by Yoo Seungki
SEOUL, Nov. 4 (Xinhua) -- Concerns have been growing at home and abroad over South Korea's credit crunch following an insurer's delay to exercise its bond repayment option and a local government-backed developer's failure to repay bonds.
Heungkuk Life Insurance, a mid-sized South Korean insurer, decided earlier this week to postpone repaying the so-called new capital securities worth 500 million U.S. dollars on the first call date of Nov. 9.
The new capital securities, also dubbed perpetual bonds with a call option, refer to a hybrid instrument with no or very long maturity like equity but a fixed coupon rate offered to investors like bond.
A call option to buy back the perpetual bonds is given to the insurer, so if the issuer fails to exercise the redemption option on the first call date, investors usually regard it as at least signs of credit crunch.
S&P Global Ratings said in a statement Friday that Heungkuk Life's decision to delay the hybrid optional redemption will likely weigh on funding conditions for local insurers as investors generally expect issuers to redeem the hybrid instruments on the first call date.
The decision followed the insurer's failure to issue new bonds for refinancing amid surging interest rates. The bond's coupon rate will be reset to about 6.7 percent on the first call date from the initial rate of about 4.5 percent.
It marked the first such case in 13 years since Woori Bank delayed the call option for its subordinated bond in 2009.
Choi Seong-jong, an analyst at NH Investment & Securities, said Heungkuk Life's delayed redemption would weaken market confidence over Korean Paper, or foreign currency-denominated bonds issued overseas by local institutions and companies.
Considering the estimated 25 billion U.S. dollars of Korean Paper set to mature in 2023, 22 percent larger than this year, concerns would escalate over the refinancing of the dollar-denominated bonds, Choi noted.
The insurer issue worsened the already fragile market sentiment, driven by a rare default of asset-backed commercial paper (ABCP) from a state-backed real estate developer.
Gangwon Jungdo Development Corp. (GJC), the developer of the Legoland Korea theme park in Chuncheon, around 75 km east of Seoul, failed to repay ABCP worth 205 billion won (144 million U.S. dollars) in late September.
The Gangwon provincial government, which owns 44 percent of the GJC, is required to redeem the GJC debt as a state guarantor.
The ABCP default triggered a "tantrum" in the overall credit market as the failed repayment by the local government-backed developer with a top credit rating raised doubts about other property development projects, said Kim Sang-hun, a credit analyst at Shinhan Investment Corp.
The default came at a time when domestic interest rates increased rapidly and the property market turned sour.
The Bank of Korea (BOK) has hiked its benchmark interest rate for eight times since August last year from 0.5 percent to 3.0 percent.
Expectations ran high for the BOK's further rate hike as the U.S. Federal Reserve took another giant step earlier this week by lifting its key rate by 0.75 percentage points to a range of 3.75-4.00 percent.
The number of unsold new homes across the country rose sharply from 13,800 in September last year to 32,722 in August this year.
To cool down the credit market meltdown, the government announced a liquidity aid package worth over 50 trillion won (35 billion U.S. dollars) last month.
The Gangwon provincial government later said it will pay ABCP by Dec. 15, moving up the initial maturity date of Jan. 29 next year. ■
