Easing the liquidity squeeze

If the market hit a bottleneck, traffic control is necessary.

The liquidity squeeze in the second-tier financial sector and companies is deepening. The debt market has turned icy after insurers Heungkuk Life Insurance and DB Life Insurance posted that they won’t be exercising the right to redeem perpetual bonds ahead of maturity. In the bond market, companies routinely exercised their right to pay off the debts earlier than maturation to help reduce their interests burden later. The liquidity squeeze was originally triggered by the scare from a default declaration on debt by a public developer of a local government behind the Legoland Korea project.

The secondary financial sector is turning panicky as securities companies turn fearful of losing big money they invested in project financing during the real estate development boom period. After the Legoland Korea debacle, insurers are grappling with capital thinning from people cashing out amid economic downturn, and credit card issuers and capital companies are struggling to raise immediate cash due to tepid demand for their short-term papers.

Heungkuk Life Insurance issued $500 million 30-year bonds with the option of repaying five years after the offering. Long-dated or perpetual bonds are usually redeemed in five years. Investors buy the bonds with expectations of redeeming their funds five year later. But the life insurance company could not repay the bonds after five years this time.

As Heungkuk Life bonds were sold in dollars overseas, the forfeiture in early repayment can negatively affect credibility of Korean papers. The value of the bonds issued by Tongyang Life Insurance, which have the option for repayment on September 2025, also fell to $52.4 last Friday from $83.4 late October. The price fall of Korean bonds would mean that much of a spike in borrowing rates for new Korea offerings.

Democratic Party head Lee Jae-myung raised the Heungkuk Life case to call for preemptive actions, since as much as 35 trillion won worth global bonds of Korean issuers are due next year. He criticized the government for being out of sync with liquidity increase when the Bank of Korea has been raising rates to tame inflation.

But the greater danger is the waning confidence in Korean issuers. Much of the anxiety could be eased through clear explanation. Seoul Dunchon L&H redevelopment cooperative last month succeeded in refinancing its maturing debt of 700 billion won. If the market hit a bottleneck, traffic control is necessary.

Fortunately, the government and Heungkuk Life have found a way to ease the anxiety over credibility in a head-on-head meeting. Heungkuk agreed to repaying the debt on Wednesday, as scheduled, mostly with its money while commercial banks and other insurance companies agreed to buy repurchase agreements (RP)-based bonds issued by Heungkuk. But financial authorities must strive to prevent such a liquidity squeeze in advance.