"Homeplus Fallout": Red Flags Flash for Meritz Financial Group's Three Financial Firms as Substandard-and-Below Assets and Delinquencies Rise Together [fn Market Watch]

[Financial News] The credit-quality and risk indicators of the three Meritz Financial Group affiliates, which hold exposure of more than KRW 1 trillion to Homeplus, were found to be significantly above the averages for their respective sectors.
According to industry data for the securities, installment finance and leasing, and non-life insurance sectors as of the end of June, released by NICE Credit Rating on June 6, Meritz Securities' substandard-and-below assets totaled KRW 1.2112 trillion, putting its substandard-and-below asset ratio at 4.2%. That was nearly twice the 2.2% average for 10 large securities firms. Its provision coverage ratio against substandard-and-below assets was 49.3%, less than half the 105.2% average for large firms.
The scale of its credit exposure was also significant. Meritz Securities' credit-related risk exposure stood at 144.1% of its equity capital, the highest among 10 large securities firms. The average was 99.2%. Contingent liabilities totaled KRW 7.2073 trillion, equivalent to 86.3% of equity capital.
At the end of June, Meritz Capital's delinquency rate on receivables overdue by one month or more stood at 8.4%. This was more than double the 3.9% average for 14 capital companies rated A or below, including Meritz Capital, and more than three times the 2.7% average for the 27 capital companies rated by NICE Credit Rating.
Substandard-and-below assets totaled KRW 822.7 billion, putting the substandard-and-below asset ratio at 9.0%. That was about 2.8 times the 3.2% average for all 27 capital companies. The provision coverage ratio, calculated by adding loss reserves of KRW 117.8 billion and loan-loss reserves of KRW 264.5 billion, was 46.5%, well below the 119.1% average for the 27 companies.
At the end of June, Meritz Fire's loan receivables totaled KRW 1.56745 trillion, accounting for 38.0% of its total investment assets. That was more than double the 18.7% average for eight non-life insurers classified as small or midsize by NICE Credit Rating, including Meritz Fire. Its substandard-and-below loan ratio was 6.4%, four times the 1.6% average for 12 direct non-life insurers.
Market participants analyzed that Homeplus-related loans had affected the three Meritz Financial Group affiliates. As of the end of last year, the group's existing senior secured loan exposure to Homeplus totaled KRW 1.1652 trillion, consisting of KRW 627.4 billion from Meritz Securities and KRW 268.9 billion each from Meritz Fire and Meritz Capital. This figure covers existing loans and excludes separate DIP financing.
Meritz Securities in particular saw a sharp increase in substandard-and-below assets after the credit-quality classification of its Homeplus-related loans was downgraded. Meritz Capital and Meritz Fire were also affected in their asset-quality indicators after their Homeplus-related loans were classified as substandard and below.
Substandard-and-below loans do not necessarily represent final losses. Meritz has secured first-priority beneficial interests backed by Homeplus stores and other assets. Store-backed claims with senior- and junior-ranking security interests are repaid first from the proceeds of store sales, and the repayment period may extend to as long as three years depending on the timing of the sales.
Separately from the existing loans, Meritz Securities, Meritz Fire, and Meritz Capital also provided KRW 200 billion in emergency operating funds, or debtor-in-possession (DIP) financing, to Homeplus in July.
An investment banking (IB) industry source said, "Because Homeplus-related loans are backed by collateral, the amount classified as substandard and below cannot be viewed entirely as a loss." The source added, "However, given the large existing real estate PF exposure and the deterioration in the quality of large corporate loans as well, it is necessary to monitor the pace of recovery and whether asset-quality indicators normalize." The source continued, "If the rehabilitation process and asset sales are prolonged, delayed recovery of funds could become a burden for Meritz."

[email protected] Kim Hyun-jung Reporter