Korean financial institutions suffer $150m cross-default on Chinese bond insolvency

South Korea’s financial institutions suffered insolvency of asset-backed commercial papers Friday at midnight, following a Chinese firm’s default on payments due for bonds.

The ABCPs were backed by dollar-denominated bonds worth $150 million that were declared insolvent Thursday. This accounts for some 7 percent of all bonds issued by CERCG Overseas Capital, a Hong Kong subsidiary of China Energy Reserve & Chemicals Group.

ABCPs refer to short-term money-market securities collateralized by other financial assets. 

The securities have attracted investments from nine Korean institutions -- Hyundai Motor Securities, BNK Securities, KB Securities, KTB Asset Management, Busan Bank, Yuanta Securities Korea, Shinyoung Securities, Golden Bridge Asset Management and KEB Hana Bank.

Hyundai Motor Securities was the top investor, pouring in 50 billion won ($44.3 million). Some 4,400 retail investors and 140 corporate investors are estimated to be affected by the financial fallout, according to Rep. Ji Sang-wook of the small opposition Bareunmirae Party. Losses from the insolvency will be reflected in the respective financial statements of the institutions, except for those already reflected in the second quarter. Nearly half of investments by Hyundai Motor Securities were recorded as losses in the second quarter.

Hanwha Investment & Securities and eBest Financial Investment issued the ABCPs on May 8.

The cross-default expected Friday comes amid concerns that assets that serve as collateral for the ABCP are subject to bankruptcy. Only three days later, CERCG Overseas Capital missed payments of a separate bundle of bonds worth $350 million. Later in May, the CERCG cited “tightening in credit conditions” amid a state crackdown on financial risk.

Litigation among parties concerned is looming, while authorities and companies are at odds as to who to blame for the insolvency.

Yuanta Securities and Shinyoung Securities filed a respective damage suit against Hyundai Motor Securities for its failure to buy back the commercial papers as promised, while Hyundai Motor Securities sued an employee at Hanwha Investment & Securities for failing to meet obligations to explain investment risks to the investor.

In October, FSS Gov. Yoon Suk-heun said in a parliamentary audit that Hanwha and eBest are legally responsible for the insolvency, calling them “underwriters” of the securities.

Hanwha Investment & Securities Chief Executive Kwon Hee-baek denied claims that it issued the securities as underwriters. He added the company’s decision to issue the securities was based on a report by Korean rating agency Nice Investors Service, which rated the Chinese bonds at a rating of “A2.” Later in May, the rating plummeted to “C.”

By Son Ji-hyoung
(consnow@heraldcorp.com)