[Column] Using 'Nudge' Wisdom to Solve Bridge Loan Defaults

It is natural for economic agents to make decisions that favor their own interests. If there is no legal issue, specific actions cannot be forced under the name of custom. The same applies to Daewoo Construction’s decision to declare bankruptcy and cut losses on the Ulsan mixed-use residential and commercial project. Despite providing joint guarantees for the bridge loan (initial project financing such as land acquisition), Daewoo Construction chose to absorb losses amounting to hundreds of billions of won and halt construction before it began, as a calculated decision to prevent even greater losses.

However, financial authorities need to pay attention to this case. It is a common issue for construction projects that require securing land and raising the main project financing (PF) to proceed. With forecasts predicting that unsold housing units will exceed 100,000, even large construction companies find it difficult to readily push forward with projects.

Daewoo Construction engaged in a prolonged struggle with financial institutions over loan conditions while raising the main PF for the ‘Ulsan Dong-gu Ilsan-dong Prugio’ project. Financial institutions willing to provide loans have no choice but to demand high interest rates and fees from construction companies given the current market conditions. Construction companies, on the other hand, oppose this. Rising raw material costs increase construction expenses, and poor sales performance continues to erode project viability. It is difficult to take on projects expected to incur significant losses.

In such circumstances, not only Daewoo Construction but also top-ranked construction companies may increasingly avoid completing projects they have guaranteed or withdraw through other means. If construction companies become hesitant and fail to proceed to the main PF stage, the risk of bridge loan defaults, amounting to tens of trillions of won, is likely to expand.

Of course, there are efforts by private financial companies to acquire bridge loans from distressed or potentially distressed projects and revive them to improve profitability. Financial authorities have also established some market stabilization measures by creating a dedicated bridge loan fund worth around 1 trillion won.

However, this alone is insufficient. Authorities do not need to provide funding for every project pushed forward recklessly, as it would only encourage moral hazard. Yet, leaving the situation as is could increase financial institutions’ non-performing loans and lead to financial stability issues. It is time to consider ways to moderate stakeholders’ self-interest and alleviate adverse conditions. Rather than direct support, a ‘nudge’-style approach that gently prods in the right direction is needed.

Lim Jeong-su, Reporter, Securities and Capital Markets Department