Farmer’s Dream Fades as Tongyang Defaults: Korea Markets

Farmer’s Dream Fades as Tongyang Defaults: Korea Markets

When a 78-year-old farmer in South Korea was seeking a safe investment for his 300 million won ($282,600) of retirement savings in 2011, his advisers at Tongyang Securities Inc. recommended Tongyang Group bonds. Less than three months after making his latest purchase of debt issued by the nation’s 47th-largest conglomerate, his dreams of a comfortable retirement were shattered as five Tongyang affiliates filed for bankruptcy protection on Sept. 30 and Oct. 1, his son told Bloomberg News by phone from Seoul.“My father wasn’t a speculator chasing after high yields and betting his principal would double or triple,” said Son Jung Yong, who filed a complaint with the Financial Supervisory Service on behalf of his father and asked that only his name be used in this article. “The bonds are now trading at 10 to 20 percent of what they were. Retail investors like my father are not market-savvy and paid too much for the lesson.”

The farmer was among almost 50,000 people who lost money in the collapse of Tongyang, South Korea’s third corporate failure in a year. Standard & Poor’s said last week the development may increase borrowing costs for lower-rated Korean companies as retail investors shun their debt. STX Pan Ocean Co. (028670), the nation’s biggest commodities shipping line, filed for bankruptcy protection in June and after-school study operator Woongjin Holdings Co. did the same in September 2012.

Apology, Investigation

The Seoul Central District Court on Oct. 17 ordered five Tongyang Group affiliates into receivership, while group chairman Hyun Jae Hyun apologized to investors during a parliamentary hearing. The five companies are Tongyang Inc., Tongyang International Inc., Tongyang Leisure Co., Tongyang Networks Corp. and Tongyang Cement & Energy Corp.

The FSS is investigating allegations of wrongdoing by Tongyang Securities in selling high-yield notes to individuals. Calls to the brokerage’s Ulsan branch, where Son’s farmer father deposited his money, went unanswered while a Seoul-based company spokesman declined to comment. The elder Son made several investments in Tongyang notes over the past two years, with the latest this July.

A total of 49,561 individuals held 1.6 trillion won, or 93 percent, of bonds and commercial paper issued by Tongyang units as of the end of September, according to FSS data. Tongyang Cement’s last issue consisted of two-year securities with a coupon of 7.3 percent on June 26 before its grading was cut to D on Oct. 1 in three-step reductions from BBB- on June 11 by Nice Information Service Co., which is among South Korea’s three largest ratings agencies.

Expensive Lesson

Tongyang was “an expensive lesson for retail investors, the key pillar of the high-yield market,” said Kim Sung Hyun, Seoul-based head of KB Investment & Securities Co.’s corporate finance department. “They are now reluctant to buy and the risk is that lower-rated borrowers will find it even harder to raise funds.”

Retail investors hold 2.3 trillion won, or 1.4 percent, of the 169 trillion won corporate bond market, exchange data show. It is dominated by the nation’s 30 biggest conglomerates, rated mostly A+ or above, while BBB or lower-ranked companies represent less than 10 percent, according to Shinhan Investment Corp.

Rising Yields

The average yield on three-year South Korean corporate notes rated BBB- rose to 8.95 percent on Oct. 18 from a five-year low of 8.41 percent on March 28, according to Korea Securities Dealers Association prices. That increased the spread over similar-maturity government securities to 613 basis points, near a 14-month high, according to data compiled by Bloomberg.

“Spreads will likely widen more from here,” said Kim Sang Hoon, a Seoul-based credit analyst at Shinhan. “Some heavily-indebted marginal companies are being mentioned as the next candidates for default as a huge amount of debt comes due.”

Hanwha Investment Securities Co. estimates 46.5 trillion won of unsecured corporate bonds will mature next year after this year’s 43.7 trillion won, the most in its data going back to 2004. Corporates rated BBB or lower issued 44 billion won of notes in October, down from September’s 110 billion won and August’s 168 billion won, heading for the lowest sales since January 2012, data compiled by Bloomberg show.

High Leverage

Companies in the shipping, shipbuilding, steel and construction industries with high leverage and operating losses are more at risk of increased borrowing costs, according to Shinhan’s Kim. STX Pan Ocean, which lost money in three of the past four years, is among firms holding the least cash covering short-term liabilities, according to data compiled by Bloomberg. Debt issued by construction-focused Tongyang Inc. (001520), Tongyang Group’s holding company, was 12 times the size of its equity as of June, the data showed.

Concern over possible defaults have grown as the outlook for Asia’s fourth-largest economy weakens. The Bank of Korea lowered its 2014 expansion forecast to 3.8 percent on Oct. 10 from the previous estimate of 4 percent. The finance ministry said on Sept. 26 that volatility in global financial markets may slow growth as the Federal Reserve prepares to reduce its monthly bond purchases that have fueled fund flows into emerging markets.

Biggest Impact

The cost of insuring South Korea’s sovereign debt against default fell 15 basis points in the past six months to 64 on Oct. 17, according to CMA prices. The won was Asia’s best-performing currency in the period, gaining 5.8 percent, as the central bank forecast the nation’s current-account surplus will reach a record $53 billion this year. The won strengthened 0.9 percent last week to 1,061.54 per dollar in Seoul last week.

The biggest impact of Tongyang’s downfall will be on the retail bond market and on weaker borrowers, while Korean banks and the financial system will be largely unscathed, S&P Hong Kong-based analyst Cho Cheul Soo wrote in a report. BBB-rated Dongbu Steel Co., which has 237 billion won due this year, sought help from a state-backed refinancing program after selling 40 billion won of two-year notes at 9.5 percent on Oct. 16.

“The Tongyang event is depressing retail demand for high-yielding notes from retail investors,” said Kim Min Jeong, a Seoul-based analyst at Daewoo Securities Co. “That will expose weak companies in the industries hit by a slowing economy to the risk of a liquidity squeeze.”

To contact the reporters on this story: Kyoungwha Kim in Singapore at; Whanwoong Choi in Seoul at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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