Korean commercial banks mull financing arms export to Poland

South Korean commercial banks are considering loan syndication for the Polish government to finance a weapons purchase deal worth 30 trillion won ($23.1 billion) with Korean arms companies, as state-run banks hit their loan limit for the contract.

South Korea's Ministry of Defense on Monday held a meeting with officials from five top local banks -- KB Kookmin, Shinhan, Hana, Woori and NongHyup -- to discuss providing loans to the Polish government for an arms export deal, according to sources.

“The government and businesses are cooperating for weapons exports to Poland,” an official from the Ministry of National Defense said. “Details on the discussion cannot be disclosed as it could affect the export deal or diplomatic ties.”

All of the aforementioned commercial banks declined to provide details on the meeting.

If the deal proceeds, it is projected to take on the form of a syndicated loan, meaning it will be provided by a group of lenders to a single borrower, a method often used to finance large deals.

In August 2022, Korean defense companies and Poland signed a comprehensive arms agreement under which local companies, including Hyundai Rotem, a defense provider under automaker Hyundai Motor Group, and Hanwha Aerospace, an affiliate of energy-to-defense Hanwha Group, would supply tanks, howitzers and fighter jets to the Polish government.

Export-Import Bank of Korea Chairman Yoon Hee-Sung said the second round of the deal will be “slightly larger” than 30 trillion won at a parliamentary audit on Oct. 24.

“The details have not been set yet,” Yoon said when asked about the size of the deal. “There have been requests (for Eximbank’s support in financing). But as (financing) starts from 2026, there needs to be further negotiations.”

Normally, for an arms sale contract or public infrastructure project, a bidding country helps the country in charge of the order secure finances, as the deals often are sizable and take a long time to be processed.

For the first round of the deal in 2022, which involved sales of 17 trillion won, the state-run Eximbank and Korea Trade Insurance Corp. decided to execute credit offerings of over 5 trillion won each to Poland. An Eximbank official said the exact amount cannot be disclosed, as financing remains in progress.

But when Poland requested support for financing 24 trillion won, some 80 percent of this year’s deal of 30 trillion won, Eximbank could not further extend credit as the law stipulates that the maximum amount of the state bank's financial support to a borrower should not exceed 40 percent of its equity capital.

Eximbank's equity capital currently stands at 15 trillion won, as mandated by law. Having financed more than 5 trillion won, the state-run bank cannot provide further assistance for the deal.

Meanwhile, with Eximbank's equity capital limit potentially hindering Korean defense firms' exports to Poland, the National Assembly is considering to double the equity capital limit to between 30 trillion and 35 trillion won.

Lawmakers from both the ruling and opposition parties have proposed the bill to raise the cap limit, which would subsequently increase Eximbank's maximum legal cap on loans and guarantees.