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Institutional Investors Face Multi-Billion Won Losses in Petrochemical Bonds
Table of Contents
- Institutional Investors Face Multi-Billion Won Losses in Petrochemical Bonds
- The Impact of Overpriced Bond Purchases
- Bonds Issued Before 2021 Hit Hardest
- Petrochemical ‘Down Cycle’ Warning unheeded
- Falling value of Petrochemical bonds
- Early Warning Signs Ignored
- Losses Reaching 30% at One Point
- Conclusion
- Petrochemical Bond Crisis: Institutional Investors Face Trillion-Won Losses – An Expert Interview
- Petrochemical Bond Crisis: Navigating the Trillion-Won Losses – An Expert interview
Major institutional investors in South Korea, including banks, insurance companies, and securities firms, are grappling with notable losses exceeding 4 trillion won due to investments in petrochemical corporate bonds. These losses stem from purchasing bonds at inflated prices, allegedly driven by the need to absorb retirement pension funds at the beginning of each year, coupled with a disregard for the deteriorating conditions within the petrochemical industry. The situation highlights the risks of overlooking industry-specific warnings and engaging in investment practices driven by short-term pressures.
Bond evaluators,including Korea Asset Assessment,have analyzed the situation,revealing that institutional investors hold significant positions in bonds issued by companies such as LG Chem,Lotte Chemical,Hanwha Total Energy,HD Hyundai chemical,Yeocheon NCC,and SK Geo Centric. The recognized loss from these holdings amounts to 3.5 trillion won, with an average loss rate of approximately 2.7%, translating to a combined evaluation loss of about 95 billion won. Including private bonds, the total estimated losses surpass 100 billion won on bonds exceeding 4 trillion won.
The Impact of Overpriced Bond Purchases
The central issue revolves around the initial purchase of these bonds at inflated prices. While holding the bonds until maturity would ensure the return of the principal, the problem arises from buying them at prices higher than their market value in the issuance and distribution market.This inflated purchase price,reflecting a lower interest rate,necessitates recognizing an evaluation loss since the bonds cannot be redeemed at their purchase price upon expiration. This practice has amplified the financial strain on these institutions.
Bonds Issued Before 2021 Hit Hardest
The most significant losses are concentrated in bonds issued before 2021,a period preceding the marked downturn in the petrochemical industry.Data from the option data platform hankyung AICEL indicates a sharp decline in exports of Korean chemicals since 2019, signaling an impending crisis that was seemingly overlooked by some investors. This oversight has proven costly, as these bonds have depreciated significantly in value.
Institutions did not properly identify the great volatility of the petrochemical industry and invested in mid- to long -term bonds, exceeding the benchmark (comparative yield).
A large financial company’s asset manager
Petrochemical ‘Down Cycle’ Warning unheeded
Despite a recent decline in market interest rates, major players in the bond market have been unable to capitalize due to the substantial losses incurred from petrochemical bonds. These bonds were acquired in large quantities during a period when the industry was already showing signs of decline. Petrochemical corporate bonds, along with those in the telecommunications industry, constitute a significant portion of the outstanding balance of private corporate bonds. The failure to heed early warnings has exacerbated the financial impact on investors.
Falling value of Petrochemical bonds
As last year, major petrochemical bonds, including those issued by Lotte Chemical and Hanwha Total Energy, have been priced lower compared to other bonds with similar credit ratings.As of February 21st,Lotte Chemical’s three-year corporate bond yielded 3.54% annually, a 0.39 percentage point difference from the average credit rating (AA). this gap, which was negligible two years prior, has steadily widened, indicating a growing discount on bond trading prices.
Similarly, hanwha Total Energy (AA-) experienced an interest rate gap of 0.10 percentage points, while yeocheon NCC (A-) reached 0.60 percentage points. HD Hyundai Chemicals (A) and SK Geo-Centic (AA-) also exhibited rates higher than the average for their respective grades. Even LG Chem (AA+) bonds, representing Korea’s largest chemical company, saw a decline in their premium. The preferential width, which was evaluated at a rate 0.15 percentage points lower than the same grade bond until September of the previous year, narrowed to 0.11 percentage points.
The institutional recognition of losses on 3.5 trillion won worth of bonds stems from a total issuance contest of 60 trillion won involving LG Chem, Lotte Chemical, Hanwha Total Energy, HD Hyundai Chemical, Yeocheon NCC, and SK Geo Centric. This implies that approximately 33% of the total investment has been lost.
