Korea bids 5% for debt the market prices at 20%, and 11 of its top 15 buyers stayed home

About four of the 15 largest firms that buy and collect distressed personal debt in South Korea have signed up for the government's New Leap Fund, according to industry sources quoted by Seoul Economic Daily on the 16th ^[1]. Those firms hold much of the long-overdue paper the fund exists to buy, so their participation is the variable that sets how much debt the program can actually secure ^[2].

The reason is arithmetic rather than sentiment. The fund's average purchase price for delinquent debt is around 5% of face value, against a market trading price of roughly 20% cited inside the industry ^[3]. On a 1 million won loan, that is about 200,000 won from a private buyer and about 50,000 won from the fund ^[4], a gap of 150,000 won per million of face ^[5]. Put another way, the state is bidding about a quarter of the going rate ^[6].

Volume is the second constraint. Firms that join may have to hand over 70% to 80% of their total debt assets ^[7]. Take a book with face value of 100: at the market's 20% it is worth 20, but transferring 80% of it at 5% returns 4 rather than 16, which works out to roughly 60% of the book's market value surrendered in a single move ^[8]. One lending industry official said the level varies from firm to firm, but that handing over about 80% of holdings could push some to the brink of closing down ^[9], and added that "most of us broadly agree with the government's intent, so rather than more incentives, a reasonable approach needs to come first" ^[10].

The incentives on offer do not close that gap. From this year, authorities widened the set of buyers allowed to purchase pandemic-era delinquent personal loans beyond the Korea Asset Management Corporation to include financial and lending firms that have joined the fund ^[11]. Such sales had previously been restricted to protect borrowers ^[12]. In practice, almost no distressed-debt buyer has used the permission: "We have never bought pandemic loans, and I haven't heard of any case in the industry either," another lending industry official said, adding that "the market already assumes that most pandemic-era loans have disappeared" ^[13]. An option to buy an empty pool is not compensation for selling a real one at a quarter of its value.

Headline participation reads better than the composition does. As of the end of last month, 28 lending firms had joined the fund ^[14], which implies that roughly 24 members sit outside the top 15 holders of long-overdue debt ^[15]. The fund buys unsecured personal loans of 50 million won or less that have been overdue for more than seven years, then writes off or restructures the balances of borrowers who cannot repay ^[16]. Small members bring small books, and the borrowers this policy targets are concentrated with the sellers who are declining.

Two terms are worth tracking, because they are the two the sector named: whether the roughly 5% average price moves ^[3], and whether the 70% to 80% transfer ratio comes down ^[7]. A third is whether pandemic-era loans ever actually change hands among fund members, which would show that the incentive has content rather than form ^[13]. Finally, watch the participation rate of the firms holding the debt, which analysts say the policy goal of getting long-overdue borrowers back on their feet will hinge on ^[17].