Financial groups rush to issue hybrid bonds to bolster equity capital

This combination of photos shows the headquarters of the country's top four financial groups — from left, Shinhan, Woori, KB and Hana. Courtesy of each group

This combination of photos shows the headquarters of the country’s top four financial groups — from left, Shinhan, Woori, KB and Hana. Courtesy of each group

By Lee Kyung-min

The country’s top four financial groups are rushing to issue hybrid bonds, or perpetual bonds, to bolster their financial profiles, market watchers said Monday.

Propelling the collective move is the financial authorities’ demand last year that the groups push up equity capital by 1 percentage point to fortify their respective risk management capabilities amid projecting financing and the Hong Kong-tied equity-linked securities (ELS) issue.

The hybrids are the easiest way to raise corporate equity capital, since the borrowing incurred in the process is recorded as capital, not liabilities. However, this is a major source of criticism as it means they are resorting to short-term financing instead of strengthening financial fundamentals.

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Hybrids are subordinated bonds. The yields of the low-priority products therefore are significantly higher than those of senior bonds from the same issuer. They are hybrid because they combine the characteristics of bonds — payment of a coupon — and equities that have no maturity date or a very long maturity.

According to market sources, four financial groups — KB, Shinhan, Hana and Woori — have either issued the hybrids or are close to it in the first half.

Shinhan and Woori issued them at an annual yield of 4.49 percent.

Hana issued 400 billion won ($299 million) worth of hybrids at an annual yield of 4.45 percent, up significantly from the initially planned volume of 270 billion won.

KB will issue 270 billion won worth of hybrids on Feb. 28.

The hybrids can help the financial groups maintain robust financial soundness, as measured by the equity capital ratio requirements of the Bank for International Settlements (BIS).

However, the mass issuance of the low-priority products means higher interest needs to be paid to the bond buyers. This, together with greater funds set aside for loss reserves to mitigate project financing and derivatives risks, can wildly undermine profit.

 

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