Pension funds, insurance companies and asset managers in South Korea have indefinitely halted new investments in North America’s midstream assets, used to be their preferred asset class between 2018 and 2019, as plunging oil prices raise default risks of shale oil producers.
Travel restrictions in the wake of the coronavirus pandemic has also led to the suspension of almost all other alternative investments. Korean institutional investors are now reviewing their existing investments to brace for cancellation or change to the terms of the deals that have yet to be closed, according to investment industry sources.
For the National Pension Service (NPS), delayed overseas investments mean that the $610 billion pension scheme may have to sit on at least 10 trillion won ($8 billion) in cash earmarked for new global alternative investments this year, including reinvestment of maturing assets.
The Bank of Korea cut the base rate by 50 basis points to a record low of 0.75% this week.
“Until recently we had studied about two new midstream investments, including one led by Blackstone, but postponed the discussion itself indefinitely,” said an insurance company source whose company had invested in multiple midstream projects.
“There is still room for a bit of relaxation until midstream investments enter the loss-making territory. But we completely halted new investment (in midstream) because of mounting uncertainty,” he told the Korean Investors.
Since 2018, South Korean institutional investors had piled into midstream assets including pipelines and processing, storage and transportation facilities of US shale oil drillers, in search for medium-risk, medium-returns.
Senior loans on the midstream projects offered as much as 7% per year as shale oil producers were willing to bear higher prices to expand midstream facilities. US shale oil output rose to a record this week.
In 2018 NPS had teamed up with oil refiner SK Corp. to fund half of the $1.75 billion acquisition by a Morgan Stanley fund of Delaware Basin subsidiaries of Texas-based Brazos Midstream Holdings LLC.
SK made another investment in Brazos Midstream in 2019 via a 1.2 trillion won fund raised with the Korean Teachers’ Credit Union.
The most recent investment in North America’s midstream assets by Korean investors was a 180 billion won commitment in February to a US infrastructure fund by six companies, including Korean Reinsurance Co. and banks.
NEGATIVE RETURN FEARS
But the recent slide in the share price of Tallgrass Energy below the offer price raised doubts about the deal completion, the Financial Times reported last week, adding that Blackstone could walk away from the deal or seek to revise the offer price.
“It is difficult to make a judgement on the current situation given that oil producing countries have yet to reach a conclusion and the US government has not been showing any reaction,” a retirement savings fund source said.
“We do not think the default risk of midstream companies is significantly high, but we are working on response measures for each scenario because their default probability is not low.”
The break-even price of midstream companies is around $20-$25 per barrel, compared with $48-$54 for US shale gas drillers.
West Texas Intermediate (WTI) crude fell below $30 per barrel for the first time since 2016, because Saudi Arabia and Russia remained at odds over oil production. WIT has been down 60% so far this year.
Meanwhile, the sale of Dalrymple Bay Coal Terminal in Australia has been suspended by Brookfield. NPS was reportedly interested in the asset reportedly valued at $1.2 billion-$1.5 billion.
Last year NPS’ alternatives accounted for 11.4% of total investments, below its 2019 target of 12.7%, in the face of intense competition for prime assets and with a lack of investment staff.
“We are not in a situation to put our hand on stocks, bonds or alternative investments. If this situation is prolonged, our fears over negative returns could become a reality,” an insurance company’s chief investment officer told the Korean Investors.
By Jung-hwan Hwang
<Edited by Yeonhee Kim>
(Photo: Getty Images Bank)