Investigation into PEF Loans
It has been found that the Financial Supervisory Service (FSS) has launched a total inspection of bank loans provided for private equity funds (PEFs) for the first time in two years before starting a similar investigation on securities companies’ loans to PEFs next month.
This is because the amount of PEFs’ acquisition financing soared last year and the acquisition financing with respect to Doosan Infracore China and D’Live (formerly C&M) is posing risk-related concerns as is the case with LG Siltron and its investor Vogo Fund. The amount of the acquisition financing subject to insolvency risks is estimated at 2.6 trillion won or so as of now.
Two years ago, the FSS told banks to evaluate and reflect fair values in their accounting procedures on a regular basis with regard to acquisition financing. In addition, it told them to report dividend incomes only when those exceed principals invested as banks could hold less allowances, when paybacks are reflected in their account books, by assuming the paybacks as interest income rather than principal payback in the case of investment losses on the part of the banks.
The FSS is to look into whether allowances are accumulated in an appropriate manner with regard to the riskier part of the acquisition financing coming to maturity this year.
“The accumulation of allowances regarding the entire loans covering the acquisition financing of commercial banks will be looked into late this year,” the FSS said, adding, “However, our investigation is likely to stop at checking the appropriateness of risk management so that financial companies’ investment banking functions are not hindered with acquisition financing playing an important role in M&A.”