[Funding] IS Dongseo's 'Business Restructuring', Raising 150 Billion Won Secured by Construction Accounts Receivable

[Asia Economy Reporter Lim Jeong-su] Mid-sized construction company IS Dongseo (IS Dongseo) has raised a large amount of funds using construction accounts receivable as underlying assets. This is interpreted as a result of increased cash demand during the process of acquiring and merging multiple water treatment and waste treatment companies.

According to the investment banking (IB) industry on the 1st, IS Dongseo secured liquidity of 150 billion KRW through a special purpose company (SPC) established under the management of Hyundai Motor Securities and Korea Investment & Securities. Of this, 130 billion KRW of senior debt has a three-year maturity, and the remaining 20 billion KRW of subordinated debt was executed in five tranches of 4 billion KRW each.

IS Dongseo provided construction payment accounts receivable as collateral for the loan. This is the construction payment to be received according to the progress of the Daegu Suseong Beomeo W project. IS Dongseo was selected as the construction company for the Suseong Beomeo W redevelopment project by the Suseong Beomeo Regional Housing Association in 2017.

Suseong Beomeo W is a project to build and sell a residential-commercial complex apartment with 59 floors above ground, the tallest in Daegu, located at 189-2 Beomeo-dong, Suseong-gu, Daegu. It supplies a total of 1,855 units, including 1,353 apartments with exclusive areas of 84㎡ and 102㎡, and 502 officetels with exclusive areas of 78㎡ and 84㎡.

The senior loan includes a condition that if IS Dongseo's credit rating falls below BBB- or A3-, it will lose the benefit of the term and immediately repay the loan. IS Dongseo's short-term credit rating is A3, so the trigger for loss of term benefit will activate only if the credit rating falls by two additional notches.

IS Dongseo's fund raising using construction accounts receivable as collateral is interpreted as due to increased capital needs during the business structure reorganization process. IS Dongseo, led by President Kwon Min-seok, the eldest son of Chairman Kwon Hyuk-woon, is shifting its business structure, which was focused on construction, toward strengthening the environmental industry.

IS Dongseo sold its ceramic business 'Inus' to E&F Private Equity (E&F PE) and sequentially acquired shares of Inseon ENT to become a major shareholder. It is also expanding investments by participating in Inseon ENT's paid-in capital increase to acquire Paju B&R and Yeongheung Industrial Environment. Together with E&F PE, it formed a consortium to continuously expand its waste sector business portfolio, including Kolon Environmental Energy, Koentec, and Saehan Environment.

In this process, financial burdens increased. Borrowings, which were around 776.8 billion KRW at the end of 2018, exceeded 1.1 trillion KRW in the first half of this year. Meanwhile, cash generation ability weakened as EBITDA dropped to less than half. This is the result of reduced order performance after completing large-scale project construction by 2018 and changing the revenue recognition point for self-developed project sites to delivery standards.

An IB industry official said, "There is a significant burden on working capital due to reduced construction sector self-generated sales, expenditures for land acquisition, and ongoing construction progress, coupled with continuous equity investments in waste companies, leading to ongoing borrowing demand," adding, "As the performance of highly profitable waste-related affiliates is reflected, cash flow is expected to gradually improve."