Bad loans may spur liquidity problem for securities firms

Local securities firms are bracing for the possibility of a liquidity crisis brought on by financial woes in the sluggish construction sector.

The firms are closely monitoring the progress of a group of savings banks already suffering from overdue “project financing loans” issued to builders.

The risk growing in the stock brokerage sector is due to asset-backed commercial papers, a type of securities for enterprises’ fundraising.

If builders fail to pay for the ABCPs based on credit guarantee contracts with financial companies, the latter are obliged to purchase the papers.

While commercial banks had usually made the contracts, securities firms have been active in ABCP issuance over the past few years as banks enhanced bad loan risk management.

Analysts say small- and mid-sized brokerage firms are more vulnerable to overdue payment for ABCPs. They include NH Investment & Securities and LIG Investment & Securities.

The risky contracts were equivalent to 505.5 billion won ($463 million) for NH Investment and 177 billion won for LIG Investment, according to industry sources.

An SK Securities analyst published a research report issuing a warning that several securities firms could see cash flow difficulties due to the PF loans.

More and more critics are saying that soured loans issued to the construction sector, which have already dealt serious blows to some savings banks, may also threaten the financial soundness of major financial sectors including commercial banks.

Savings banks saw defaults on their troubled PF loans sharply driven up by the property market slump that started during the 2008 global financial crisis.

While financial regulators called for major financial groups to absorb the toxic PF loans held by the secondary banking sector, it has been found that several commercial banks are also having difficulty recouping PF loans.

The Financial Supervisory Service found that five major commercial banks were holding overdue PF loans ― which have been in arrears for more than three months ― totaling about 3.3 trillion won.

By Kim Yon-se (kys@heraldcorp.com)