[Exclusive] Daewoo Construction Guarantee Bridge Loan Default

Refusal to Provide Core Responsibility Completion Agreement
Ulsan Mixed-Use Development Owner Defaults on Bridge Loan
Concerns Over Greater Losses if Project Proceeds... Cutting Losses on Loan
"Indicates Instability in Real Estate Development Project Situation"

[Asia Economy Reporter Lim Jeong-su] The bridge loan borrowed by the project owner for the ‘Ulsan Dong-gu Ilsan-dong Prugio’ mixed-use complex construction project has been defaulted (loss of benefit of term: EOD). This is because Daewoo Engineering & Construction, which had agreed to provide a completion guarantee for the main PF loan, withdrew from the project, stating it could no longer proceed. The lending consortium, which had trusted Daewoo Engineering & Construction and executed the loan, was thrown into confusion by the unexpected default.

According to the investment banking (IB) industry on the 6th, Daewoo Engineering & Construction recently sent an official letter related to the ‘Ulsan Dong-gu Ilsan-dong Mixed-Use Complex New Construction Project,’ bearing the seal of CEO Baek Jeong-wan, to the lending consortium composed of several financial companies. The letter stated, "PF loan-related tasks are ‘cooperative’ matters under the construction contract, so Daewoo Engineering & Construction’s obligation to guarantee completion is not legally enforceable." This means the construction company will neither provide nor fulfill the customary completion guarantee agreement during the conversion of the bridge loan into the main PF loan.

Daewoo Engineering & Construction, as the contractor, repaid the subordinated bridge loan of 44 billion KRW, for which it had provided joint guarantees, using its own funds. The project site is planned to be sold through a public auction. Even if losses occur on the guaranteed loan, the company has decided not to proceed with the contracted construction project. It is interpreted that Daewoo Engineering & Construction judged it better to cut losses early on the existing loan rather than continuing the project under existing construction cost conditions and increasing losses. In other words, they preemptively cut losses on a construction project expected to run at a deficit before it transitioned to the main PF. A Daewoo Engineering & Construction official said, "Losses incurred while winding down the project were reflected in the fourth quarter results last year," adding, "There will be no additional losses from this transaction this year."

Industry insiders said it is quite rare in industry practice for a major construction company to refuse to guarantee completion after signing a construction contract. An IB industry insider said, "Daewoo Engineering & Construction deliberately defaulted on the bridge loan for the project site, making it impossible to continue the project." The insider added, "Construction costs continue to rise, and with the real estate market downturn, pressure on selling prices has increased. Daewoo Engineering & Construction judged the project unfeasible and withdrew from the project, citing that the completion guarantee is not legally binding."

Financial companies that participated in the senior bridge loan, trusting Daewoo Engineering & Construction’s completion guarantee, appeared bewildered by the sudden default. The existing loan consortium included Yuanta Securities (20 billion KRW), Woori Financial Capital (10 billion KRW), and iPartners Asset Management (8 billion KRW). Including the subordinated loan of 44 billion KRW guaranteed by Daewoo Engineering & Construction and equity of 10 billion KRW, the total size of the bridge loan borrowed to secure the land is 100 billion KRW.

The securities firms and lending consortium promoting the main PF are also in a difficult situation. An industry insider said, "Based on Daewoo Engineering & Construction’s completion guarantee agreement, investors were gathered for a main PF worth 150 to 200 billion KRW, and many financial companies had already completed internal approvals," adding, "Daewoo Engineering & Construction’s sudden refusal to guarantee completion rendered the main PF worthless and turned all existing loans into non-performing assets."

An IB industry insider expressed concern, saying, "I have never seen a top 10 domestic construction company that even provided guarantees voluntarily stop a contracted construction project and deliberately cause a default," adding, "This is a sign of how unstable the real estate development business has become." The insider also said, "At the end of last December, unsold housing nationwide reached 68,000 units," and "With defaults occurring even in projects contracted with major construction companies, financial companies are anxiously worried that similar cases may spread."

Meanwhile, this project is located in Ilsan-dong, Dong-gu, Ulsan Metropolitan City, and involves constructing a total of 644 mixed-use apartment units. Daewoo Engineering & Construction had planned to proceed with the main PF and sales under the Daewoo apartment brand ‘Prugio’ after signing the construction contract.

*What is a bridge loan?

A bridge loan is the fund borrowed by a developer to secure the project site (land) before obtaining construction permits for apartments or other projects. Once the project is approved by local governments or other authorities and the project’s progress is assured, the developer proceeds with the main PF and sales. It is called a bridge loan because it serves as a bridge to the main project financing. As of the end of last year, financial companies are known to have tens of trillions of KRW in loans either extending maturities in bridge loan status or awaiting conversion to main PF, prompting financial authorities to closely monitor the situation.