Heungkuk Life’s bond buyback delay splashes cold waters on fragile debt market

Heungkuk Life [Photo by Kim Ho-young]

A decision by a Korean midsized insurer not to buy back its perpetual bonds has triggered scare in Korean issues at home and abroad, aggravating liquidity woes for Korean Inc following the default crisis over a municipal bond related to Legoland Korea.

The move by Heungkuk Life could splash cold waters to debt financing plans of Korean Inc. and raise the borrowing costs.

After forfeiture to buyback in five years, Heungkuk Life’s coupon, or annual interest it pays to bondholders, rose to 6.74 percent from 4.475 percent, according to NH Investment & Securities.

A NH Investment researcher said since 2009, all local financial companies repaid their debt on the first call date, and Heungkuk Life’s decision could cause bond prices to fall and undermine investor demand.

A Heungkuk Life official said that the insurer opted to put off the call right in light of higher borrowing cost as debt issue for refinancing has become unfavorable amid rapid rises in interest rates globally. A call option was postponed by a European issuer last month due to similar reason and the insurer does not have any liquidity issues, he added.

While forfeiture in the call option on perps doesn’t imply a default, it has been customary to repay normally in five years.

The move can further upsent the local debt market feebly recovering from credit issue on multiple stabilization measures by the government.

When Woori Bank decided not to exercise a call option on its 10-year debt in the wake of Wall Street meltdown of 2008, prices of Korean debt tumbled.

Other Korean companies, such as Lotte Insurance and Jin Air, have call options coming soon. As of last month, there were 7.3 trillion won ($5.1 billion) worth perpetual papers by Korean issuers outstanding, far greater than previous annual high of 5.3 trillion won in 2020, according to financial companies.

Prices in Korean debt are expected to fall as global investors, such as those in Hong Kong, are avoiding Korean debt. About $25 billion of global debt by Korean issuers are due in 2023, 22% greater than this year, according to Bloomberg and NH Investment.

Financial authorities are monitoring the situation closely. A government official said Heungkuk Life’s financials could have been adversely affected if it repaid its perps.

The broad impact won’t be that big as only two to three institutions plan foreign debt issue within the year, he added.

The government has been encouraging local companies and financial firms to seek fundraising from the overseas market to ease the glut issue at home. But the plan likely won’t work out after Heungkuk Life move.

By Cha Chang-hee, Kim Myung-hwan, Moon Jae-yong and Kyunghee Park