Investors are warned against 67 stocks with Korea Securities Finance ownership

Korea Securities Finance Corp. logo [Courtesy of Korea Securities Finance]

The number of South Korean stocks in which the Korea Securities Finance Corp. (KSFC) owns 5 percent or more stake in has increased sharply as individual investors actively engage in debt-backed investments.

According to financial market tracker FnGuide Inc. on Tuesday, there were 67 listed companies that had 5 percent or more of their stake owned by the KSFC as of the end of April, up 24 percent from the end of last year.

The KSFC said that the change in the stake ownership comes from “new acquisitions and variances of collateral rights under credit facilities.”

The rising ownership comes as the KSFC has increasingly taken out the stocks bought on credit by individual investors as security for the credit.

Investors are advised to stay cautious when purchasing stocks with above 5 percent of ownership by the KSFC, as the stocks are more vulnerable to potential price fluctuations.

The KSFC is a shareholder of many Korean stocks, many of which were involved in the recent massive sell orders made through SG Securities Korea Co., such as Daou Data Corp. (6.38 percent), Samchully Co. (6.12 percent), Daol Investment & Securities Co. (5.07 percent), and Daesung Holdings Co. (5.01 percent).

Of the 8 companies that saw a sharp fall in their stock prices triggered by unexplained sell orders in April, six had the KSFC as a shareholder with more than 5 percent. The remaining two were Seoul City Gas Co. and Harim Holdings Co.

“The disclosure of ownership in credit facilities can be a worrying signal of stock investments on credit,” said Lee Hyo-sup, a researcher at Korea Capital Market Institute.

The KSFC holds the largest ownership in Youngpoong Paper Mfg. Co. at 8.88 percent. Shares of Youngpoong Paper surged 231 percent this year. HanmiGlobal Co. and Jeju Bank also reported in a disclosure that the KSFC had more than 5 percent of their stakes.

Korean investors, in the meantime, have turned to leveraged investments amid the bullish stock market since the beginning of this year.

That led to a rise in the balance of credit facilities by securities firms to 19.45 trillion won ($14.5 billion) at the end of April from 16.53 trillion won early this year. The loan capital that the KSFC has devoted to each securities firm also dried up.

Margin account loans, in which individual investors buy stocks on credit loans secured by securities firms, have two sources of funds - financing from brokers and debt financing.

The latter refers to the funds the securities firm owes to the KFSC. An individual investor buys a stock through a securities firm’s debt financing, and the KSFC becomes a shareholder of the stock owned by the investor.

Under the law, shareholders have an obligation to disclose their ownership if they have a stake of 5 percent or more in voting stocks.

“Investors should be aware that stocks with a large balance of credit facilities can be more prone to fluctuations,” said an unnamed industry source.