First Early Redemption Failure of New Hybrid Bonds in 13 Years...Will Foreign Currency Bonds Also Face Worsened Investor Sentiment?

Heungkuk Life Insurance Does Not Exercise $500 Million Callable Option on Hybrid Capital Securities
First Time in 13 Years Since 2009 Woori Bank Subordinated Bonds
Hybrid Capital Securities Investment Risk Materializes

[Asia Economy Reporter Ji Yeon-jin] Heungkuk Life Insurance has decided not to exercise the call option on the $500 million hybrid capital securities scheduled for the 9th of this month, raising concerns that the investment sentiment, already weakened by the Gangwon-do Legoland incident, could deteriorate further.

According to the financial investment industry on the 2nd, Heungkuk Life Insurance announced that it is unable to exercise the call option on the $500 million dollar-denominated hybrid capital securities issued in 2017. The call option exercise date is the upcoming 9th.

Hybrid capital securities are perpetual bonds issued by financial companies to meet the capital adequacy ratio (BIS) regulations. Typically, after about five years, the issuer has the option to repurchase these bonds under a call option condition. Heungkuk Life Insurance’s decision not to exercise the call option marks the first failure of early redemption of hybrid capital securities by a domestic financial institution in 13 years since Woori Bank’s subordinated bonds in 2009, reflecting the realization of extension risk, an investment risk associated with hybrid capital securities.

Heungkuk Life Insurance initially planned to raise redemption funds through the issuance of dollar-denominated hybrid capital securities, but due to the rapid deterioration of the funding market environment caused by the Legoland incident, it faced difficulties in raising funds and decided not to redeem the existing bonds.

Choi Sung-jong, a researcher at NH Investment & Securities, said, "Not exercising early redemption does not mean a default, but it is a factor that increases reputational risk," adding, "Investors who regarded the first call option exercise date as the effective maturity may lose trust." Since domestic financial institutions have conducted early redemption at the first call option exercise date since Woori Bank in 2009, bond prices may fall and future investment demand may shrink, Choi added.

As of the end of June this year, Heungkuk Life Insurance’s Risk-Based Capital (RBC) ratio stood at 157.8%, which is low among life insurers. The RBC ratio is an indicator of an insurer’s financial soundness, representing the ratio of funds available to pay policyholders if a large number of insurance claims are made simultaneously. According to the Insurance Business Act, it must exceed 100%, with a recommended level of 150% or higher.

However, the industry views the possibility of a credit crisis as limited, considering the company’s relatively good position in the insurance sector and gradual profitability improvement. Nonetheless, concerns have been raised that this could further weaken the foreign currency bonds (KP) issued by domestic companies.

Regarding the KP credit spread, which assesses the credit risk of foreign currency bonds, investment sentiment has weakened following the default declaration on asset-backed commercial paper (CP) for the Legoland project in Gangwon-do, and concerns over corporate earnings have caused spreads to widen. The KP maturities scheduled for next year amount to $25 billion, a 22% increase from this year, raising concerns about refinancing of dollar bonds. Researcher Choi said, "Considering the contraction in KP investment demand from domestic and foreign investors, KP is expected to show a structural weakness for the time being, so a conservative approach is necessary."

Meanwhile, on the previous day, Kim Ju-hyun, Chairman of the Financial Services Commission, met with the heads of the five major financial holding companies to request liquidity supply for financial market stabilization, and commercial banks agreed to provide 95 trillion won in funds. On the same day, Lee Bok-hyun, Governor of the Financial Supervisory Service, gathered representatives from major banks, securities firms, and capital companies to seek cooperation regarding the government’s announced market stabilization measures.

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