Korean Re Placed On CreditWatch Positive After Proposed Subordinated Capital Securities Rated ‘BBB’

• Korean Re could strengthen its capital and earnings to levels that are commensurate with higher ratings, depending on the details of its proposed issuance of subordinated capital securities.
• We are assigning our ‘BBB’ rating to Korean Re’s proposed subordinated capital securities. We are placing our ratings on Korean Re on CreditWatch with positive implications.
• We will resolve the CreditWatch placements within a relatively short period of time, taking into account the details of the proposed issuance and Korean Re’s current circumstances and future prospects.

HONG KONG (Standard & Poor’s) Sept. 30, 2014-Standard & Poor’s Ratings Services said today that it has placed its ‘A-‘ financial strength and counterparty credit ratings and its ‘BBB’ issue rating on Korean Reinsurance Co. (Korean Re) on CreditWatch with positive implications. The CreditWatch placements follow our assignment of our ‘BBB’ rating to Korean Re’s proposed subordinated capital securities, which we expect could boost its capital and earnings to levels that are commensurate with higher ratings, depending on the issuance details.

The ‘BBB’ issue rating on the proposed U.S.-dollar-denominated Tier 1 securities is two notches below the long-term issuer credit rating on Korean Re. The gap reflects the notes’ subordination to senior creditors and the issuer’s ability to defer interest payments.

We regard the proposed capital securities as having “intermediate” equity content and will incorporate them accordingly as part of Korean Re’s capital base in our capital assessment. The proposed issue has a 30-year maturity and redemption is not allowed for five years from issuance. Although the interest rate will increase after 10 years, the step-up of the coupon will not exceed 100 basis points. The issuer can defer interest payments at its discretion and the repayment of the securities at the time of liquidation is subordinated to other senior debt. We also expect the proposed securities to be counted as part of Korean Re’s regulatory capital.

The rating and equity content on the proposed notes are subject to our review of the final issuance documentation.
In our view, the proposed issuance may have an impact on our ratings on Korean Re. As of now, we assess its capital and earnings as lower adequate (its capital is up to 15% deficient to its required capital amount at the ‘BBB’ benchmark under our criteria). Depending on the final issuance amount, we think Korean Re could boost its capital and earnings to upper adequate or above (its capital is redundant to its required capital amount at the ‘BBB’ benchmark under our criteria). This could lead us to raise by one notch our financial strength and issuer credit ratings and issue rating on Korean Re.

We expect to resolve the CreditWatch placements within a relatively short period of time, taking into account the final issuance conditions and Korean Re’s current circumstances and future prospects. We will then take rating actions that we deem appropriate and remove the ratings from CreditWatch.

We will raise the ratings if we believe that Korean Re’s capital and earnings assessment will be at the upper adequate or above level over the medium term, after considering the issue size and Korean Re’s business expansion prospects and profitability over the same period of time.

On the other hand, we will affirm the ratings with a stable outlook if we believe that the issue size or Korean Re’s business expansion and profitability are unlikely to help it to maintain its capital and earnings level at upper adequate or above over the medium term.

Source: Standard & Poor’s