Co-op a force in M&As

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Co-op a force in M&As

The Korean Federation of Community Credit Cooperatives has risen as a big star in M&A deals as it wants to use its abundant funds accumulated by the government’s tax breaks to diversify its investment channels.

This began in August, when private equity fund firm MBK Partners acquired the country’s No. 1 water purifier manufacturer Woongjin Coway.

Woongjin Group had originally selected KTB Private Equity, an affiliate of KTB Investment and Securities, as the preferred bidder for Woongjin Coway, but later withdrew the deal and reselected MBK Partners, which is known for its abundant funding capacity.

It was later revealed that the Korean Federation of Community Credit Cooperatives was behind the MBK Partners’ victory as it financed 400 billion won ($377.7 million) for the deal.

In November, a consortium that included the Korean Federation of Community Credit Cooperatives as an investor was named as the preferred bidder in the acquisition of the bankrupt Green Non-life Insurance.

In December, the federation took over 100 percent of the stake in the KIS Credit Information Service from the NICE Information Service for 23.5 billion won.

“Korean Federation of Community Credit Cooperatives has been the centerpiece of mega M&A deals these days,” said Jeong Do-hyeon, CEO at private equity fund Dominus Investment. “It seems as its move for the M&A market will be expanded further.”

The federation, which was once regarded as a small piggy bank for its petite funding capacity a decade ago, has emerged as a big investor in M&A deals as it is in search of finding new investment channels to use its ample funds.

According to industry sources on Jan. 7, the federation has shown its desire for investments by participating in indirect and direct M&A deals for acquiring pipeline manufacturer Golee and Kumho Industrial, though it had already bitterly failed to acquire Woori Financial Holdings and ERGO Daum Direct General Insurance.

The federation is also expanding its horizon to real estate properties in and out of Korea.

It has participated as a financial investor in the Central Park I Mall in Songdo, Incheon, and the MBC headquarters in Yeouido, western Seoul. In the United States, it has participated as financial investor for 333 Market Street Building in San Francisco and the Three First National Plaza in Chicago.

Market observers said the federation’s surprisingly aggressive move is intended to diversify its investment portfolio.

The federation’s managed assets heavily rely on treasuries. Its loan-to-deposit rate is 60-something percent, much lower than other banks’ 90-something percent.

Sticking to treasuries and the net interest margin would limit the federation from generating bigger profits, market observers said.

After the 2011 savings bank scandal prompted massive withdrawals of saved money from the troubled banks, money flowed into the federation.

With the federation, lenders are exempted from tax on interest rates thanks to the government’s tax break incentive provided to the federation.

As of October 2012, the federation has maintained a combined 90.9 trillion won fund from customers’ deposits, surpassing the 52 trillion won of savings banks. This is remarkable growth given that the federation held a combined 64.5 trillion won in deposits.

Some market observers have raised concerns for the federation’s unusually aggressive pursuit of new investments as aggressive asset management weakens the lender’s financial soundness.

The role for the nation’s financial watchdog, the Financial Supervisory Service, is limited to closely monitor the financial conditions of the federation because, unlike other financial institutions, it is under the watch of the Ministry of Public Administration and Security.

According to the ministry, 257 out of the 1,479 federation’s branches had been ordered by the ministry to improve their operation management between 2008 and 2011.

“Loan default rates in cooperatives, including the federation, and the National Credit Union Federation have gone up as low-income households fail to repay mortgage loans,” said an official at the Financial Services Commission. “We’re paying attention to these federations to prevent a repeat of the savings bank scandal.”

In regard to the FSC official’s comment, an executive at the Korean Federation of Community Credit Cooperatives said, “the federation has been thoroughly monitoring lending and investments under the watch of its risk management team just like other financial institutions do.”

By Sohn Hae-yong, Hong Sang-ji []
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