[Donmaekgyeonghwa] Securities Firms' 'Legoland' Aftershock... PF ABCP Purchase Commitment Time Bomb

PF Short-Term Securitization Bonds of 10 Trillion to be Refinanced by November
Refinancing Scale Exceeds 3 Trillion by End of October
Low Possibility of Margin Call on COVID ELS
3Q ELS Issuance Volume Down 31%
Korean and US Central Banks Announce Rate Hikes in November
ELS Risks Likely to Increase if Stock Prices Plummet

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[Asia Economy Reporter Hwang Yoon-joo] The securities industry is experiencing a "tantrum" (tightening spasm) over the LegoLand project financing (PF) asset-backed commercial paper (ABCP) issue in Gangwon Province. Some securities firms are reported to be facing worsening liquidity crunches due to being tied up with purchase commitments for securitized bonds. It is pointed out that liquidity tightening will peak during the month when the U.S. and South Korean central banks have announced interest rate hikes.

◇Securities Firms' PF 'Purchase Commitments' Become a Boomerang for Liquidity Crunch= According to data compiled by NICE Investors Service on the 21st, the scale of short-term securitized bonds for PF refinancing, for which securities firms have provided credit enhancement or purchase guarantees, has exceeded 10 trillion won by November. The amount of securitized bonds that must be refinanced within two weeks after the 18th of this month alone exceeds 3 trillion won.

In this situation, as the short-term financial market tightens due to the LegoLand incident, there are no investors willing to invest in short-term securitized bonds, so most of these bonds are being absorbed by securities firms. An investment banking (IB) industry official said, "When short-term financial market interest rates soar, securities firms are taking on all PF-ABCP that must be refinanced according to purchase commitments," adding, "The volume is so large that they must continuously secure short-term liquidity."

According to Korea Ratings, as of the first half of this year, the ratio of real estate PF exposure to equity capital is 35% for large securities firms (with equity capital over 3 trillion won) and 50% for small and medium-sized firms. Securities firms with relatively high proportions of purchase commitments related to real estate PF include H Securities, D Securities, D Securities, and S Securities. A securities firm official expressed concern, saying, "Due to the impact of the 'LegoLand ABCP,' for which Gangwon Province, with higher credit than securities firms, refused to provide payment guarantees, investors are withdrawing funds from PF ABCP," adding, "If this situation continues, securities firms may face a liquidity crisis."

[Image source=Yonhap News]

◇COVID-19 Nightmare, ELS Margin Call Concerns Not Yet... Crisis Expected to Peak in November= According to the Korea Securities Depository, the issuance amount of ELS in the third quarter of this year was 7.9194 trillion won, a 31.7% decrease compared to the same period last year. This is interpreted as a decrease in ELS issuance balance due to the market downturn starting from the end of last year.

During COVID-19, securities firms nearly faced a financial crisis due to ELS margin calls (requests for additional collateral). Derivatives such as ELS are mainly actively sold by large securities firms, most of which hedge on their own. In self-hedging, securities firms directly invest funds in overseas futures or options products to operate the products and must post a certain percentage of collateral at overseas exchanges.

When the global stock market crashed due to the COVID-19 shock, overseas exchanges demanded large additional collateral from securities firms. The condition was payment in 'U.S. dollars.' As a result, some large securities firms received margin calls exceeding 1 trillion won per day and sold short-term bonds to raise funds. This led to rising interest rates and increased concerns about credit tightening in the short-term funding market.

A securities firm official said, "The volume of ELS issuance has decreased since the second half of last year, so liquidity risks due to margin calls on over-the-counter derivatives have not yet significantly emerged," adding, "If stock prices continue to fall, liquidity risks may increase along with tightening in the short-term financial market."

The securities industry expects the sense of crisis to peak over the next month. This is because the U.S. Federal Open Market Committee (FOMC) and the Bank of Korea's Monetary Policy Committee have announced interest rate hikes at their regular meetings in November.

According to the Korea Financial Investment Association's bond information system, the final bid yield on 91-day CP on the previous day (20th) recorded 4.10%. This is a 97 basis point (1bp=0.01 percentage point) increase from 3.13% on September 20th, one month earlier.

A securities firm official pointed out, "With the U.S. rate hike in November and companies disclosing business reports, some construction companies are expected to face difficulties," adding, "Downgrades of credit ratings for some construction and financial companies will begin, and difficulties in the short-term funding market will also increase."

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