Bank of Korea, Financial Stability Report
Deterioration of Financial Soundness in Construction Companies
Recently, as the real estate market has weakened and unsold housing stock has accumulated, the business environment for the construction industry has deteriorated, leading to a decline in the financial soundness of some construction companies and an increased risk of insolvency. In particular, there is a significant possibility that the proportion of marginal and at-risk companies among local small and medium-sized construction firms will rise sharply.
The Bank of Korea stated in its Financial Stability Report released on the 23rd, "Local small and medium-sized construction companies are more likely to see a greater increase in the proportion of marginal and at-risk companies compared to large corporations and small and medium-sized construction firms located in the Seoul metropolitan area."
Analyzing 72 construction companies among 2,392 non-financial listed companies that disclosed business reports, the Bank of Korea found that listed construction companies experienced a decline in repayment ability, liquidity, and stability during the first to third quarters of last year. The proportion of vulnerable companies unable to cover interest expenses with operating profit alone was 36.1% as of September last year, up from 28.9% at the end of 2021.
During the same period, the proportion of companies with liquidity concerns also increased to 18.1% from 13.3% the previous year. Companies with liquidity concerns are those whose current liabilities due within one year exceed current assets that can be liquidated within one year, resulting in a liquidity ratio below 100%.
The debt ratio (debt/equity) stood at 107.9% at the end of September last year, up from 97.4% at the end of 2021. However, the proportion of excessively indebted companies with debt exceeding 200% of equity decreased to 19.4% from 27.7% at the end of 2021.
The median insolvency risk for construction companies (the probability of a company becoming insolvent within one year) slightly increased to 0.613% compared to 0.603% at the end of 2021, while the proportion of at-risk companies (with insolvency risk exceeding 5%) remained steady at 2.8%.
Notably, some construction companies have provided substantial debt guarantees for project financing (PF) and other real estate-related loans, which could increase insolvency risk if contingent liabilities materialize. According to the Bank of Korea, 32 listed construction companies have provided debt guarantees for PF loans and securitized bonds, with some companies offering PF debt guarantees exceeding twice their equity.
Including other debt guarantees such as interim payment loan guarantees, 44 companies hold contingent liabilities related to real estate, with about one-tenth having contingent liabilities exceeding five times their equity.
Furthermore, the Bank of Korea estimates that due to last year's sluggish construction market, rising raw material prices, and interest expense burdens, the proportion of marginal and at-risk companies within the construction sector, especially among small and medium-sized firms, has significantly increased. Regionally, the proportion of marginal and at-risk companies among local small and medium-sized construction firms likely rose more sharply than those in the Seoul metropolitan area.
Considering the nature of real estate PF, where funds are supplied through pre-sales and ultimately liquidated, the Bank of Korea judged that a smooth landing of the real estate market is fundamentally important to prevent PF insolvency and mitigate financial risks for construction companies.
The Bank of Korea emphasized, "It is necessary to strengthen micro-level monitoring not only of companies whose insolvency risk, as assessed by financial ratios on financial statements, already exceeds 5%, but also of construction companies with large PF debt guarantees and the PF projects they construct and guarantee. Conditional support based on self-help efforts should be considered for construction companies temporarily facing liquidity crises."
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