[Donmaekgyeonghwa] Construction Companies' PF Contingent Liabilities 'Warning Signs'... 70% Unstarted Projects Even in High Credit Rating Firms

Even with orders won by Lotte, GS, Daewoo, Hyundai, Kolon, POSCO, Halla, Ssangyong, Hanwha Construction, etc., idle operations continue
Delaying groundbreaking and failing to repay PF loans could materialize a crisis in the construction industry

[Asia Economy Reporter Kwangho Lee] It has been revealed that the contingent liabilities of construction companies' real estate project financing (PF) are rapidly increasing. Although they aggressively secured orders during the boom period, the market downturn has prevented them from breaking ground, raising concerns about related risks.

According to the June 28 report titled "Construction Industry Credit Enhancement A to Z" by Korea Ratings (KR), the total scale of PF contingent liabilities excluding debt assumption by 17 construction companies holding valid KR ratings as of the end of June this year is 15.8 trillion KRW. This represents a 17% increase compared to 13.5 trillion KRW at the end of 2018. Contingent liabilities are assets that are not currently debts but may become confirmed debts if certain conditions are met.

Amid the increase in construction companies' PF contingent liabilities, the noteworthy aspect is the 'non-commenced' projects. Even major construction companies with solid financial structures and relatively high credit ratings are struggling to proceed with their projects. In particular, Lotte Construction, GS Construction, Daewoo Construction, Hyundai Construction, Kolon Global, Hyundai Engineering, POSCO Construction, Halla, Ssangyong Construction, and Hanwha Construction have a non-commenced project ratio exceeding 70%.

Especially in the case of Lotte Construction, the proportion of non-commenced projects is high due to credit facilities such as bridge loans. Regarding regional distribution, the share of Seoul and the metropolitan area is below 40%. Companies with more than 50% of their projects in metropolitan cities with multiple risk areas such as Daejeon and Daegu include Daewoo Construction, Kolon Global, IS Dongseo, and Dongbu Construction.

KR emphasized that monitoring is necessary for Lotte Construction, Kolon Global, and Taeyoung Construction when considering the scale and qualitative risks of PF contingent liabilities. Lotte Construction is conducting multiple projects, many of which are non-commenced, and has a short-term maturity structure. Kolon Global has a high proportion of projects in risk areas. It was pointed out that monitoring the performance of single projects with large credit enhancement provisions is necessary. Taeyoung Construction has a long-term maturity structure but a relatively high proportion of non-commenced and non-residential buildings.

If profitability is not secured despite securing orders and the projects remain idle, there is a high possibility that PF contingent liabilities will turn into non-performing debts. Concerns have been raised that if construction continues to be delayed due to poor sales market conditions, the worst-case scenario of being unable to repay PF loans could occur.

KR stated, "Contingent liabilities do not highlight refinancing or repayment risks during a real estate market boom, even if the project feasibility is relatively poor, supported by sales performance." However, "during financial market tightening, refinancing risks may arise regardless of individual project feasibility, so continuous liquidity risk management is necessary." They added, "Monitoring of individual project feasibility, including new order volume and regional distribution, should be strengthened."