Housing Development Project Uncertainty Despite Large-Scale Liquidity Injection
Burden of Maturing Loans and PF Contingent Liabilities
Market Anxiety Intensifies After Daewoo Construction's Construction Rights Withdrawal Incident
[Asia Economy Reporter Lim Jeong-su] The short-term project financing asset-backed commercial paper (PF-ABCP) related to the ‘Heunin Village Development Bridge Loan (Bridge Loan)’ with credit enhancement by Lotte Construction was traded at an interest rate in the mid-7% range. Although Lotte Construction injected liquidity of 1.5 trillion KRW through Meritz Securities and its affiliates, it is still traded at a higher rate compared to PF-ABCPs of other construction companies. Following the Daewoo Construction’s Ulsan residential-commercial complex construction rights abandonment incident, anxiety has resurfaced, causing interest rates to fluctuate, especially for some PF-ABCPs.
According to the financial investment industry on the 15th, the special purpose company (SPC) ‘Velo House Heunin J Cha’ issued 60 billion KRW worth of 2-month maturity PF-ABCP, which was traded at 7.30%. Although the interest rate, which had surged to double digits due to the Legoland incident, has dropped significantly, considering that other PF-ABCPs are traded at 3-5%, this is evaluated as a relatively high interest rate.
This ABCP is related to the ‘Heunin Village Development Project’ being promoted in Naegok-dong, Seocho-gu, Seoul. The project’s developer, Heunin Town Development Co., Ltd., received a 600 billion KRW bridge loan from the main lenders in September last year. This project, which had been stalled for over ten years, recently succeeded in fundraising after obtaining approval for the land readjustment plan in the urban development project implementation plan. The actual project owner is ‘Upper House Heunin,’ an affiliate of Shinwon Comprehensive Development.
Lotte Construction, which agreed to participate as the contractor, made a capital supplementation and debt assumption agreement. If the developer lacks funds and has difficulty repaying the bridge loan, Lotte Construction will lend the repayment funds or assume the debt. Because of this, the credit rating of the ABCP was evaluated as A2+, the same as Lotte Construction’s short-term credit rating. It is known that KB Securities and NH Investment & Securities also participated in the loan at that time.
The lending consortium securitized the bridge loan and issued ABCP. After transferring the loan assets to the SPC, securitized securities are issued based on the principal and interest generated from the loan. When the borrower repays the principal and interest of the bridge loan to the SPC, the SPC repays the ABCP with that money. The securitization underwriter is Mirae Asset Securities.
The reason why the interest rate of Lotte Construction’s credit-enhanced ABCP does not fall below the 7% level is analyzed to be due to the still unstable market environment. A short-term finance market official said, “As the market environment has become unstable again, such as a rapid increase in unsold real estate recently, PF-ABCP interest rates are no longer falling,” adding, “In the case of Heunin Village, although it is a Seocho-gu development project, anxiety about real estate in the surrounding areas, centered on Gaepo-dong, is spreading, so it is uncertain whether construction will start in the second half of this year when the bridge loan matures.”
Lotte Construction’s credit rating issue, despite the credit enhancement, is also a background factor preventing PF-ABCP interest rates from falling further. An investment banking (IB) industry official said, “Although the related PF-ABCP interest rates have stabilized downward significantly as Lotte Construction received 1.5 trillion KRW in liquidity from Meritz Securities and others,” he analyzed, “Lotte Construction still faces large-scale bond maturities, and there is a high risk that PF contingent liabilities may materialize due to the downturn in the real estate market.” The official added, “The recent Daewoo Construction construction rights abandonment incident also amplified the anxiety in the PF-ABCP market.”
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