Mid-sized Construction Companies' PF Project Securitization Bonds Approaching 13% Interest Rates
Kolon Global, HLD&I Hanla, Daol Investment Credit-Enhanced Securitization Bonds Traded at High Rates
Gap Between Prime and Non-Prime PF Securitization Bond Rates Widens Further
As financial authorities launch a comprehensive investigation into project financing (PF) across the entire financial sector, including Saemaeul Geumgo, the interest rates on PF securitization bonds are diverging sharply depending on whether the construction companies and securities firms have provided credit enhancement. PF securitization bonds backed by credit enhancement from high-quality construction companies or securities firms have relatively stable interest rates, whereas those backed by non-prime companies exceed double-digit interest rates by a wide margin. Concerns over PF loan defaults persist, causing the interest rate gap between prime and non-prime PF securitization bonds to remain wide or even widen.
Short-term Risk Concerns for PF Loans Remain High
PF securitization bonds refer to the issuance of long-term PF loans with maturities of over one year, divided into multiple short-term securities with shorter maturities. They are issued in the form of asset-backed commercial paper (ABCP) and asset-backed short-term bonds (ABSTB) with maturities ranging from one month to one year. The high interest rates on short-term securitization bonds indicate a significant short-term risk (default probability) associated with PF loans.
According to the investment banking (IB) industry on the 9th, the interest rates on PF securitization bonds backed by PF loans received by developers such as Ecocity, New Urban City, and Fore Urban City recently traded in the 13% range. Ecocity is a developer corporation established for the Jeonju Ecocity development project in Deokjin-gu, Jeonju. A1 Stream and Fore Urban City are developers established for the urban development project in Ojeon-dong, Bucheon-si, Gyeonggi-do. All these projects involve constructing apartments and other facilities on sites vacated by relocated military bases.
All three developers received PF loans worth several hundred billion won, with five investing companies, including the construction company Taeyoung Construction, providing capital replenishment agreements. A capital replenishment agreement is a credit enhancement contract promising to support the shortfall if the developer fails to repay the PF loan properly due to sluggish development. Although the terms vary slightly among capital replenishment, debt assumption, and joint guarantees, the companies that made the promise ultimately bear the responsibility for repaying the PF loan. Taeyoung Construction is both an investor in these urban development projects and a credit enhancement provider.
The interest rates on PF securitization bonds issued by Cheonho Station Area Project Finance Vehicle (Cheonho Station Area PFV), Samgye Development, and Inje Spidium, all credit-enhanced by Taeyoung Construction, are also trading at high levels between 9% and 12%. Cheonho Station Area PFV is responsible for the urban development project in Cheonho-dong, Seoul; Samgye Development handles the urban development project in Samgye-dong, Gimhae-si; and Inje Spidium is promoting the development of the Auto Theme Park tourist complex in Inje-gun, Gangwon-do.
An industry insider said, "Taeyoung Construction has a significant portion of self-developed projects where it directly invested equity," adding, "With borrowings exceeding 2.1 trillion won in the first half and deteriorating performance, the financial burden is increasing." The insider also noted, "Recently, as Taeyoung Construction has sought funding from multiple financial institutions, both loan and securitization bond interest rates have risen together."
High Interest Rates Also on PFs Credit-Enhanced by HLD&I Hanla and Kolon Global
The interest rates on securitization bonds credit-enhanced by Kolon Global and HLD&I Hanla are also trading at high levels. Securitization bonds issued by the developer First One Holdings recently traded at around 9%. First One Holdings is the developer of the mixed-use residential and commercial project in Bongmyeong-dong, Yuseong-gu, Daejeon. Kolon Global, the construction company, provided credit enhancement through capital replenishment and debt assumption for First One Holdings' PF loan.
Securitization bonds issued by the developer corporations Diorocity and Artista recently traded at 9.30% and 12.00%, respectively. Diorocity is a developer promoting a mixed-use facility development project in Hapjeong-dong, Seoul. HLD&I Hanla, a construction company affiliated with the Hanla Group, provided credit enhancement in the form of a capital replenishment agreement for the PF loan. Artista is the developer of the Paju Wollong Studio development project in Wollong-myeon, Paju-si, Gyeonggi-do, with KCC Auto providing credit support such as debt assumption.
PF securitization bonds credit-enhanced by Daol Investment & Securities are trading in the 8% range. These bonds were issued by developers Dasan Jigum D&C, HW Consulting, SBK Tower, and ATDP, who securitized their PF loans.
Dasan Jigum D&C is promoting an officetel development project in Dasan Jigum District, Namyangju-si, Gyeonggi-do; HW Consulting is developing a logistics center in Samjuk-myeon, Anseong-si, Gyeonggi-do; SBK Tower is developing an officetel in Sangbong-dong, Jungnang-gu, Seoul; and ATDP is promoting a residential lodging facility development project in Pyeongchang-gun, Gangwon-do. All these projects were arranged and credit-enhanced by Daol Investment & Securities.
An industry insider said, "Whether residential or logistics facilities, it is difficult to guarantee the viability of PF projects, so the interest rates on PF securitization bonds inevitably depend on the creditworthiness of the construction companies or securities firms providing credit enhancement," diagnosing, "The interest rate gap between PF loans credit-enhanced by relatively creditworthy companies and those backed by less stable companies has actually widened." The insider predicted, "The instability in the PF market will persist for a long time, and the interest rate gap between prime and non-prime loans is likely to remain wide."
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