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Alternative investments

Brokerage firms see losses on $7 bn overseas alternatives

Jan 04, 2021 (Gmt+09:00)


Brokerage firms see losses on  bn overseas alternatives


South Korea’s 22 brokerage firms have classified a combined 7.5 trillion won ($6.9 billion), or 15.7%, of their cumulative overseas alternative investments as nonperforming or precautionary assets, according to the country’s top financial regulator.

Of the 48 trillion won in their overseas alternative assets, they have not yet sold down 16.6 trillion won, or 35% of the total. The 16.6 trillion won is equivalent to 30% of their combined equity capital as of the end of June 2020.

“There remains the possibility that investments in hotels, aircraft and trade finance facilities could become distressed assets in an extended pandemic situation and as a result of shrinking global trade,” the Financial Supervisory Service (FSS) said in a statement on Jan. 4. 

The 7.5 trillion won in investments, highly likely to incur losses, breaks down into 2.7 trillion won held by the brokerages themselves and 4.8 trillion won sold down to institutional investors.

Derivatives-linked securities (DLS) accounted for almost half, or 2.3 trillion won, of the 4.8 trillion won in overseas alternatives sold down to the domestic institutions.

The statement was issued after the watchdog completed its June-August inspection last year of domestic brokerage houses’ cross-border alternative investments. The study found faults with their reporting systems and risk assessment procedures, in particular, in relation to the DLS.

FSS will soon unveil guidelines on brokerage companies’ alternative investments for immediate effect, while inspecting their alternatives biannually.

“Given the size of overseas alternative investments and their heavy impact on brokerage companies’ financial conditions, they need to improve risk management on overseas alternatives and tighten internal compliance systems for investor protection,” FSS said.

For their real estate investments, the regulator will classify potential risk factors by type, region and company, and monitor them systematically.

Since 2017, Korean brokerage firms have been aggressively chasing office buildings, hotels and infrastructure assets abroad in search of higher returns. By country, the US represented 37% at 17.7 trillion won, followed by the UK at 11% and France at 9%.

By asset class, office buildings made up 53% worth 12.2 trillion won, with hotels and condominiums at 19%, or 4.5 trillion won. In 2019, their investments peaked at 24.5 trillion won, compared with 3.7 trillion won last year.

DERIVATIVES-LINKED SECURITIES

FSS divided the overseas alternatives into the investments made through domestic asset managers and the DLS based on overseas funds.

Power plants, harbors/railroads, aircraft/ships and trade finance facilities are categorized as special assets in which Korean brokerage firms have put 24.9 trillion won as of the end of June 2020.

Of the 3.4 trillion won of the DLS, 68%, or 2.3 trillion won, were classified as nonperforming or precautionary assets. German Heritage DLS, based on debt sold by a German real estate developer, took a big chunk of the distressed assets.

Write to Hyeong-Ju Oh at ohj@hankyung.com

Yeonhee Kim edited this article.

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