Heungkuk Life to call on $500 min perps via funding by parent, repos

Lee Ho-jin, former Taekwang Group Chairman [Provided by Maekyung Media Group]

South Korean authorities and the major shareholder of Heungkuk Life Insurance Co. stepped in to contain the widening jitters over Korean debt so that the insurer exercises the right to buy back $500 billion 30-year bonds issued in 2017 on the first option date on Wednesday.

The midsized insurer’s notice to global investors about its forfeiture on the first call option falling five years after the issue through a filing to the Singapore Exchange earlier this week aggravated scare over Korean papers at a time when the Korean debt market has come to a standstill after a default declare by a municipal bond related to Legoland Korea project financing.

Through intervention from authorities, Heungkuk Life Insurance corrected that it would call on the right to buy back the hybrid securities as planned on Nov. 9.

According to multiple industry sources on Monday, Heungkuk Life Insurance would raise 800 billion won ($574 million) through funding by its parent, Taekwang Group, and banks and other insurers through repurchase agreements (RP).

Taekwang would shoulder about 300 billion won, 400 billion won through multiple repos with banks and 100 billion won through respos with insurers through the coordination by the financial authority.

To contain growing doubts about Korean papers at home and abroad and capital run from insurers, authorities quickly mended repo guidelines and urged greater role from major shareholders to bolster the capital base of the life insurer.

Heungkuk Life Insurance decided not to call on the perps as it found poor demand for subordinated debt issues at home and abroad for refinancing amid unfavorable conditions from rising interest rates and economic uncertainties as it would risk worsening year-end risk-based capital adequacy ratio to fall below the government-guideline of 150 percent if it pays with own funding.

Hybrid securities usually with maturity of 30 years do not have the obligation to pay, but bond investors usually invest in them with belief they would redeem the funds in five years or the first call option date.

When Heungkuk Life bonds are uncalled, the annual rate return would have gone up to 6.742 percent from original pricing of 4.475 percent.

“We’ve decided with the funding as the redemption delay caused unexpected market upset and concerns among insurance subscribers,” said a senior official from Taekwang Group who asked to be unnamed.

Lee Ho-jin, former Taekwang Group Chairman, is the largest shareholder of Heungkuk Life Insurance with 56.3 percent stake. Other group units like Daehan Synthetic Fiber Co. with stakes in the insurer would also chip in.

Financial Supervisory Service Governor Lee Bok-hyun in a conference with foreign press on Monday suggested a possible arrangement, noting sufficient funding ability of the shareholders.

The insurer’s equity capital reached 1.97 trillion won in the second quarter and available capital in terms of RBC ratio 2.77 trillion won. Its liability adequacy test (LAT) surplus in which the financial authority approves as capital stood at 4.4 trillion won as of end of June.

By Shin Chan-ok and Lee Eun-joo