Early Warning Signs Ignored
Market participants suggest that the widening discount on petrochemical bond prices reflects a return to “don’t ask” investing,a practice fueled by excessive liquidity between 2019 and 2021. This involved purchasing high-priced corporate bonds despite clear signals of industry deterioration dating back to 2019. The abundance of liquidity created an environment where due diligence was often overlooked in favor of securing deals.
According to Hankyung Escher, the ‘ethylene export price-naphtha imported price,’ a key indicator of domestic basic chemicals’ profitability, halved from January 2018 to $350 in June 2021. Furthermore, China’s imports of domestic chemicals, once accounting for over 50% of total exports in 2019, have recently fallen to 30%. Based on these indicators, Korea Company Evaluation declared in March 2019 that “the petrochemical industry has entered a down cycle due to slowing demand and increasing production capacity.”
The high -priced bidding of petrochemical bonds in 2019-2021 was not ceased in 2019-2021.
A financial company’s debt management station
Losses Reaching 30% at One Point
Some long-term bonds have experienced losses of up to 30% due to soaring interest rates and the industry’s decline. A prime example is LG Chem’s 15-year maturity bonds, issued in February 2021, worth 120 billion won. At the time, the corporate bond competition bidding (demand forecasting) attracted 210 billion won, exceeding four times the total amount of 50 billion won. Of this, 130 billion won was considered “don’t ask” investment, as the interest rate (expensive price) was lower than the bottom of 2.22 ~ 2.62%, the range of hoped-for issuance rates.These bonds suffered from a surge in market interest rates and a sluggish industry, causing the face value to plummet to 6,800 won (-32%) per 10,000 won in 2022.
While the loss rate has recently decreased to 13%, these bonds continue to suffer from interest rate fluctuations (-9%).
The more volatile industry companies should analyze the wider data and make an investment decision.
A large securities firm’s research center
Conclusion
The significant losses incurred by institutional investors in petrochemical corporate bonds highlight the risks associated with overlooking industry-specific warnings and engaging in investment practices driven by short-term pressures. The situation underscores the importance of thorough analysis and due diligence, especially in volatile sectors, to avoid substantial financial setbacks. A more cautious and informed approach is crucial for navigating the complexities of the bond market.
Petrochemical Bond Crisis: Institutional Investors Face Trillion-Won Losses – An Expert Interview
“The recent collapse in the value of South Korean petrochemical corporate bonds reveals a critical flaw in institutional investment strategies. It’s not just about billions of won lost; it’s about a systemic failure to understand market volatility and the devastating consequences of overlooking crucial warning signs.”
World-Today-News.com Senior Editor (WTN): Dr. Lee, thank you for joining us today. The recent losses experienced by institutional investors in South Korean petrochemical corporate bonds have sent shockwaves through the financial world. Can you explain, in simple terms, what went wrong?
Dr. lee (Financial Market Expert): The core problem lies in a confluence of factors.Firstly, many institutional investors, driven by short-term pressures and the need to deploy funds, purchased these bonds at inflated prices, significantly above their fair market value. This is a classic case of chasing yield without sufficient due diligence. They failed to adequately assess the inherent risks associated with the petrochemical industry’s cyclical nature.
WTN: You mentioned the cyclical nature of the petrochemical industry. Can you elaborate on how this contributed to the losses?
Dr. Lee: The petrochemical industry is notoriously volatile.Profitability is heavily influenced by global commodity prices, supply chain disruptions, and geopolitical factors. The period leading up to this crisis saw a critically significant downturn in the industry, driven by factors such as slowing global demand and increased production capacity. Institutional investors, however, seemed to ignore or underestimate this cyclical downturn.
WTN: What specific red flags were missed by these investors?
dr. Lee: There were several. Declining export figures, notably to major markets like China, should have served as a clear warning signal. furthermore, key industry indicators like the ethylene export price-naphtha imported price ratio showed a significant decline, reflecting reduced profitability. These factors, coupled with expert warnings from credit rating agencies indicating an industry downturn, were largely disregarded.
WTN: The article mentions the term “don’t ask” investing.What does this meen, and how did it contribute to the problem?
Dr.Lee: “Don’t ask” investing refers to situations where investors prioritize securing a deal, often at an inflated price, without thoroughly questioning the underlying risks. This practice thrives in environments with excessive liquidity, such as those experienced in the pre-crisis period. in the context of petrochemical bonds, it meant securing high-priced investments irrespective of the warning signs.
WTN: What lessons can be learned from this crisis to prevent similar events in the future?
Dr. Lee: This crisis underscores the critical need for:
Thorough Due Diligence: Investors must conduct rigorous assessments of underlying assets and industries, including an in-depth understanding of cyclical trends and potential vulnerabilities.
