Meritz Showed Outstanding Animal Instincts for Making Money

Meritz Purchases 1.5 Trillion Won of Lotte Construction PF Securitization Bonds
Low Loss Risk Due to Many High-Quality Projects and Support from Lotte Affiliates
Seeking New IB Business Opportunities Through Network Expansion

[Asia Economy Reporter Lim Jeong-su] "The management's consistent strategy of providing timely solutions when companies face difficulties to seek business opportunities has created the deal with Lotte Construction." Regarding Meritz Financial Group and Lotte Group's establishment of a 1.5 trillion KRW fund to support Lotte Construction, the investment banking (IB) industry evaluates that "Meritz Securities has once again keenly sensed the scent of money."

‘Triple Safety Mechanism’ in Support from Lotte Affiliates... Low Possibility of Loss

At first glance, Meritz Financial's large-scale investment appears to be quite risky. This is because affiliated financial companies are injecting 900 billion KRW into purchasing high-risk project financing (PF) securitized bonds. They are concentrating a large amount of liquidity equivalent to 18% of Meritz Securities' equity capital into construction sites of just one company, Lotte Construction. Credit rating agencies have also expressed concerns. NICE Credit Rating assessed, "Meritz Securities, whose real estate exposure reaches 110% of its equity capital, has increased its PF assets, thereby increasing real estate-related risks."

Hee-moon Choi, Vice Chairman and CEO of Meritz Securities. Photo by Meritz Securities

In response, Meritz Securities argues that they have established a triple safety mechanism, making the possibility of losses on senior investment funds unlikely. As the first safety measure, Lotte Group affiliates have agreed to inject 600 billion KRW of subordinated funds into the fund. Even if losses occur in the fund purchasing Lotte Construction guaranteed PF securitized bonds, Lotte Group affiliates will bear losses up to 600 billion KRW. The subordinated loan is also secured by the headquarters building of Lotte Construction.

Additionally, Meritz Financial secured collateral such as real estate at construction sites and accounts receivable while executing senior loans. If losses exceeding 600 billion KRW occur due to PF securitized bond defaults, they can exercise collateral rights to recover the principal. Even if interest payments are delayed or unpaid for a long period, there is little concern. Strong Lotte Group affiliates such as Lotte Hotel and Lotte Property & Development have committed to ensuring interest payments.

An IB industry insider commented, "Lotte Group affiliates have sufficient liquidity to provide side support to Lotte Construction and possess many assets to offer as collateral," adding, "By layering safety mechanisms, Meritz has significantly reduced the probability of principal and interest losses on the senior loans they invest in."

A Meritz Securities IB executive explained, "The PF sites guaranteed by Lotte Construction are located in key areas of the metropolitan area and major provincial cities, so long-term sales performance is expected to be good," noting, "Recently, the Lotte site in Changwon City saw a competition rate exceeding 20 to 1." He added, "Among all Lotte Construction guaranteed sites, 20% are reconstruction and redevelopment projects with low unsold risk, amounting to over 1 trillion KRW in scale," evaluating that "the risk of PF defaults due to unsold units is relatively low."

Providing Umbrellas in Heavy Rain and Forming a Blood Alliance with Lotte... Expanding IB Business Opportunities

The decision by Meritz Financial's management also includes a strategic move to expand IB business opportunities beyond real estate PF. Meritz Securities has equity capital of 5.3 trillion KRW, already meeting the capital requirement (over 4 trillion KRW) to operate as a mega IB capable of comprehensive IB services.

Meritz Securities has expanded assets and increased profitability by leveraging strengths in real estate PF and structured finance. However, its performance in traditional IB services such as initial public offerings (IPO), rights offerings, and corporate bond issuance has lagged significantly behind other large securities firms with similar capital sizes. Last year, its rankings in corporate bond issuance and IPO underwriting and acquisition were all outside the top 10.

However, with this investment agreement, the relationship is expected to improve, raising expectations for IB deals originating from Lotte Group affiliates. Over the past three years, Lotte Group has issued over 4 trillion KRW in corporate bonds annually. Additionally, several IPO candidates, including Hotel Lotte, are waiting. From Meritz's perspective, this provides opportunities to increase IB fee income through corporate bond issuance, IPO underwriting, and acquisition with Lotte Group, diversifying revenue sources.

Lotte Group holds a large amount of real estate assets across many affiliates, including distribution. It is also a major player in the mergers and acquisitions (M&A) market. It is expected that Meritz Securities will expand opportunities to provide solutions and liquidity for Lotte Group's real estate securitization, real estate investment trusts (REITs), and M&A-related transactions.

An IB industry insider said, "Meritz Securities is known to have proposed similar structured deals to other group-affiliated construction companies," adding, "Through such deals, the management's will and strategy to appropriately resolve corporate funding issues and gradually expand the corporate client base to grow into a mega IB are evident."

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