Hwacheondaeyu, Controversy Over 'Cash Collateral' Deposit and Withdrawal Loan Agreement

Hwacheon Daeyu, 7.325 Trillion Won Loaned from 14 Financial Institutions Including Banks
Some Commercial Banks Set Cash Equivalents as Collateral
Other Developers and Financial Authorities Say "It's Unprecedented"

[Asia Economy Reporter Song Seung-seop] It has been confirmed that some financial companies, including commercial banks, lent large sums of money to Hwacheon Daeyu, which is at the center of the controversy over preferential treatment in the Daejang-dong development project in Seongnam, Gyeonggi Province, and allowed them to freely use the cash and other collateral. This is highly unusual and different from the common collateral management practice of blocking withdrawal accounts to prevent the collateral value from being impaired.

According to the financial sector and the Financial Supervisory Service's electronic disclosure system on the 5th, Hwacheon Daeyu announced that it signed loan contracts with 14 companies, including commercial banks, insurance companies, and capital firms, for a total of 732.51716 billion KRW in 2019. This was when Hwacheon Daeyu began realizing profits by launching the Daejang-dong sales.

About 50% of the loan amount, approximately 385 billion KRW, was executed by Hana Bank, NH Nonghyup Bank, Sh Suhyup Bank, and IBK Industrial Bank of Korea. By financial institution, Hana Bank provided the largest loan amount of 225 billion KRW, followed by IBK with 70 billion KRW. Nonghyup Bank and Suhyup Bank lent 50 billion KRW and 40 billion KRW respectively. In addition, Hwacheon Daeyu signed loan agreements with Dongyang Life Insurance (70 billion KRW), DB Insurance (70 billion KRW), Nonghyup Life Insurance (30 billion KRW), Hana Life Insurance (10 billion KRW), and Mirae Asset Capital (20 billion KRW).

The lending financial companies mainly took Hwacheon Daeyu's cash and cash equivalents as collateral. Cash and cash equivalents collateral amounted to 871 billion KRW, the largest portion, and housing finance credit guarantees reached 117.5 billion KRW. Available-for-sale securities and short-term financial products were 71.5 billion KRW and 29.2 billion KRW respectively.

The problem is that despite being collateral assets, Hwacheon Daeyu was able to withdraw and use the funds as they wished for business purposes. Hwacheon Daeyu disclosed in its audit report that "loan management accounts and interest reserve accounts of the lenders are pledged for the borrowings of the consolidated entity," but also stated, "However, cash and cash equivalents in these accounts can be freely deposited and withdrawn when used for the purpose of the project." This contrasts with the usual practice of restricting the use of cash or cash equivalents pledged as collateral.

Most financial companies said they could not disclose specific contract details or reasons but insisted that withdrawals and deposits were not completely unrestricted. A financial company official said, "All contracts have confidentiality clauses and obligations to comply," adding, "Since this is currently under investigation, it is difficult to provide related information." Another financial company official explained, "Procedures were established to obtain the consent of the lenders' group for withdrawals and deposits."

Nevertheless, the industry points out that this contract method is far from the usual purpose of collateral. An official from a major project developer explained, "If cash and cash equivalents pledged as collateral can be freely deposited and withdrawn, it loses its meaning as collateral." He added, "When a pledge is established, it is correct that withdrawals and deposits require the approval of the collateral holder," and "Even so, I have never seen a disclosure case stating that it can be freely used."

Financial sector officials also regard this as unusual. A financial regulator said, "Because of the principle of freedom of contract, it is not impossible to enter into such contracts," but added, "It is not a common case." Another financial regulator pointed out, "If collateral is set but partial withdrawal of the collateral is allowed, wouldn't that create risks?" and "It differs from the usual transaction methods."

Meanwhile, a financial company official said, "This is a typical project financing (PF) fund management structure," and "It is thought to mean that the funds can only be used for the specific project."

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