PF-ABCP Interest Rates Soar Again Amid Rising Unsold Housing Units

Partial PF-ABCP Trading at 11~13%
HL D&I Hanla, IS Dongseo, and Other Small to Mid-Sized Firms Guarantee Projects
Concerns Over PF Loan Deterioration Rise Amid Increasing Unsold and Unstarted Construction

[Asia Economy Reporter Lim Jeong-su] The real estate project financing (PF) market, which seemed to stabilize somewhat after the Legoland incident, is showing signs of instability again. The interest rates on asset-backed commercial papers (ABCP) issued based on real estate PF loans are soaring. In particular, securitized bonds related to local housing construction projects guaranteed by small and medium-sized construction companies are trading at double-digit interest rates, reflecting market anxiety.

According to the investment banking (IB) industry on the 21st, the PF ABCP issued by the special purpose company (SPC) ‘Blue Moon Light Jeilcha’ recently traded at interest rates of 12-13%. This securitized bond was issued based on a bridge loan (initial project financing needed for land acquisition, etc.) borrowed by the developer Daesung I&D to build apartments in Bongmyeong-dong, Heungdeok-gu, Cheongju City. The structure is such that when the developer repays the principal and interest of the bridge loan to the SPC, the SPC pays the promised principal and interest to the securitized bond investors.

The construction company HL D&I Hanla (formerly Hanla Construction), which was contracted for the construction, provided a capital replenishment agreement (credit facility) due to concerns about the bridge loan’s default. This contract stipulates that if the developer lacks sufficient capacity to repay the loan principal and interest due to low pre-sale rates, the construction company will support the repayment funds to the developer. Investors invested in this securitized bond trusting the creditworthiness of the construction company HL D&I.

PF securitized bonds related to local construction projects, for which the local construction company IS Dongseo provided joint guarantees, also saw large-scale transactions at around 11%. This is a PF-ABCP issued by the SPC ‘The H Daewon Jicha’ based on part of a 340 billion KRW PF loan received by the Daewon 3 District Housing Reconstruction Association in Changwon City. IS Dongseo, selected as the construction company, provided joint guarantees for the PF loan. If the PF loan funds are not properly recovered, IS Dongseo will bear the debt repayment burden on behalf of the association.

HL D&I and IS Dongseo are both reputable mid-sized construction companies ranked 31st and 37th in contract ranking, mainly handling local construction projects. Although their own credit ratings are not particularly poor, concerns over PF projects have increased, causing the related PF securitized bond interest rates to surge. An IB industry official said, "Cases where construction companies keep extending the maturity of bridge loans without starting PF construction at the bridge loan maturity are increasing," adding, "As the number of PF projects not yet started grows, the interest rates on related securitized bonds reflect the unstable real estate market situation."

The soaring interest rates on PF securitized bonds worsened sharply right after the default incident of the Gangwon-do Legoland asset-backed commercial paper (ABCP) guarantee debt in September last year. Many PF ABCP interest rates surged to double digits but showed some stabilization until January this year due to government market support measures. However, recently, as unsold units have increased mainly in local construction projects and Daewoo Construction voluntarily gave up construction rights on projects for which it provided joint guarantees, concerns about PF loan defaults have grown again.

A PF loan officer at a financial company said, "Financial companies are reflecting market conditions by raising loan interest rates when extending PF loans such as bridge loans," adding, "Especially, the interest rates on mezzanine and subordinate loans, which have relatively lower repayment priority, are formed at quite high levels." The official said, "It is inevitable that PF ABCP issued based on high-interest PF loans trade at high interest rates."

A credit rating agency official said, "In the case of PF ABCP, the A1 grade interest rates, which are mainly guaranteed by financial companies, have stabilized, whereas the interest rates for A2 and lower grades, mainly guaranteed by construction companies, are formed at considerably high levels," and predicted, "As the risk of unsold units materializes, interest rates will continue to show instability mainly in projects guaranteed by construction companies with relatively lower creditworthiness."