South Korean investors to put $580 mn in TALF fund

  • 2020-06-05

Hyundai Investments Co. Ltd. has collected $580 million from South Korean institutional investors to invest in a fund that buys securities with borrowings under the US Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF).

The Public Officials Benefit Association committed $100 million to the TALF fund managed by the US-based investment firm EMP Belstar, according to sources with knowledge of the matter on June 4. Other participants in the fund of funds were not identified.

Under the TALF set to begin this month, the Fed will provide up to $100 billion in loans with a three-year term to holders of top-rated securities backed by student, auto and credit card loans and other assets. TALF is part of the Fed’s $2.6 trillion emergency funding programs to help shore up credit markets, in responding to the coronavirus impacts.

Given that the program is limited to US-domiciled borrowers, South Korean investors are allowed to invest in TALF eligible assets only through a fund of funds.

During the 2008-09 global financial crisis, only a few South Korean institutions invested in predecessor TALF funds and secured annual returns of about 30%.

Those investors included DB Insurance Co. Ltd., Heungkuk Asset Management Co. Ltd., the National Credit Union Federation of Korea and investment company Atinum Partners Co. Ltd.

“During the global financial crisis a decade ago, many companies gave up investing in TALF on the possibility of a rise in loan delinquencies. But the actual delinquency rate came to 5% or below,” said an asset management industry source. “Those betting on a quick recovery in the US economy achieved handsome returns.”

EMP Belstar was one of the top 10 TALF borrowers during the 2008-09 financial crisis, accounting for $2.8 billion in loans out of the total TALF loans of $77 billion. It had raised an undisclosed amount from Korean investors for the predecessor TALF fund.

Several other asset managers in South Korea are preparing to roll out similar vehicles to invest in TALF funds in partnerships with US investment companies.

“The interest rate spread has tightened compared with a 10 year ago. But the interest rates on asset-backed securities are still higher than before the Covid-19 struck, creating a good investment opportunity,” a Hyundai Investments source told the Korean Investors.

They restricted the pool of domestic participants in TALF funds to institutional investors.

Retail investors remain hesitant to invest in products without a guarantee on the principal repayment, after derivative products linked to Germany’s interest rates incurred heavy losses and a Korean hedge fund suspended fund redemption worth an estimated 1.6 trillion won ($1.3 billion) last year, said a brokerage company source.

By Hyun-il Lee

hiuneal@hankyung.com

<Edited by Yeonhee Kim>

(Photo: Getty Images Bank)