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Non-bank Financial Companies' Investment in High-risk CLOs Increasing at Rapid Pace
Concerns Rising over High-risk Investment
Non-bank Financial Companies' Investment in High-risk CLOs Increasing at Rapid Pace
  • By Yoon Young-sil
  • October 28, 2019, 11:02
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Non-bank institutional investors' investment in high-risk collateralized loan obligations (CLOs) is increasing at a rapid pace.

The Financial Supervisory Service announced on Oct. 27 that the collateralized loan obligation (CLO) investment of non-bank institutional investors in South Korea totaled 7,614.9 billion won in the first half of this year. The CLO is a high-risk financial product that triggered the global financial crisis of 2008.

Specifically, insurers’ CLO investment more than doubled from 1,592.9 billion won to 3,274.3 billion won from the end of 2014 to the end of the first half of this year. That of securities companies jumped from 40.1 billion won to 174.7 billion won during the same period and increased 2.6-fold in just six months. That of asset management firms totaled 4,165.9 billion won as of the end of August this year. Banks’ CLO investment is zero.

With a recession going on, concerns are rising over the high-risk investment. The Korea Institute of Finance recently mentioned corporate liabilities as a potential risk factor of the global financial market, saying that the liabilities are attributable to financial companies’ investment in risky assets such as CLOs, emerging bonds and overseas real estates.

According to the Financial Supervisory Service, the credit ratings of the CLO investment target companies are BB or less in most cases. Specifically, 75.2 percent of the companies invested by insurers have such credit ratings and the ratios are 76.2 percent and 92.8 percent for those invested by securities companies and asset management firms, respectively. Besides, only 7.21 percent of the investment targets of asset management firms are senior notes, which means a very risky investment, whereas the ratios are 92 percent and 91.6 percent for insurers and securities companies, respectively.

Meanwhile, the rate of return as of the end of June stood at 6 percent for insurers, 4.76 percent for securities companies, and 2.74 percent for asset management firms.