Following Heungkuk Life's Failure to Redeem Bonds Early
Heungkuk Life Insurance failed in US$500 million early bond redemption scheduled for Nov. 9. This is the first time since 2009 that a South Korean financial institution failed in an early redemption of foreign currency bonds.
Investors’ concerns are increasing rapidly. The company attempted at US$300 million conversion issue for early redemption in September but failed to find investors. Redemption of the hybrid securities without conversion issue means a decrease in equity capital and potential problems in terms of insurance payment capabilities.
Hybrid securities are classified as capital in accounting and a widely used capital raising method of financial institutions. Those are similar to perpetual bonds in that extension automatically occurs at the end of the 30-year maturity, and their difference is that new hybrid securities are issued and existing ones are redeemed early every five years. In other words, the maturity of hybrid securities is five years as investors see it.
Although the early redemption is not mandatory, non-fulfillment may lead to investors’ disappointment. Besides, in that case, the coupon rate applied to regular payments to investors rises. The rate has risen from 4.475 percent to 6.7 percent a year in the case of Heungkuk.
Hanwha Life Insurance and KDB Life are supposed to redeem US$1 billion and US$200 million of hybrid securities next year, respectively. If the same is repeated, more foreign investors are likely to shun investment in the already tight South Korean bond market.