Will Similar Cases Arise? Flood of Inquiries by Financial Companies
Ambiguous Responses on Responsibility for Completion
Growing Concerns over 'Bridge Loan Status' at Regional Offices
[Asia Economy Reporter Lim Jeong-su] The creditor group that lent funds to construction project sites related to Daewoo E&C is on edge. Daewoo E&C has withdrawn from the Ulsan (Ilsan-dong Prugio) project site, where it provided joint guarantees, raising concerns that similar cases may follow. This decision has spread the sentiment that it is difficult to guarantee responsibility for completion solely based on the contract for construction.
"The atmosphere at Daewoo E&C is different from before"... Construction uncertainty increases
According to industry sources on the 9th, financial companies holding bridge PF loans related to Daewoo E&C are checking whether responsible completion (construction) is being carried out at the project sites where bridge loans were issued. However, it is known that Daewoo E&C is not providing definitive answers to related inquiries as it did in the past. A financial company PF official said, "In the past, it was taken for granted that the construction company with the contract would provide responsible completion, but recently, the nuance of Daewoo E&C's responses has changed significantly."
Jungheung Group, which acquired Daewoo E&C, previously indicated that construction abandonment cases might occur, saying it was inevitable even from the construction industry's perspective. Jung Won-ju, chairman of the Korea Housing Builders Association and vice chairman of Jungheung Group, said at the Korea Housing Builders Association inauguration press conference at the end of last month, "The problem is that due to rising material and labor costs, the sale prices inevitably continue to rise," adding, "In the future, construction companies will not be able to build houses at the current sale prices."
An industry insider said, "Coincidentally, the day the press conference was held was the maturity date of the bridge loan for the Ulsan project site where Daewoo E&C gave up the construction rights." A Daewoo E&C official said, "The decision to give up the construction rights in Ulsan was made after deep consideration of profitability and followed internal procedures."
Considering Daewoo E&C's financial situation, there is also analysis that they have no choice but to decide whether to proceed with construction. Although the company posted record-high operating profits last year, this was due to profits from past projects, and the actual cash flow is deteriorating.
Rapid increase in unstarted PF projects... Tension over potential additional cases
According to Daewoo E&C's quarterly report, as of the end of September last year, the balance of PF loans was 1.2294 trillion KRW. According to the Q4 performance announcement last year, the total PF loan guarantee balance slightly decreased to 1.1879 trillion KRW. However, the balance of unstarted PF projects increased more than fourfold to 964.9 billion KRW compared to 243.1 billion KRW at the end of 2021.
Among these, the housing project sites are under the names of developers or special purpose companies such as Locus (Seoul Noryangjin), Yongjin D&C (Daejeon Gyebaek), Jayang Five PFV (Seoul Jayang 5 District), Jinjeop 2 Daeto Development (Gyeonggi Namyangju Jinjeop), Yuto Development 2nd Phase (Daejeon Doan), Namdong Town (Gyeonggi Yongin), and DCR (Incheon City OCL).
In the case of Yuto Development 2nd Phase, the project site is in Daejeon Doan, with related loan amounts reaching 430 billion KRW. Initially, HDC Hyundai Development Company was the contractor, but after the Gwangju Hakdong accident last year and the subsequent suspension of HDC Hyundai Development Company's operations, Daewoo E&C took over the contract. This is a large-scale housing project constructing 51 apartment buildings with 5,290 units and auxiliary facilities from two basement floors to 35 floors above ground in Hakha-dong, Yuseong-gu, Daejeon Metropolitan City. The goal is to start sales and construction in December this year.
Daewoo E&C signed a contract with Yuto Development 2nd Phase and provided debt assumption and funding supplementation agreements for the bridge loan. Debt assumption is a promise to take over the debt if the developer is unable to repay it properly. The funding supplementation agreement is a contract to lend funds for loan repayment. This bridge loan matured in November last year. However, due to market deterioration following the Legoland incident and others, loan conditions such as interest rates were changed, extending the maturity to February and March this year.
A Daewoo E&C official said, "As of the 9th, an agreement was signed to convert the loan to a land-secured loan for Yuto Development 2nd Phase," adding, "Daewoo E&C will exit about 350 billion KRW of debt guarantees, and 100 billion KRW will be converted to a land-secured loan as of the 10th."
Daewoo E&C gave up the construction rights for Palm Haven Planning (Ulsan Dong-gu Ilsan-dong mixed-use complex), which matured in January this year. Yongjin D&C is the developer promoting the Gyebaek District multi-family housing development project in Gwanjeo-dong, Seo-gu, Daejeon. The goal is to start construction in March this year. The bridge loan matured in January but was extended to March by changing loan conditions.
Jungheung Construction project sites as well?
Concerns are also being raised about project sites related to Jungheung Construction, an affiliate of the same group as Daewoo E&C. There is speculation that Jungheung Construction may make similar choices as Daewoo E&C.
Jungheung Construction is expected to be even more cautious about construction projects due to increased financial burdens from investing large sums in acquiring Daewoo E&C. Although sales at project sites such as Pyeongtaek Brain City, Osan Segyo, Gwangyang Wau, and Incheon Geomdan were successful, cost burdens have significantly increased due to rising construction costs.
An investment banking (IB) industry official said, "Unsold units are rapidly increasing in Daegu, Ulsan, Daejeon, and Incheon, causing construction companies to feel considerable pressure in proceeding with construction," adding, "As Daewoo E&C and Jungheung Construction proactively assess project profitability, concerns over bridge loan defaults are growing."
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