[Teheran-ro] Financial Institutions Guaranteeing Non-Prime Companies

"If you guarantee recklessly, you could lose everything." In Korean society, warnings about financial ruin due to guarantees are a common theme, frequently heard in daily life or depicted in dramas. A 'guarantee' means vouching for someone else's credit, ultimately taking on their financial responsibility. The financial risk is transferred to the person who agrees to guarantee. This issue is not limited to personal relationships. Recently, as corporate conditions have worsened, financial institutions are increasingly providing guarantees for 'non-prime companies.' There is a risk that the threat of financial ruin could spread to the financial system itself.
In a period of persistently high exchange rates, industries sensitive to currency fluctuations, such as airlines, hotels, and duty-free shops, as well as sectors like petrochemicals and construction facing structural downturns, are increasingly utilizing Hybrid Bonds (Perpetual bonds) in the private placement market. In just the past month, Asiana Airlines, Hotel Lotte, SK Advanced, and Hanwha TotalEnergies Petrochemical have all issued Perpetual bonds through private placements. Sectors experiencing structural slowdowns are relying heavily on Perpetual bonds.
In this process, a Special Purpose Company (SPC) issues Asset-backed Securities (ABS) using Perpetual bonds as underlying assets, while securities companies and financial institutions provide credit enhancement and liquidity support. The problem arises when these Perpetual bonds are repackaged into ABS through SPCs. Financial institutions add their guarantees on top of the underlying assets, strengthening the credit rating. However, despite appearances, the safety of the underlying assets is never truly assured. This is not limited to Perpetual bonds. Guarantees from financial institutions are repeatedly used in the securitization of corporate bonds and Accounts Receivable as well.
Guarantees serve as a safety net to facilitate transactions. However, if a company fails to repay, the risk travels through the securitization structure and ultimately falls on the financial institutions that provided the guarantees and the investors who purchased the securities. Tail risks, which seem insignificant and unlikely, can have a massive impact if realized. Financial engineering continues to evolve, often hiding corporate insolvency within seemingly sound structures. Guarantees are not only widely used in financial engineering but are also being exploited. Furthermore, guarantees from financial institutions have become a blind trust mechanism for investors.
For example, individual investors who invested in Asset-Backed Short-Term Bonds (ABSTB) issued by Homeplus through a securitization process trusted the guarantees of credit card companies, only to suffer losses. Although the Korea Composite Stock Price Index (KOSPI) has surpassed 4,450 points and reached a record high, the fundamentals of many companies, except for those in the semiconductor sector, are actually weakening. It is time to reconsider the guarantee systems of both companies and financial institutions.
khj91@fnnews.com Kim Hyun-jung Reporter