HONG KONG, Feb 9 (Reuters) - South Korea's Woori Bank is expected to exercise an option to buy back $400 million of its debt next month, averting a nasty clash with investors that could sour confidence in the broader Asian lending sector.
Woori Bank, part of Woori Finance Holdings (053000.KS), has until Wednesday to announce whether it will repurchase its junior-ranking bonds maturing in 2014, or leave investors stuck with debt that is trading below the price they originally paid.
The decision by the South Korean lender is proving to be a litmus test for other Asian lenders that sold similar securities to investors.
Analysts believe the potential damage to Woori's reputation if it chooses not to buy back the bonds would be too steep a price to risk.
At the core of the issue is trust between issuers and investors, especially in these uncertain times. Banks have typically bought back such debt in past years, giving investors a high degree of security.
"Investors' confidence in the strength of and outlook for Woori Bank should be deeply damaged if Woori opted to miss the call date repayment," said Scott Bennett, a fund manager at Aberdeen Asset Management in Singapore who holds the bonds.
"A missed call by Woori would create a contagion effect in Korea by increasing investor expectations that other Korean banks would follow suit. This could lead to portfolio losses that would far exceed losses caused by virtually any other issuer default."
Issuance of this so-called subordinated debt -- ranking somewhere between senior debt and stocks -- soared when the going was good. Some of the bonds sold even had perpetual timeframes, meaning that, technically, the bond would never mature.By Rafael Nam
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