[Desk Column] Your Lever

[Asia Economy Reporter Jeon Pil-su] Debt investment, all-in.

These are buzzwords heard so often in recent economic news that they have become clich?. They refer to investing by borrowing money and investing by pulling together every last resource, respectively. As asset prices, including real estate, soar, more people are engaging in 'debt investment' and 'all-in' investing. Given the skyrocketing housing prices, it is understandable that there is anxiety about whether one should jump in now. Since many have limited assets, borrowing as much as possible to maximize returns through leverage can be seen as an economic choice.

A prime example of leverage effect is the current hot topic, 'Hwacheon Daeyu.' Hwacheon Daeyu generated leverage hundreds to thousands of times through project financing (PF) via a project financing investment company (PFV). The key to successful leverage investment is how much money can be attracted. Although wrapped in the grand name of project financing, the basic structure of PF is to receive investments or borrow money from financial institutions or others.

In the stock market, the number of 'debt investment' investors borrowing to invest is also increasing. The credit loan limits at major securities firms are nearly reached. Credit loans refer to securities firms lending trading funds to investors after receiving a certain margin, usually setting limits at about 80-90% of the securities firm's own capital. According to Min Hyung-bae, a member of the National Assembly's Political Affairs Committee from the Democratic Party, Mirae Asset Securities, the largest securities firm in Korea, has a capital of 9.3897 trillion won and can extend credit up to 7.5 trillion won. As of the 10th, Mirae Asset had lent 7.2844 trillion won on credit to customers, leaving only 215.6 billion won of credit loan limit remaining. NH Investment & Securities, which can lend up to 3.9 trillion won, has reportedly exhausted its limit.

From the securities firms' perspective, even if they want to lend more, there is no room left. In fact, in mid-last month, NH Investment & Securities and Daishin Securities stopped issuing new credit loans. This indicates that there are many investors seeking leverage effects, but there is a fundamental difference between individual investors' leveraged investments and those of real estate development companies like Hwacheon Daeyu.

Looking at the PF structure of development companies, construction companies and financial firms bear a significant portion of the development project risks. Although the developer also bears risks, the scale of their capital is small, so the risk relative to expected profits is inevitably lower.

On the other hand, the risks of investments using individual investors' credit loans mostly fall on the individuals themselves. Typically, securities firms lend trading funds at about 150% of the cash held by individuals. If the investor holds existing stocks, they can borrow up to 10 times the cash held, but only within the valuation of the held stocks. If the value of the lent stocks falls to a point where the principal cannot be recovered, the securities firm mercilessly sells the stocks at market price. This is known as forced liquidation, occasionally reported in securities news.

The interest rates on securities firms' credit loans average 5.3% (1-7 days) to 7.9% (61-90 days). In today's low-interest-rate era, although called credit loans, they are essentially secured loans with quite high interest rates. 5-7% is about 3-4 times the bank interest rates and is also the annual target return rate for conservative investors. Those who love leverage, you are neither investment geniuses nor Hwacheon Daeyu.

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