[Edaily Marketin Hur Jieun KIM YEON-SEO Reporter] "When stock prices fall, bills even more frightening than debt come flying in."

As major domestic conglomerates turn to raising funds through Price Return Swaps (PRS) using their equity holdings, the risk of hidden losses is also growing. Given that this structure requires companies to compensate securities firms for losses in cash if the stock price of the underlying asset falls, some point out that the recent increase in stock market volatility could pose a threat.

According to the Financial Supervisory Service on the 12th, the total value of new PRS contracts signed by major conglomerates from the beginning of this year through the 7th of this month amounted to 6.3505 trillion won. The value of PRS contracts, which stood at just 403.8 billion won in 2023, has been increasing significantly each year—reaching 5.3946 trillion won in 2024 and 9.6709 trillion won last year. Since this year’s total has already reached 60% of last year’s annual contract value, there is speculation that a new annual record could be set.

Starting with SK raising 1.25 trillion won in February using SK BIOPHARMACEUTICALS shares as the underlying asset, HANWHA SYSTEMS and HANWHA SOLUTIONS signed PRS contracts worth 1.7 trillion won and 400 billion won, respectively, in March. Subsequently, following ILJINHOLDINGS (April) and KoreaZinc (July), POSCO Holdings closed a 2.5 trillion won PRS deal earlier this month using its stakes in POSCO INTERNATIONAL and POSCO DX.

A PRS is a derivative contract in which a company sells its equity stakes to a securities firm but settles the difference in stock price fluctuations at maturity. It is typically structured using a parent company’s stake in a subsidiary as the underlying asset. Since PRS is treated as a sale of equity or a derivative rather than a loan for accounting purposes, it does not affect the debt-to-equity ratio. Another advantage is that the largest shareholder can maintain control because the securities firm holds the shares during the funding period.

The issue lies in the risk of losses at settlement. Under a PRS, if the value of the underlying equity falls below the agreed-upon price, the company must compensate the securities firm for the loss in cash. When using stakes in unlisted or overseas subsidiaries, companies are exposed to risks such as exchange rate fluctuations and deteriorating local performance.

These risks are already materializing. SK Innovation(096770)disclosed that it incurred a 1.2 trillion won valuation loss on derivatives in the second quarter of this year from a PRS utilizing stakes in its subsidiaries SK On and SK ie technology. This is attributed to a decline in the value of the stake in SK On, an unlisted company, and a corresponding drop in SK ie technology’s stock price following the sharp decline in the KOSPI during the second quarter. SK Innovation has raised a total of 3.8 trillion won through PRS using its stakes in the two companies.

Kim Ga-young, Head of the Rating Standards Division at NICEHoldings’ Rating Policy Headquarters, stated, “While PRS appears to maintain stable financial indicators on the surface, it actually acts as a mechanism that increases the rigidity of the cost structure and delays the materialization of risks,” adding, “There is a high likelihood that liquidity risks will spread rapidly if the external environment deteriorates.”