Heungkuk Life does abrupt about-face, will pay off bonds

Heungkuk Finance Group office in central Seoul on Nov. 3 [YONHAP]

Heungkuk Life Insurance is receiving funding from one or a number of companies in order to pay owners of its perpetual bonds.

Korea's eighth largest insurer said on Nov. 1 that it would not redeem $500 million of perpetual bonds issued in November 2017, rattling debt markets already on edge about rising rates and weak corporate credit.

On Monday, it did an about-face.

The company reversed its decision "to settle down the confusion in the financial markets that followed the delayed redemption,” it said in a statement.

Heungkuk Life Insurance will redeem the bonds on Wednesday.

Perpetual bonds never have to be repaid, and the insurer was not in default. In Korea, for debt agreements of this type, borrower and lender normally have an understanding that the bonds will be redeemed at a certain set date.

The last borrower in Korea to delay the redemption of a perpetual bond was Woori Bank, in 2009.

“The company’s profitability, liquidity and financial soundness are favorable, and we plan to further strengthen capital stability through an additional expansion of capital,” the statement read. The company “apologizes for the confusion in the financial markets caused by” its earlier decision.

Heungkuk Life Insurance is being vague about the source of the funding and the amount of the funding. It did not disclose whether the insurer was taking on debt or selling equity to cover the payment for the bond.

It did say that the funding would come from one of the companies in the Taekwang Group, a chaebol of about 20 related companies. The group includes Heungkuk Securities, Goryo Savings Bank, Heungkuk Asset Management, Taekwang Industrial and Daehan Synthetic Fiber.

Heungkuk Life Insurance is 56.30 percent owned by Lee Ho-jin, former chairman at Taekwang Group.

DB Life Insurance has also said it would delay the repurchase of 30 billion won ($22 million) of perpetual notes.

Heungkuk Life Insurance's delay in buying back the bonds led to a rapid destabilization in the market, with bonds of Kyobo Life Insurance, Woori Bank, Shinhan Financial Group and Kookmin Bank falling in sympathy, according to a report from Bloomberg.

In October, 354 trillion won of bonds were traded, down 18 percent from a month earlier and at levels not seen since August 2009 following the global financial crisis.

The price of Heungkuk Life Insurance’s bonds declined 27.5 percent in the four days after it announced it would delay redemption of the note on Nov. 1.

The bond market was already under stress before Heungkuk Life Insurance delayed the redemption of its perpetual bond.

Iwon Jeil Cha, a special purpose company established to fund the construction of the Legoland resort in Gangwon, was listed as bankrupt in early October. It had failed to repay 205 billion won ($146 million) in asset-backed commercial paper.

“The bond market may slightly recover after Heungkuk Life Insurance redeems the note Wednesday, but it will take some time for the sentiment to fully recover,” said Kim Joon-soo, an analyst at Kiwoom Securities. Due to the Heungkuk Life Insurance incident, the market will charge Korean companies more for their borrowing, he added.

New guidelines effective in January will reduce the amount of capital insurers will have to hold.

“Heungkuk could have just stood by its original decision until the risk-measuring indicators change next year, but the company seems to have been conscious of the cold market response,” Kim said.

Delaying the redemption of perpetual notes also occasionally happens abroad.

In 2020, the Lloyds Banking group, Britain’s biggest domestic lender, did not redeem a 750 million euro “CoCo” bond. In the same year, Deutsche Bank did not exercise an option to redeem $1.25 billion on bonds.

“Exercising a call option is a choice by the issuer and it also sometimes happens abroad,” said Yoo Seung-woo, an analyst at DB Financial Investment. “But yields offered by Korean firms are usually set at a lower rate than that of the United States or Europe on the belief that the bonds would be redeemed.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]