Social responsibility

If proof were needed that capital instruments don’t function properly in much of Asia, a moment of crisis in the South Korean market apparently saw the regulator ask an issuer to repay some of its regulatory capital to calm investors.

Heungkuk Life Insurance caused panic on November 1 when it announced it would not redeem its US$500m subordinated perpetual note on the first call date, just days after it had given notice to holders that it would.

That caused the price of the paper to plunge to 75 cents in the dollar and made other Asian insurers’ paper sell off too, while adding to a sell-off already underway in the Korean onshore market.

There was more confusion on Tuesday when Heungkuk Life reversed course and said it would redeem the note after all – apparently under pressure from Korea’s Financial Services Commission, which wanted to restore confidence to the market.

One week the insurer was going to skip a call because its solvency ratio was worryingly low, and the next it was being asked to send money to offshore investors. In a rational market, that wouldn’t reassure investors at all.

Heungkuk Life was vague about where it obtained the funds to meet the call without breaching solvency rules, but said they came from affiliate companies. Domestic newspapers suggested that majority shareholder Ho-jin Lee’s Taekwang Group, which includes a bank and an asset manager, had provided funds.

Tellingly, the insurer said it had changed its mind about redemption because the non-call notice had hurt investor sentiment in the Korean market and caused some clients to cash in their policies, so it decided to redeem the perp to fulfil its “social responsibilities”.

Korea is sending the signal that its more important to preserve calm among investors – who are well aware of the terms of the notes they buy – than to make rational economic decisions about regulatory capital.

If Korean financial institutions have to consider “social responsibilities” ahead of their own financial strength, it’s pointless pretending that such notes are perpetual, since in a crisis issuers could be pressured to redeem.

If that is the case, then such notes serve very little use as regulatory capital, and authorities ought to insist that financial institutions raise plain equity instead.