South Korean Financial Firms Rush to Issue Hybrid Capital Securities Before Rates Rise Further
Summary
- Banks, brokerages and insurers are increasing issuance of hybrid capital securities as they seek to expand capital and manage soundness indicators.
- Financial companies are using hybrid capital securities with the characteristics of perpetual bonds — instruments with no maturity or extremely long tenors — to improve capital ratios and strengthen capital adequacy.
- Demand is rising to secure capital in advance before funding costs increase further as monetary tightening in the US and South Korea persists and market interest rates may rise.
Forecast Trend Report by Period
Banks, brokerages and insurers in South Korea are rushing to issue hybrid capital securities. The move is seen as a pre-emptive effort to shore up capital and manage soundness ratios before any further rise in funding costs.
According to the financial industry on Sept. 25, major firms including Industrial Bank of Korea, Meritz Financial Group, Kiwoom Securities and Kyobo Life Insurance have recently issued hybrid capital securities or finalized plans to do so.
Industrial Bank of Korea issued $289 million of hybrid capital securities on Sept. 21 at an annual interest rate of 4.84%. It returned to the market about seven months after raising $505 million in February. On the same day, Meritz Financial Group decided to issue $146 million of hybrid capital securities through a private placement.
Brokerages are also moving to bolster capital. Kiwoom Securities issued $289 million of privately placed hybrid capital securities on Sept. 18. The notes have a 30-year maturity and a call option that allows early redemption after five years. It was the company’s first hybrid capital securities sale.
Insurers have also joined the wave of issuance. Kyobo Life Insurance issued $361 million of hybrid capital securities earlier this month at an annual rate of 5.39%. The deal was intended to refinance $339 million of hybrid capital securities issued in 2021.
Some firms are also tapping overseas markets for capital. Hana Securities conducted bookbuilding for a dollar-denominated hybrid capital securities sale in the global bond market and decided to raise $300 million. It marks the first time a South Korean brokerage has issued hybrid capital securities in the foreign-currency bond market.
Financial firms are increasing issuance because the securities can help lift capital ratios. Hybrid capital securities have the characteristics of perpetual bonds, with no maturity or extremely long tenors, but are recognized as capital for accounting purposes. That makes them useful for improving capital adequacy. They typically include a call option that allows early redemption after a certain period.
The prospect of additional rate increases is also prompting firms to move quickly. If monetary tightening in the US and South Korea persists, market interest rates could climb further, raising funding costs for financial companies. That is fueling demand to secure capital in advance before borrowing costs rise more.
As volatility in financial markets increases, moves to prepare for potential bad loans are also expected to continue. “With market uncertainty elevated, financial companies are likely to keep securing capital in advance for the time being to defend their soundness,” a financial industry official said.
