Major Construction Companies Including DL E&C and Hyundai Construction Move into Asset Securitization

Securitization of Lease Deposit Return Claims... A Representative Funding Method in Economic Downturns
Utilized as an Alternative Funding Source Amid Construction Slump and High Interest Rates

Large construction companies such as DL E&C and Hyundai Construction are also raising funds by securitizing their owned assets. This is interpreted as utilizing alternative financing methods due to the difficulty of issuing bonds and the market interest rates becoming burdensomely high.

According to the investment banking (IB) industry, DL E&C raised 68 billion KRW in funds underwritten by Shinhan Bank. DL E&C issued asset-backed securities based on the tenant deposits of 162 real estate properties, which are to be returned upon the expiration of the real estate lease contracts. Hyundai Construction, in June, selected Mirae Asset Securities as the underwriter and raised 94 billion KRW in cash using the same method.

DL E&C and Hyundai Construction will repay the borrowed money with the deposits returned at the expiration of the real estate leases. If it becomes difficult to recover the tenant deposits, the construction companies must repay the funds necessary for the principal and interest payments of the asset-backed securities on behalf of the special purpose company (SPC). In effect, the construction companies have secured liquidity by securitizing the tenant deposit refund claims, which are among their owned assets.

Securitization of tenant deposit refund claims is one of the financing methods companies use during economic downturns or when raising funds is difficult. For construction companies, along with the securitization of construction accounts receivable (construction fees to be received in the future as payment for construction), it is considered a representative financing method during recessions. CJ CGV securitized theater tenant deposits to raise large-scale funds, and distribution companies such as Homeplus secured liquidity by utilizing tenant deposits paid when leasing large supermarkets or mixed-use commercial buildings.

Asset securitization is similar to collateralized loans and has the advantage of relatively low financing costs. An IB industry official said, "Even top-tier, highly capable construction companies find it difficult to issue corporate bonds, and even if they succeed, they have to bear considerably high interest costs," adding, "The method of raising funds by securitizing assets such as construction accounts receivable or tenant deposit refund claims is expected to continue for some time."