South Korean brokerage firms are exposed to chain losses after the bombshell news that a unit of China Energy Reserve & Chemicals Group Co. (CERCG) has failed to meet the $350 million bond that matured on May 11, triggering cross-defaults on other bonds.
According to sources from the financial industry on Sunday, some Korean securities firms and credit rating agencies exposed to risks will visit the headquarters of CERCG on Monday hopefully to minimize losses.
The Chinese energy company said last week that one of its wholly-owned subsidiaries failed to repay $350 million bond it had guaranteed due to the tightening credit conditions in China.
The missed payment raised the possibility of a cross-default on the firm’s other bonds including 165.6 billion won ($154.7 million) worth asset-backed commercial papers whose underlying assets were dollar-denominated bonds guaranteed by the energy company.
Hanwha Investment & Securities and eBest Investment & Securities were the underwriters in the papers rated “quasi-public” by NICE Investors Service and Seoul Credit Rating & Information. Other Korean names Hyundai Motor Investment & Securities, BNK Securities, KB Securities, Yuanta Securities and Shinyoung Securities were in the secondary buyers of the notes.
The brokerages would have to book loss reserves in the financial statement in the second quarter if the bonds go insolvent. The firms also could file a damage suit against the credit rating agencies and lead managers.
The nation’s financial authorities plan to step in if the crisis becomes a reality.
By Hong Jang-won and Choi Mira
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