Meritz Securities as Savior for Meritz Capital... Taking on PF Volume

Participation in 200 Billion Won Capital Increase
Acquisition of 330 Billion Won Real Estate PF Assets
Capital Asset Soundness Indicators Expected to Improve

Meritz Securities has stepped in as a savior to ease the real estate project financing (PF) burden of its group company, Meritz Capital. As part of improving the capital company's financial structure, it is providing 200 billion KRW in funding and taking on 330 billion KRW worth of non-performing assets.

According to the financial investment industry on the 11th, Meritz Securities will support a 200 billion KRW (4 million shares) rights offering by Meritz Capital scheduled for the 17th. Since Meritz Securities holds 100% of Meritz Capital's shares, there will be no change in the shareholding structure due to the rights offering.

Along with this, Meritz Securities is known to purchase assets worth 333.4 billion KRW from Meritz Capital through a loan participation agreement to improve the financial structure. Most of the assets being sold are real estate PF loans and bridge loans classified as watchlist and fixed assets. They mostly consist of senior loans.

Korea Ratings stated in a report, "The assets subject to transfer include 285.2 billion KRW and 174 billion KRW classified as watchlist and fixed substandard loans, respectively," and added, "It is also understood that many assets that could be evaluated as 'caution' or 'at risk of default' under the revised business feasibility evaluation criteria to be applied from the second quarter of 2024 are included."

From next month, the financial authorities will apply new business feasibility evaluation criteria to more than 5,000 real estate PF sites nationwide. The PF site business feasibility evaluation criteria announced by the Financial Services Commission and the Financial Supervisory Service on the 13th consist of four stages (Good - Normal - Caution - At Risk of Default). The Financial Services Commission estimates that currently, 5-10% of PF sites require restructuring or liquidation.

The asset soundness indicators of Meritz Capital and Meritz Securities are also expected to change. This rights offering and asset transfer are expected to negatively affect Meritz Securities' asset soundness ratio. The contingent liability ratio against equity capital, which was 102.4% as of the end of March this year, is also expected to rise. The adjusted net operating capital ratio, which was 165.1% as of the end of March 2024, is expected to fall by an additional 6.6 percentage points.

Meritz Securities' real estate exposure will also increase. The real estate PF assets transferred from Meritz Capital amount to about 330 billion KRW. Most are the main PF assets in which Meritz Securities and Meritz Capital are joint senior investors. In this case, Meritz Securities' real estate PF exposure will increase from the existing 4.7 trillion KRW to 5 trillion KRW.

Korea Ratings said, "Considering that these assets have already recognized provisions once through an external business feasibility evaluation and are mainly composed of senior loans, the negative impact of this asset transfer on the securities company's financial indicators is expected to be limited," but added, "However, since the assets have a high proportion of regional, non-residential, and watchlist or lower classifications, it is likely to take a considerable period until these assets are finally liquidated. It is also analyzed that this will negatively affect the securities company's soundness indicators."

It added, "We plan to monitor whether there will be changes in the securities company's financial stability indicators along with the introduction of new PF business feasibility evaluation criteria for real estate PF in the second half of the year."

Some are paying attention to the fact that many watchlist assets were included in this real estate PF asset transaction, which differs from previous transaction patterns. There is also speculation that preemptive measures were taken so that the securities company can lead external sales using its sales infrastructure during the future real estate asset disposal process.