High Proportion of Local PF Sites in Daegu and Daejeon
Increased Risk of Unsold and Unoccupied Units
Relatively Low Credit Ratings Also Cause High Interest Rates
Kolon Global and Dongbu Construction's project financing asset-backed commercial papers (PF ABCP) backed by credit guarantees are trading at double-digit interest rates, stirring market concerns. This contrasts with the significant decline and stabilization of PF-ABCP interest rates related to projects backed by credit guarantees from Lotte Construction, Daewoo Construction, and Taeyoung Construction earlier this year, supported by government and financial sector assistance.
According to the short-term funding market on the 30th, PF ABCPs issued by special purpose companies (SPCs) established to raise funds for PF projects, such as ‘HODIUM Jeilcha’ and ‘Ecophora,’ were traded in the corporate paper (CP) secondary market at interest rates around 11% to 12%. After the Legoland incident, PF ABCP interest rates once rose to 18% to 20%, but most have fallen below 10% thanks to market stabilization measures.
An investment banking (IB) industry insider explained, "The fact that certain PF-ABCPs are trading at high interest rates indicates that the profitability of the PF project that raised the funds is poor or that the creditworthiness of the construction company or securities firm providing credit enhancement is unstable."
HODIUM Jeilcha is an SPC created by the ‘Duryu Outdoor Music Hall Regional Housing Association’ to borrow PF project funds. The PF loan is used to build multi-family housing (apartments) in the area of 638-19 Duryu-dong, Dalseo-gu, Daegu. After borrowing funds from a lending group under the lead of Hyundai Motor Investment Securities, ABCP was issued based on this loan as the underlying asset.
The contractor, Dongbu Construction, provided a completion guarantee and a fund replenishment agreement for the PF loan. If Dongbu Construction fails to obtain a completion permit after finishing the construction, it is responsible for repaying the loan, and even if the developer cannot repay the principal and interest, Dongbu Construction will support the shortfall. Therefore, the ABCP issued based on this loan is linked to Dongbu Construction’s short-term credit rating of A3(sf), which reflects the credit guarantee provided.
Ecophora is an SPC established under the lead of Ebest Investment & Securities by the developers named The City and The Partners to raise PF funds. Ecophora issued asset-backed securities (ABSTB) based on a PF loan for the mixed-use residential and commercial development project in Haemil-ri, Yeongi-myeon, Sejong City. Kolon Global, the contractor, provided a completion guarantee, fund replenishment, and unconditional debt assumption agreements for the PF loan. The credit rating of this PF asset-backed security was evaluated as A3+(sf), the same as Kolon Global’s short-term credit rating.
A securities firm PF executive said, "As real estate prices have sharply declined, risk aversion toward unsold and unoccupied properties has intensified," adding, "PF projects associated with ABCPs trading at high interest rates are mostly local projects with significant concerns about unsold or unoccupied units, reflecting market anxiety in the interest rates."
Dongbu Construction has seen stable growth in sales and profits based on orders since exiting rehabilitation procedures. However, it recorded poor sales performance in several projects, including the PF project in Suseong-gu, Daegu, last year. Although the proportion of redevelopment projects with low unsold risk is high, many local projects face significant risks of unsold and unoccupied units. Additionally, increased borrowings due to the acquisition of HJ Heavy Industries shares since 2020, despite operating cash flow (OCF) deficits, have negatively impacted its creditworthiness.
Kolon Global faces a somewhat burdensome PF contingent liability of about 1.1 trillion KRW as of the end of September last year, including joint guarantees and fund replenishment agreements. It has provided PF fund replenishment agreements for projects classified as not yet started, such as the officetel in Bongmyeong-dong, Yuseong-gu, Daejeon, and the 3rd mixed-use residential and commercial development in Seonhwa-dong, Jung-gu, Daejeon. If sales performance remains poor, these contingent liabilities are likely to materialize.
A Kolon Global official said, "Recently, Korea Investment & Securities invested 268 billion KRW to support liquidity in our PF projects," adding, "We also recently issued 30 billion KRW worth of private bonds with call options at around 7.9%, so liquidity concerns are not significant."
A PF industry insider said, "It is difficult for the two construction companies, which have a high proportion of housing projects, to improve sales and profitability amid the overall downturn in the real estate market," and predicted, "Their credit ratings are lower compared to other top-tier construction companies, so unless external support is received, the interest rates on related PF asset-backed securities will remain high for some time."
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