[Donmaekgyeonghwa] Growing Concerns of Chain Bankruptcies Among Developers... Construction Companies Fear Contingent Debt Risks

The Dunchon Jugong reconstruction project site in Gangdong-gu, Seoul, is also facing difficulties, such as failing to refinance asset-backed short-term bonds (ABSTP) related to project financing (PF) loan claims. Photo by Mun Ho-nam munonam@

[Asia Economy Reporters Chawan-yong and Lee Kwang-ho] The development industry expects an increase in the number of projects going up for auction due to issues with PF loans. It is understood that many projects located in the metropolitan areas such as Uijeongbu and Incheon, as well as Daegu, Gyeongbuk, Daejeon, and Sejong, are struggling because they have not been able to transition from bridge loans to main PF (Project Financing) loans.

Even if a buyer emerges for the project sites put up for auction, the main PF loans necessary for project progress are blocked, making it difficult to proceed. Especially, except for large-scale projects in Seoul where project feasibility is stagnant due to the worsening housing market slump and increasing unsold units, it is difficult to select contractors.

Construction companies with significant PF contingent liabilities are also facing deteriorating financial structures and risks of insolvency. When developers with weak financial power receive PF loans, construction companies provide credit support such as joint guarantees and capital supplementation. Although they do not directly borrow funds, if the PF projects become insolvent, construction companies end up bearing the debt or not receiving construction payments.

According to Korea Ratings, as of the end of June this year, the total amount of PF contingent liabilities excluding debt assumption by 17 construction companies holding valid credit ratings from the agency was 15.8 trillion KRW. This is a 17% increase compared to 13.5 trillion KRW at the end of 2018. Among construction companies, Lotte Construction, Taeyoung Construction, HDC Hyundai Development Company, GS Construction, and Daewoo Construction bear significant PF contingent liabilities.

Construction companies are currently pressured not only by contingent liabilities but also by the increase in unsold housing due to the housing market slump. As of the end of August, the nationwide unsold housing units totaled 32,722. This nearly doubled compared to 17,710 units at the end of last year, marking the highest level in 32 months since December 2019.

By region, the unsold housing units are as follows: Seoul 610 units, Gyeonggi 3,180 units, Incheon 1,222 units, Daejeon 668 units, Daegu 8,301 units, Busan 1,799 units, Ulsan 775 units, Gwangju 198 units, Sejong 8 units, Gangwon 1,348 units, Chungbuk 619 units, Chungnam 1,386 units, Gyeongbuk 6,693 units, Gyeongnam 2,042 units, Jeonbuk 157 units, Jeonnam 2,503 units, Jeju 1,213 units. The so-called "malignant" unsold units after completion also reached 7,330 units.

A construction company official expressed concern, saying, "Especially in regions with concerns about unsold units in local areas, there is a high possibility of a chain reaction of project failures. Since many projects have been halted or postponed due to funding and unsold housing concerns, if the situation prolongs, bankruptcies may surge mainly among local construction companies."

This content was produced with the assistance of AI translation services.