Korean life insurer eases bond market woes with buyback

A South Korean small insurer will buy back dollar perpetual bonds as scheduled, reversing its earlier decision not to recall the notes, to ease concerns over a widespread crisis in the local bond market.

Heungkuk Life Insurance Co. said on Monday it has decided to exercise on Nov. 9 an option to call back $500 million in its dollar perpetual notes issued in November 2017.

Last week, the insurer announced it would not exercise the option after it failed to issue hybrid securities to repay the existing bonds due to rising interest rates amid recent soured market sentiment. That could have marked Heungkuk as the first South Korean issuer to take such a step since Woori Bank did not recall $400 million in junior-ranked debt in 2009 when the global financial crisis hit the local markets.

“We apologize for the chaos in financial markets caused by the earlier decision,” said a Heungkuk official. “The major shareholder Taekwang Group plans to help (Heungkuk) increase capital to fulfill its social responsibility.”

Heungkuk decided to raise 400 billion-500 billion won ($288 million-$360 million) by issuing repurchase agreements (RPs), which local major banks and larger insurers were known to have already bought or will purchase.

The insurer agreed to apply the South Korean won currency’s value against the dollar at the time of issuance of the perpetual bonds for the call option, not at the time of its exercise in 2017. It plans to repay 557.1 billion won, which was converted based on the foreign exchange rate at the time of issuance, through the proceeds of the RPs and its cash holdings.

PARENT COMPANY, AFFILIATES TO HELP INCREASE CAPITAL

“We will increase capital through a rights offering and other measures after taking care of the most urgent problem with the RPs,” said a Taekwang official. “The parent Taekwang Industrial Co. and affiliates such as Daehan Synthetic Fiber Co. will join the fundraising.”

The reversal came as Heungkuk’s earlier decision rattled the local bond market, which has already been dented by a debt default of the domestic developer of a Legoland theme park in the country.

Prices of hybrid securities of Shinhan Financial Group to be called back in August 2023 lost 8.9% as of Nov. 4 from a week earlier. Those securities of Woori Bank and Tongyang Life Insurance Co., which are scheduled to be recalled in October next year and September 2025, respectively, tumbled 11.1% and 37.2%.

The financial authorities were known to have pressed Heungkuk to repay the debt, industry sources said.

“Heungkuk may have been more burdened by the potential blame put on them by the authorities, which were known to have stepped in when the insurer decided not to exercise the call options,” said one of the sources. “The authorities pushed ahead for normal repayment to calm the situation sooner as far as I know.”

Write to Ho-Gi Lee at hglee@hankyung.com
Jongwoo Cheon edited this article.