Bloomberg News

Uamco Plans IPO as Korean Buyer of Bad Loans Sees Market Growth

June 02, 2011

June 3 (Bloomberg) -- Uamco Ltd., South Korea’s biggest buyer of bad debts from banks, plans an initial public offering by September 2013 as stricter capital rules and accounting standards encourage lenders to sell more soured loans.

“Banks will become more willing to offload bad debt from their books to meet Basel rule changes, helping stabilize the bad-loan supply without fluctuations in the economic cycle,” Chief Executive Officer Lee Seong Kyu said in a May 31 interview.

Uamco, which was set up in 2009 by six Korean lenders to house assets that deteriorated following the global financial crisis, is profiting by selling debt collateral such as land and factories. The company now plans to buy bank loans made to developers for construction projects stalled by a real-estate slump.

“So far, there haven’t been buyers who can absorb the bad loans from real-estate development projects,” Lee, 51, said in Seoul. “With our experience in the past year and a half, we’re confident we can profit from the new frontier that’s approaching.”

A public listing in 2013 would occur about a year before the company is scheduled to be liquidated according to an agreement that the six shareholder banks made when it was formed in October 2009, the CEO said.

“Through an IPO, our shareholders can recoup their investment earlier than their schedule,” he said. “As a listed company with higher credit in the market, we can also lower our funding costs.”

Loan-Buying Fund

Seoul-based Uamco and seven lenders will form a private- equity fund this month to purchase as much as 2.5 trillion won ($2.3 billion) worth of soured construction-project loans extended by banks. Korean banks’ non-performing loans jumped 37 percent from a year earlier at the end of March, fueled by builder defaults.

Lee said the fund aims to recoup its investment in five to seven years by buying the loans at market price -- usually around half their face value -- then injecting cash to finish the stalled projects and selling the properties at a profit.

“I hope this new fund acts as a trigger for a virtuous cycle -- completing projects, reviving real-estate market sentiment, and ultimately pushing up home prices,” he said.

State-run Korea Asset Management Corp., known as Kamco, will separately this month begin buying as much as 3.5 trillion won of soured construction loans extended by savings banks, the Financial Services Commission said on June 1.

Urged to Support

Uamco expects to buy 8 trillion won worth of non-performing loans this year, after purchasing a similar amount in 2010 when it took about 45 percent of market share, according to Lee. While purchases may shrink to about 4 trillion won from 2012 as the economy recovers, that figure is still almost double the amount banks used to sell in times of prosperity, he said.

South Korean regulators urged banks to support construction companies in April after at least five of the nation’s 100 biggest builders sought court protection from creditors this year. At the same time, they asked banks to cut their bad-debt ratios to below 1.5 percent this year and maintain reserves against non-performing loans.

Combined non-performing loans at South Korea’s 18 lenders accounted for 1.98 percent of their outstanding credit at the end of March, according to the Financial Supervisory Service. Bad debts extended to builders and developers made up 18.35 percent of those types of loans.

‘True Sale’

Lee worked as the chief strategy officer at Hana Financial Group Inc. before joining Uamco. He earlier worked as vice president at Kookmin Bank, a Uamco shareholder, and helped restructure assets at Daewoo Group after it collapsed in the wake of the 1997-98 Asian financial crisis.

Along with global regulatory changes requiring higher capital, stricter accounting requirements will prompt banks to seek “true sale” of bad assets, rather than transfer them to their own paper-company units, the CEO said.

From this year, South Korean companies and banks are required to report results on a consolidated basis, meaning accounts of subsidiaries are included.

Uamco forecasts meeting a 12 percent return-on-equity goal this year, expecting 60 billion won in net income, the CEO said. That compares with 8.1 billion won profit in 2010, its first full year of operations.

The company’s “counter-cyclical” business character will complement investors’ portfolios, Lee said. “Companies like us can do good for the overall economy by enabling commercial banks to focus on core work while we clear up non-performing loans.”

--Editors: Russell Ward, James Gunsalus

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net.


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