The number and the scale of distressed asset opportunities will undoubtedly increase due to the Covid-19 pandemic. But what is not so certain is how the looming red tape in Korea will impact investors’ appetite for such assets. 

Speaking to AsianInvestor in an exclusive interview, Jeong Seung-Ki, manager of asset management at DGB Life insurance, said the uncertainty around the accounting treatment of non-performing loans under the upcoming K-Insurance Capital Standards (K-ICS) regulations may make it difficult for the company to allocate funds to distressed debt.  

Basically, non-performing-loan-related investment will be assigned a higher risk rating than normal debt investments, Jeong said.  

K-ICS, as well as the IFRS 17 global accounting standards, will likely be in place in just three years, but purchases and commitments made before the regulations come into effect may be classified as high-risk assets after the changes are implemented. 

Jeong Seung-ki, DGB Life

DGB Life currently doesn’t have any distressed debt in its portfolio and has yet to set a specific target allocation, but Jeong said its private debt pot is expected to rise by over 20% to 30% within the alternative assets bucket. 

Under the existing risk-based capital (RBC) regime, distressed debt generally falls under the double-B credit rating category, which has a risk charge of 9%. 

Overall, insurers will need to do a careful cost-benefit analysis because the RBC charge may outweigh the potential increased yield for distressed debt, said Andrew Shin, head of investments for Korea at Willis Towers Watson. 

The biggest concern for the insurer, however, lies in the speed of deployment, Jeong said. Given the pace at which companies are becoming stressed, he argued that not investing early enough in its investment period could be an issue. 

BEING SELECTIVE 

Having said that, Jeong feels the current crisis could create attractive distressed debt opportunities as the pandemic has thrown the world into situations as severe as the global financial crisis, if not worse. 

The lifer, with $5 billion in assets under management (AUM), is continuously looking to deploy capital into distressed debt assets, with a typical commitment size of $10 to $30 million. While there’s no specific limit on how many funds in which it will invest, Jeong said it would not invest in more than three funds that have similar strategies. 

“The most important thing to consider in the long term is risk allocation…These continuous plans and investment execution are not based on [any] timeframe but risk allocation,” he said. "It’s an essential element of planning to consider minimising risks and stabilising long-term yield regardless of market conditions.” 

In particular, DGB Life is cautious about various aspects of distressed debt funds. In addition to the track record of fund managers and general partners (GP), it seeks to understand specific guidelines of prospective funds. 

“It would be ok to have a bad performance as long as it is within our risk budget stated in the guidelines. [But] the biggest problem is having to take a risk that was not considered in our investment scenarios,” Jeong said.  

While the subsequent versions of a successful fund provide decent yields statistically, Jeong said investors should avoid “recklessly” investing in them. 

GPs who actively communicate with investors and provide pre- and post-investment updates are also attributes it is looking for in a distressed debt manager. 

For DGB Life, favourable corporate legal structures are key to distressed debt investing. "In my opinion, the most important component of investing in distressed debt is the legal environment," Jeong said.

The firm, therefore, holds a preference for developed countries with a sound legal framework, in which procedures for bankruptcy are secured and guaranteed.  

Josh Jeon contributed to the article.