Institutional investors have committed 600 billion won ($496 million) to a fund set up by Hyundai Investments Co. Ltd. that will buy securities with borrowings under the U.S. Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), a Covid-19 liquidity support initiative.
Established as part of a program to strengthen Hyundai Investments’ product strategy division, the TALF Credit Specialized Private Investment Trust fund has succeeded in attracting large-scale funds at a time of reduced investment due to the coronavirus. Industry reports on Thursday (June 4) indicated that it will be set at 600 billion won.
Many domestic institutional investors are known to be investing in the fund, which is part of a $2.6 trillion emergency credit scheme set up by the US Federal Reserve to support markets as liquidity dwindles due to Covid-19 shutdowns. Loans totaling as much as $100 billion with a three-year term will be granted by the Fed to holders of highly-rated securities.
South Korean investors are not permitted to directly invest in TALF eligible assets under the program because they are not based in the U.S., but can do so indirectly through a fund of funds. Hyundai Investments will be investing through a fund operated by U.S.-based asset management company EMP Belstar.
They will use a mortgage loan system under the TALF, which lends funds by using asset-backed securities (ABS) or Commercial mortgage-backed securities (CMBS) as collateral. The Federal Reserve utilized the same system to provide liquidity to markets during the 2008 financial crisis.
EMP Belstar plans to use AAA-rated ABS bonds as collateral for its borrowings. ABS, which are an acceptable form of collateral for the TALF program, must be rated AAA minimum by at least two global credit rating agencies.
The TALF fund will sell ABS to recoup debts and will not carry out a separate execution process for a borrower even if a loan goes into default. The Federal Reserve Board also will not give out separate margin calls as it does not conduct a market valuation after the initial collateral assessment. Institutional investors seem to have judged that the risk is minimal, as only high-rated ABS are included due to the process.
Hyundai Investment initiated the collaboration because it values the management ability of EMP Belstar, which raised funds for local investors during the TLAF 1.0 (Transmission Loss Adjustment Factor) process, implemented for the first time in 2009 following the global financial crisis.
The fund is led by Hyundai Investment’s product strategy division, which has a lot of experience in operating structured products such as collateralized loan obligation. The company has recently shown its potential by focusing on products related to global credit and corporate finance.
Industry sources say that Hyundai Investment is in the spotlight among institutional investors as it has been sourcing differentiated alternative investment products. Earlier this year, the company also reportedly raised funds worth 500 billion won ($413 million) by introducing collaborative products with foreign asset management firm Antares Capital to institutional investors.
“The loans provided through the TALF program can get higher interest than the general interest on loans,” a Hyundai Investment official said.
“If the ABS market stabilizes, we believe we can make a profit by selling the ABS itself.” (Reporting by Jinhyun Kim)