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S. Korean banks to raise some 3.8 tln won next year via CoCo bonds

All Headlines 09:57 November 12, 2014

SEOUL, Nov. 12 (Yonhap) -- South Korean banks are expected to raise up to 3.8 trillion won (US$3.47 billion) next year by selling contingent convertible bonds, or CoCo bonds, in their efforts to refinance maturing subordinated bonds and meet stricter capital requirements, a report showed Wednesday.

CoCo bonds refer to debts that a holder can convert into common stocks of the issuing bank if it becomes financially troubled and such bonds carry higher coupon rates compared to subordinated debts.

So far this year, local banks have raised over 1 trillion won by issuing such bonds.

JB Financial Group sold CoCo bonds worth 100 billion won and the state-run Industrial Bank of Korea also floated 800 billion won worth of such bonds.

NH Nonghyup Bank is also set to sell 500 billion won worth of CoCo bonds this year, according to industry sources.

Since December 2014, local banks have been required to adopt the new capital requirements, called the Basel III. Under the new capital rules, proceeds from sales of CoCo bonds are classified as capital.

The report compiled by Samsung Securities Co. also shows that local insurers are expected to sell up to 2.4 trillion won worth of CoCo bonds in order to meet stringent capital requirements.

Local life insurers are likely to sell 1.7 trillion won worth of CoCo bonds next year, while the comparable figure for non-life insurers is some 700 billion won, according to the report.

Under the capital requirements, local insurers are asked to meet the risk-based capital (RBC) ratio. The ratio refers to the minimum amount of capital that insurance firms need on top of their reserves against operating losses and to maintain their financial soundness.

"Going forward, demand for CoCo bonds will be on the rise, and local banks will be tempted to sell more of such debts to capitalize on low interest rates," said Choi Jong-won, an analyst at Samsung Securities.


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