Hyundai, GS, and POSCO Also Postpone Groundbreaking and Extend Bridge Loans

Credit Extensions by 4 Construction Companies to 5 Project Sites
KRW 500 Billion Raised for PF Purchase with KB Financial Support
PF Refinancing and Project Uncertainty Amid Unsold Inventory Fears

Leading construction companies such as Hyundai Engineering & Construction, GS Engineering & Construction, and POSCO Engineering & Construction are also unable to escape the trap of the deteriorating real estate market. Major domestic construction firms are postponing the start of construction on projects for which they have provided credit facilities such as guarantees or debt assumption, and are extending bridge loans borrowed to secure land.

According to the investment banking (IB) industry on the 20th, four construction companies?Hyundai Engineering & Construction, GS Engineering & Construction, POSCO Engineering & Construction, and Lotte Engineering & Construction?raised approximately 500 billion KRW to extend bridge loans for construction sites. They gathered funds through asset-backed lending (ABL) via the special purpose company (SPC) ‘New Star One Firm 2023 1st’. KB Financial Group affiliates, including KB Kookmin Bank and KB Securities, provided credit facilities for the loans.

ABL is a type of secured loan where funds are borrowed from financial institutions using the cash flow (CF) of specific assets as collateral. Each construction company entrusted the bridge loan for the project site where they hold construction rights to a financial institution and provided the issued trust beneficiary certificates as collateral for the ABL. When the developers repay the principal and interest of the loan (bridge loan), the funds are used to repay the ABL.

New Star One Firm 2023 1st used the funds raised through ABL to acquire project financing (PF) securitized bonds related to construction sites for which the construction companies provided joint guarantees or debt assumption commitments. Most of these securitized bonds were issued based on bridge loans nearing maturity at the end of March or April. Bridge loans are funds borrowed for initial project financing such as land acquisition.

Typically, bridge loans are converted into main PF loans upon commencement of construction and then recovered. However, due to the downturn in the construction market, construction companies are unable to decide on the start of construction. Unsold housing units nationwide have exceeded 80,000 and are rapidly approaching 100,000, while construction costs have surged, significantly reducing the viability of PF projects. As a result, many construction companies are postponing the start of construction and only extending bridge loans.

An IB industry insider said, "If individual project owners (developers or associations) refinance bridge loans separately, there is a high risk of PF defaults, making refinancing uncertain and interest rates considerably high in double digits. By pooling multiple projects together as collateral and refinancing bridge loans all at once, the interest rate and refinancing risk for individual projects were reduced."

The projects targeted for securitized bond purchases include ‘Incheon Songdo International Business District Package 6 Development’ where POSCO Engineering & Construction holds construction rights, ‘Seoul Gayang-dong CJ CheilJedang Research Center Site Development’ constructed by Hyundai Engineering & Construction, ‘Yongin City Sinbong 2 District Urban Development’ guaranteed by GS Engineering & Construction, and ‘Daejeon Yuseong-gu Yonggye-dong Apartment and Officetel Development’ guaranteed by Lotte Engineering & Construction.

The Songdo International Business District Package 6 project is a development of commercial land measuring 150,900 m² (approximately 45,727 pyeong) and residential land measuring 71,772 m² (approximately 21,749 pyeong) in Songdo District, Yeonsu-gu, Incheon Metropolitan City. The project entity, Songdo International City Development Co., Ltd., secured a loan of up to 486 billion KRW using the land as collateral, with maturity on the 21st. POSCO Engineering & Construction has agreed to assume the bridge loan debt in case of developer default.

The CJ CheilJedang Research Center site development project involves constructing a knowledge industry center on the CJ Bio Research Center site at 92-1 Gayang-dong, Gangseo-gu, Seoul. The site covers 103,049 m² (31,227 pyeong) near Yangcheon Hyanggyo Station on Subway Line 9. The Inchang Development-Hyundai Engineering & Construction consortium acquired the site for about 1 trillion KRW. The bridge loan maturity is also approaching, requiring refinancing.

The Sinbong 2 District urban development project and the Yuseong-gu Yonggye-dong apartment and officetel development project are both housing development projects facing significant concerns over unsold units. The maturities of these bridge loans are also imminent. A KB Securities official commented, "By extending bridge loans with short maturities for one year, construction companies have reduced the burden of debt assumption and can decide on the start of construction while monitoring market conditions."

However, as more construction companies extend only bridge loans without commencing construction, concerns are rising over the accumulation of potential PF defaults. A financial institution’s PF officer said, "The link where bridge loans are converted into main PF loans and funds are ultimately recovered through sales is continuously broken at the bridge loan stage," adding, "If this situation prolongs, potential defaults may accumulate and eventually trigger a default bomb."