Securities Firm-Guaranteed ABCP Converted to Long-Term Loans? Doubts Over Effectiveness of PF Default Measures

Securities Firms' Burden Increases as Loan Guarantees Turn into Loans
Small and Medium-Sized Firms with Limited Capacity Find It Difficult to Accept

Financial authorities are making an all-out effort to prevent the spread of default risks in real estate project financing (PF). In particular, as the delinquency rate of real estate PF has recently increased, they are ordering securities firms that handle a large volume of PF to convert asset-backed commercial paper (ABCP) into long-term loans. However, there is controversy over the effectiveness of this measure in the field. This is because many securities firms practically lack the capacity, and even if they convert to loans under pressure from financial authorities, they must bear the risk themselves, which is expected to only cause a 'risk transfer' phenomenon.

Financial Services Commission: "Converting ABCP to long-term loans will solve refinancing issues"

According to the financial investment industry, the Financial Services Commission (FSC) is recently encouraging securities firms related to PF to convert ABCP guaranteed by them into long-term loans. In the real estate PF market, securitized products such as ABCP, PF-ABS (asset-backed securities), and ABSTB (asset-backed electronic short-term bonds) serve as major funding sources. As of 2010, securitized products accounted for about 12.7% of real estate PF exposure, but by the third quarter of last year, this increased to about 28%. After the Legoland incident last year, refinancing securitized products became difficult and interest rates soared, prompting financial authorities to support refinancing through purchasing securitized products. Starting this year, to prevent the spread of default risks, the focus has shifted to reducing ABCP issuance and encouraging conversion into long-term loans.

Currently, loan maturities for real estate projects are generally 1 to 3 years, but ABCP supplying funds must be continuously refinanced every 1 to 3 months, causing maturity mismatches. Therefore, if the short-term financial market tightens, short-term market interest rates rise sharply to refinance large amounts of ABCP, and refinancing failures could increase securities firms' risks. To address this, the FSC plans to encourage conversion by relaxing the net capital ratio (NCR) risk weight (100%) applied to loans converted from securitized products such as PF-ABCP guaranteed by securities firms to 32%, equivalent to ABCP, matching the maturity of the underlying assets. According to the Korea Financial Investment Association, about 4.9 trillion won out of more than 20 trillion won in securitized products is expected to be converted into loans within this year. This means that money will flow more smoothly in the funding market. According to the Financial Supervisory Service (FSS), the scale of securities firms' guaranteed PF-ABCP is about 22 trillion won, and securities firms' PF loans amount to about 5 trillion won.

The financial authorities intend to reduce the refinancing risk of PF projects that recur every 1 to 3 months. An FSC official explained, "Real estate PF-ABCP has a short maturity, so even if someone takes over the volume, refinancing issues during the construction period will inevitably continue. Converting ABCP into long-term loans can solve refinancing problems until the sales proceeds come in later."

Only large securities firms can participate... "Effect may not be significant"

However, some express skepticism about the effectiveness. An industry insider said, "Securities firms have offset risks related to real estate PF project exposure to some extent by issuing relatively short-term securitized products. If securities firms switch from issuing securitized products to investing in 3-year loans matching the maturity of real estate projects, it will be difficult to respond promptly to risks in PF projects."

Moreover, converting ABCP into loans itself could be a burden. It is believed that only some securities firms with capacity will be able to convert loans. An industry insider noted, "Some securities firms with abundant liquidity may convert to loans, but they are not many. ABCP is a debt guarantee, not a direct loan, but converting to loans means actually lending money, which inevitably increases the burden on securities firms."

Another industry insider also pointed out, "There are not many securities firms that can withstand pressure from financial authorities, so large securities firms will likely provide long-term loans, but there are quite a few small and medium-sized securities firms without capacity." He added, "These firms generally supplied funds to risky PF projects, so converting to loans will transfer the risk to securities firms. They will be reluctant to convert loans, so the authorities' efforts to induce long-term loan conversion will be diminished."

Will the flow of funds in the real estate PF market change?

Furthermore, the industry interprets that financial authorities intend to change the flow of funds in the real estate PF market through this loan conversion. An industry insider said, "More places will have to comply with policies regardless of profitability or risk management." However, the FSC emphasizes that the short maturity of securitized products compared to the project period frequently causes refinancing failures, which in turn triggers instability in the financial market.

Securities firms arrange funding such as bridge loans (short-term loans) and main PF loans, earning fees. In recent years, cases where securities firms directly lend to PF or issue securitized products to provide funding have significantly increased. This is a result of developers turning to securities firms as alternatives after financial authorities tightened PF loan management in banks following the 2011 savings bank crisis.

However, with the sales market depressed and interest rates rising, delinquency rates have soared, making real estate PF a potential threat to the financial market. Among financial companies, securities firms have the highest delinquency rates. According to the FSS, as of the end of last year, the delinquency rate of securities firms' real estate PF was 10.4%, up 6.7 percentage points in one year. Considering the delinquency rates were 3.4% and 3.7% at the end of 2020 and 2021 respectively, this is a sharp increase. The delinquent balance of securities firms' real estate PF rose rapidly from 175.7 billion won at the end of 2020, 169 billion won at the end of 2021, 363.8 billion won at the end of September last year, to 465.7 billion won at the end of last year. The fixed and below-standard loan ratio of securities firms' real estate PF was also 14.8% at the end of December last year, up 3.9 percentage points from 10.9% at the end of September last year, indicating a risky level.

Accordingly, financial authorities are also pushing for the prompt write-off of bad debts to manage the soundness of securities firms. Among the real estate PF loan scale in the securities industry, assets already classified as 'estimated losses' by securities firms will be promptly applied for write-off to the FSS and processed as bad debt write-offs. To get approval for write-offs, applications must be submitted to the FSS at least one month before the quarter-end. An FSS official said, "We plan to encourage securities firms to actively use this procedure every quarter."

The 1.8 trillion won securities firms guaranteed PF-ABCP purchase program, which started operating at the end of last year, was scheduled to end this month but will be extended until February next year. ABCP purchase applications can be made until the end of this year. The PF ABCP purchase program, involving nine large securities firms (comprehensive financial investment business operators) and policy financial institutions such as the Korea Development Bank, selectively purchases ABCP of certain grades when securities firms request refinancing purchases. Currently, all repayments have been completed.

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