Diversification: Over-reliance on any single sector carries significant risk; diversification can mitigate the impact of sector-specific downturns.
Long-Term Outlook: Short-term pressures should not dictate long-term investment strategies. Focusing on sustainable investments with sound fundamentals outweighs short-term gains.
self-reliant Analysis: Relying solely on market sentiment or the advice of others poses risks; self-reliant analysis is critical in evaluating investments before commitment.
WTN: What advice would you give to institutional investors looking to navigate similar situations in the future?
“The recent collapse in the value of South Korean petrochemical corporate bonds reveals a critical flaw in institutional investment strategies. It’s not just about billions of won lost; it’s about a systemic failure to understand market volatility and the devastating consequences of overlooking crucial warning signs.”
World-Today-News.com Senior Editor (WTN): Dr. Lee, thank you for joining us today. The recent losses experienced by institutional investors in South Korean petrochemical corporate bonds have sent shockwaves through the financial world. Can you explain, in simple terms, what went wrong?
Dr. Lee (Financial Market Expert): The core problem lies in a confluence of factors. Firstly, many institutional investors, driven by short-term pressures and the need to deploy funds, purchased these bonds at inflated prices, significantly above their fair market value. this is a classic example of yield chasing without sufficient due diligence. They failed to adequately assess the inherent risks associated with the petrochemical industry’s cyclical nature. In essence, they prioritized immediate returns over a comprehensive risk assessment.
WTN: You mentioned the cyclical nature of the petrochemical industry. Can you elaborate on how this contributed to the losses?
Dr. Lee: The petrochemical industry is notoriously volatile. Profitability is heavily influenced by global commodity prices,supply chain disruptions,and geopolitical factors. the period leading up to this crisis saw a significant downturn in the sector, driven by factors such as slowing global demand and increased production capacity. Institutional investors, though, seemed to ignore or underestimate the severity of this cyclical downturn, leading to significant losses on their petrochemical bond holdings. Understanding industry cycles is paramount for triumphant long-term investment strategies.
WTN: What specific red flags were missed by these investors? Were there any clear indicators that foreshadowed the crisis?
Dr.Lee: Several red flags were missed. Declining export figures, notably to major markets like China, should have served as a clear warning signal. Furthermore, key industry indicators like the ethylene export price-naphtha imported price ratio showed a significant decline, reflecting reduced profitability within the petrochemical sector. These indicators, combined with warnings from credit rating agencies pointing towards an industry downturn, were largely disregarded. Ignoring these signals significantly increased their risk exposure.
WTN: The article mentions the term “don’t ask” investing. What does this mean, and how did it contribute to the problem?
Dr. Lee: “Don’t ask” investing refers to situations where investors prioritize securing a deal, often at an inflated price, without thoroughly questioning the underlying risks. This practice thrives in environments with excessive liquidity, such as those experienced in the pre-crisis period. In the context of petrochemical bonds, it meant securing high-priced investments irrespective of the warning signs of an impending industry downturn. This behavior demonstrates a lack of appropriate risk management.
WTN: What lessons can be learned from this crisis to prevent similar events in the future?
Dr. Lee: This crisis underscores the critical need for:
Thorough Due Diligence: Investors must conduct rigorous assessments of underlying assets and industries, including an in-depth understanding of cyclical trends and potential vulnerabilities.
Diversification: Over-reliance on any single sector carries significant risk; diversification can mitigate the impact of sector-specific downturns.
Long-Term Outlook: Short-term pressures should not dictate long-term investment strategies. Focusing on sustainable investments with sound fundamentals outweighs short-term gains.
Independent Analysis: Relying solely on market sentiment or the advice of others poses risks; independent analysis is critical in evaluating investments before commitment.
WTN: What advice would you give to institutional investors looking to navigate similar situations in the future?
Dr. Lee: My advice is to prioritize thorough due diligence, diversify portfolios across various sectors, and adopt a long-term investment outlook. Don’t chase yield at the expense of sound risk management.Understand the specific risks of each industry. This includes analyzing critical industry indicators, understanding cyclical patterns, and actively monitoring global economic trends that can impact your investments. A proactive, well-informed approach is essential in navigating the complexities of the bond market.
WTN: Thank you, Dr. Lee, for your insightful perspective on this crucial issue.
(End of Interview)
We encourage readers to share their thoughts on this critical issue in the comments below. What additional strategies do you believe institutions can adopt to mitigate risk in an increasingly volatile market? Share your insights on social media using #PetrochemicalBonds #InvestmentRisks #FinancialMarkets.