Lotte Construction Purchases Additional 200 Billion KRW of Securitized PF Bonds for Unstarted Projects

Acquisition of Bridge Loan Securitization for Land Securing at 3 Sites Including Haeundae Centum Mixed-Use Development
Uncertainty in Recovery via Conversion to Main PF Amid Prolonged Real Estate Downturn

Lotte Construction has raised an additional 200 billion KRW to acquire project financing (PF) securitization bonds related to construction sites that have not yet started construction. This liquidity was secured separately from the 1.5 trillion KRW PF securitization bond acquisition fund established with Meritz Securities. The raised funds will be used to purchase bridge loan-backed securitization bonds (PF ABSTB) for three construction sites, including the mixed-use development project in Busan.

According to the investment banking (IB) industry on the 15th, special purpose companies (SPCs) Werther 1st and 2nd each borrowed 100 billion KRW, totaling 200 billion KRW, in asset-backed loans (ABL) from a lending consortium composed of financial institutions. Werther 1st and 2nd then lent the raised funds to Werther 3rd, which acquired PF securitization bonds for which Lotte Construction provided credit guarantees. Lotte Construction provided credit guarantees, taking final repayment responsibility for the ABL.

The PF securitization bonds acquired by Werther 3rd were issued based on bridge loans for three construction sites being developed by Lotte Construction. Bridge loans are loans borrowed by the project operators at each site for initial activities such as land acquisition. The projects include the ‘Haeundae Centum’ mixed-use development at 856-1 Jaesong-dong, Haeundae-gu, Busan Metropolitan City; the ‘Homeplus’ development project at 33-1 Yongdu-dong, Dongdaemun-gu, Seoul; and the ‘Doan 2 District Officetel’ new construction project in Yonggye-dong, Yuseong-gu, Daejeon Metropolitan City. All of these sites remain in a non-started construction state because they have either not received project approval after land acquisition or have not converted to the main PF for other reasons.

Sammi D&C, the project operator of the Haeundae Centum mixed-use development, borrowed a 250 billion KRW bridge loan in September 2017 and has continuously extended its maturity. Although there is a plan to start construction in September and complete it by September 2028, the project has not yet received permits, making the start and sales schedule uncertain. The Homeplus development project in Yongdu-dong, Seoul, is also continuously extending the maturity of its bridge loan while weighing the timing of construction and sales. Giselle M, the project operator of the Doan 2 District Officetel project in Daejeon, borrowed an 185 billion KRW land acquisition loan (bridge loan) in June 2021 but has not converted it to the main PF.

For all three projects, Lotte Construction has provided credit guarantees such as capital supplementation agreements and debt assumption for the bridge loans. If the project operators fail to repay the loans on time, Lotte Construction is responsible for repaying part or all of the loans. However, since construction has not yet started and the bridge loan maturities are only being extended, the timing for starting construction and sales remains uncertain. If sales are not made on time, repayment of the bridge loans could also become difficult.

An industry insider in the PF sector explained, "If bridge loan recovery through sales is not properly achieved and the project operators become insolvent, Lotte Construction will have to bear all the debt," adding, "The funds were raised to proactively acquire PF securitization bonds of projects with potential insolvency risks." The insider also noted, "The loans borrowed to acquire the securitization bonds have a maturity of one year," and assessed, "There will be no burden of maturity extension or refinancing of securitization bonds related to the three projects for the next year."

Previously, Lotte Construction had established a 1.5 trillion KRW fund with Meritz Financial Group to acquire real estate PF securitization bonds. Meritz Financial Group affiliates provided 900 billion KRW in senior capital, and Lotte Group affiliates provided 600 billion KRW in subordinated capital. This money was lent to SPCs Charlotte 1st and 2nd, which acquired PF securitization bonds for which Lotte Construction provided credit guarantees.

An IB industry official said, "Lotte Construction raised nearly 2 trillion KRW earlier this year to resolve PF-related borrowings and contingent liabilities, significantly reducing credit and liquidity risks that emerged after last year's Legoland incident," but added, "However, contingent liabilities remain accumulated as projects remain in a non-started construction state without converting to the main PF and remain in bridge loan status. If the real estate market downturn prolongs, there is a possibility that insolvency concerns will resurface."