Refinancing burden spreads across non-bank financial firms
Insurers and capital funding companies that are specialized in assetbased leasing and car loans are struggling with liquidity shortages, as steep hikes in the key interest rate put the pressure for refinancing on non-bank financial firms.
The banks have been offering high deposit interest rates in past months, prompting investors to pull their money out from the bond and shortterm money markets and save it in banks instead.
The latest investment trend has resulted in a price fall in the bond market, which had been a major investment destination among insurers looking to reap profits.
In particular, the investor sentiment weakened for bonds issued by the insurers after midsized Heungkuk Life Insurance’s unusual delay in exercising its perpetual bond repayment option in early November.
Such delays have dealt a blow to the bond market, together with a default announced by the Gangwon Province-backed developer for the bonds to fund the establishment of a Legoland theme park in the province.
According to the Korea Financial Investment Association, the insurers nationwide offloaded bonds worth 2.23 trillion won ($1.64 billion) in October and 2.49 trillion won during the first 19 days of November.
“It is rare to see insurers dumping such a large amount of bonds in less than two months, and their measures suggest they are desperate to find alternative means of raising money,” the association said.
Additionally, “a considerable” number of customers are canceling their savings insurance plans despite penalties, as it is more profitable to save the corresponding money in banks, according to the association.
For instance, a cash deposit kept in a bank account with a maturity period of one year could return more than 5 percent in interest annually, which compares with savings insurance plans that mostly have a maturity period of five years. Capital funding companies have been raising money by issuing bonds with coupon rates that are comparable to interest rates offered by banks.
“And capital funding companies are losing competitiveness against banks in the wake of a sharp hike in the policy rate, and they are increasing coupon rates against their will,” the association said.
A capital funding company rated AA- raised its annual coupon rate for a one-year maturity bond to 6.07 percent as of Friday, up from 2.05 percent a year earlier.
For a company rated BBB+, the annual coupon rate for a one-year maturity bond was raised from 4.9 percent to 9.2 percent during the same period.
The association urged the financial regulators to intervene in the market and ensure the liquidity is “not excessively absorbed by the banks.”
“It is understandable the banks increasingly have become an attractive investment destination, but even so, refinancing burdens among nonbanks should be avoided as failure to do so will bring a credit crunch across the entire financial market,” it said.
It is rare to see insurers dumping such a large amount of bonds in less than two months, and their measures suggest they are desperate to find alternative means of raising money. ”