3 Trillion Won Payment Guarantee for Housing Projects, 1.3 Trillion Due Within the Year
Company Creditworthiness Declines, Financial Institution Insolvencies Increase, Causing PF Market Tightening
Concerns are rising over the failure to refinance project financing (PF) due to the collapse of an underground parking lot in an apartment complex constructed by GS Engineering & Construction (GS E&C). The prevailing analysis suggests that if the bridge loan, for which GS E&C provided payment guarantees and which has not yet commenced construction, is not converted into the main PF or properly refinanced, the burden of the accident that GS E&C must bear will increase.
According to industry sources on the 10th, GS E&C is expected to incur approximately 500 billion KRW in accident recovery costs solely for reconstruction at the accident site. This figure reflects the increase in construction costs and compensation for delays in occupancy following the decision to reconstruct the accident site. It is analyzed that the cost burden will be greater than the 337.7 billion KRW cost reflected in the financial statements by HDC Hyundai Development Company due to the collapse accident at Gwangju Hwajeong I-Park, owing to increased construction costs and other factors.
Considering only the accident recovery costs, GS E&C is in a situation where it can sufficiently bear the expenses. As of the end of March this year, GS E&C holds cash-equivalent assets worth 3.6 trillion KRW, demonstrating its financial capacity. Taking into account short-term borrowings of 2.6 trillion KRW that must be repaid within one year out of total borrowings amounting to 5.9 trillion KRW, the company effectively holds about 1 trillion KRW in net cash.
However, concerns are growing that recent safety issues, which have lowered construction reliability, could spread to other projects where GS E&C has secured new orders or contracts. This year alone, GS E&C has experienced a series of incidents including exterior wall cracks at Central Xi in Jung-gu, Seoul, parking lot leaks at Gaepo Presidents Xi, and parking lot leaks at Pyeongtaek Jije Station Xi.
In particular, there is increasing analysis that refinancing or conversion to the main PF for project financing (PF) loans will become difficult. According to NICE Credit Rating, GS E&C has provided payment guarantees amounting to 2.9018 trillion KRW related to housing projects, with 1.2839 trillion KRW maturing within this year.
Kwon Joon-sung, a senior researcher at NICE Credit Rating, stated, "Looking at past similar cases, a decline in external credibility and negative administrative measures from local governments such as the Seoul Metropolitan Government could worsen investor sentiment toward the company," adding, "Difficulties in refinancing real estate PF loans are likely to lead to increased financial burdens for the company."
The major PF projects for which GS E&C has provided payment guarantees include bridge loans for land acquisition funds at the pre-construction stage, with maturities within one year, located in Manchon-dong, Suseong-gu, Daegu (debt amount 390 billion KRW); Buam-dong, Busanjin-gu, Busan (148.4 billion KRW); Dongsan District, Asan, Chungnam (131.1 billion KRW); Yeonggye-dong, Yuseong-gu, Daejeon (131 billion KRW); Dangu-dong, Wonju, Gangwon (110 billion KRW); and Handeul 1-ro, Seobuk-gu, Chungnam (110 billion KRW).
The Buam-dong residential development project in Busan involves the construction of five super high-rise apartment buildings with 1,874 households and 218 officetel units, ranging from five basement floors to 69 above-ground floors. Last year, during the process of raising 148.4 billion KRW in bridge loans from financial institutions to secure the land, GS E&C, as the contractor, provided payment guarantees. The project aims to commence construction and sales by April next year, requiring the bridge loan to be converted into the main PF or extended at the time of groundbreaking.
The Doan District project in Daejeon is being developed by Seokjeong Urban Development, which plans to build 1,195 apartment units in Yeonggye-dong 267-3, Yuseong-gu, Daejeon. GS E&C provided payment guarantees for a 131 billion KRW bridge loan received by Seokjeong Urban Development in April this year. The project is currently being promoted with the goal of obtaining implementation plan approval by July this year.
An investment banking (IB) industry official said, "With financial institutions becoming conservative about PF loans due to rising delinquency rates and increasing non-performing assets, GS E&C's credit rating downgrade will make refinancing existing bridge loans or converting them into main PF loans even more difficult," adding, "Even if financial institutions provide PF loans for GS E&C guaranteed projects, they are likely to impose stricter conditions such as higher interest rates."
There are also forecasts that problems may arise not only with PF loans but also with refinancing PF securitized bonds. While refinancing contingent liabilities related to PF generally does not pose significant issues, if investor concerns about the issuer increase, refinancing difficulties cannot be ruled out. Korea Ratings stated, "Although the liquidity crunch caused by last year's Legoland incident has somewhat eased due to government liquidity support measures, concerns about the construction sector remain high, which could negatively affect GS E&C's refinancing of PF contingent liabilities."
An IB industry official commented, "Concerns about liquidity tightening in the PF market and capital markets are growing due to the Saemaeul Geumgo incident, making it difficult to gauge how large GS E&C's contingent liability burden will become."
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