedures and strengthen monitoring systems.

Furthermore, a model code presenting internal control and risk management standards that securities firms must comply with when making alternative investments will be prepared and implemented. A shadow banking system for real estate will be established and managed to systematically manage the potential risks of domestic and overseas real estate invested in by securities firms by type, region, and company. Additionally, inspections of investments with defaults such as redemption delays and strengthened monitoring of investment losses will also be enhanced.

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