Securities Companies Expected to Actively Create NPL Funds as Public Auctions Expand

According to a report released by Samsung Securities researchers on the 14th, the real estate PF (project financing) market soft landing policy being promoted by the financial authorities is expected to create new business opportunities for securities companies, such as NPL (non-performing loan) funds.

Samsung Securities researchers Lee Kyung-ja and Jung Min-gi predicted that “as the environment for full-fledged PF restructuring is created, public auctions will increase from next month, and NPL funds, which have been lukewarm until now, will become more active.”

Key Points:

• The financial authorities are pushing for public auctions for non-viable PF projects and the creation of a 5 trillion won syndicate loan by banks and insurance companies to provide liquidity.
• The acceleration of restructuring of non-viable projects could lead to additional provisioning by securities companies, savings banks, and capital companies in the 2nd financial sector, but this is expected to be manageable.
• The establishment of standards for public auctions and the acceleration of restructuring of non-viable projects are expected to provide new business opportunities for large securities companies with capital and networks.
• Recent industry trends include Korea Investment Securities agreeing to find undervalued real estate projects with TPG Angelo Gordon and NH Investment Securities launching a 200 billion won real estate institutional private equity fund (PEF) and Meritz Securities creating a PF loan fund.
• In particular, overseas institutions are recognizing the current PF loan interest rate as its peak and are actively seeking opportunities, and banks and insurance companies are also gradually resuming PF participation centered on projects with high stability.
• The impact on the capital adequacy of banks and insurance companies participating in the syndicate loan is expected to be limited, as the financial authorities are providing various incentives to participating financial institutions to minimize the impact on their soundness and capital adequacy.
• This is a measure similar to past stock stabilization funds and bond stabilization funds in terms of improving market liquidity and safety.

Expected Effects:

• Creation of new business opportunities for securities companies, such as NPL funds
• Stabilization of the real estate PF market and strengthening the soundness of the financial system

References:

• Syndicate loan: A system in which banks and insurance companies jointly provide loans
• NPL fund: A fund that purchases and rehabilitates or disposes of non-performing loans
• Stock stabilization fund: A fund created to stabilize the stock market. Securities companies, banks, insurance companies, and listed companies raise funds in the form of a civil law association and invest in and manage listed stocks, while taking measures to prevent stock price declines from spreading to financial system risks. The stock stabilization fund has been implemented a total of 3 times: in 1990 when the stock market was sluggish due to the end of the 3 lows boom, in 2003 when the Iraq War and the credit card crisis broke out, and in 2008 when the global financial crisis hit. In 2020, when the COVID-19 crisis broke out, it was only formed.
• Bond stabilization fund: A fund created to provide liquidity to companies that are experiencing temporary cash flow difficulties due to economic downturns and bond market sluggishness. It was first created in 2008 during the global financial crisis with a size of 10 trillion won, and was created again in 2020 with a size of 20 trillion won due to the COVID-19 crisis.

Additional Notes:

• The soft landing of the real estate PF market is expected to lead to an increase in the number of non-performing loans (NPLs) in the financial sector. However, the financial authorities are preparing various measures to minimize the impact on financial institutions, such as expanding NPL disposal channels and providing incentives for NPL disposal.
• The creation of NPL funds by securities companies is expected to contribute to the efficient disposal of NPLs and the revitalization of the real estate market. However, it is necessary to pay attention to the possibility of moral hazard, such as an increase in risky lending, as NPL funds are involved in the disposal of NPLs.