Korea Enterprise Rating Announces Real Estate PF Risk Assessment
Estimated Losses of 1.4 to 2.8 Trillion Won for Next Year's Maturities
Among the real estate project financing (PF) exposures held by 23 domestic securities firms, 12 trillion won?accounting for half of the total?is set to mature within one year. Of this, the bridge loan stage preceding the main PF amounts to over 7 trillion won. There are calls for close monitoring of potential defaults until the maturity date.
According to Korea Ratings, out of the 24 trillion won PF exposure (loan receivables + debt guarantees) held by the 23 securities firms, exposures maturing by the end of June 2024 amount to approximately 11.9 trillion won, representing about 50%. Among these, bridge loans total 7.3 trillion won.
Jung Hyo-seop, a senior researcher at Korea Ratings, stated, "It is estimated that a significant portion of bridge loan exposures have already had their maturities extended. If refinancing or conversion to PF fails when the maturity comes around again, it is highly likely to lead to defaults." He further explained that considering the high proportion of mezzanine and subordinated exposures in bridge loans, the burden of soundness management is increasing.
Korea Ratings estimated securities firms’ PF losses to range from 2.3 trillion won up to a maximum of 4.1 trillion won. Limiting the scope to PF exposures maturing in one year (by the end of June 2024), the loss scale was between 1.4 trillion won and a maximum of 2.8 trillion won. Senior researcher Jung emphasized, "Most bridge loans are scheduled to mature by the first half of 2024, so the burden of PF losses could be heavy over the next year. While large firms are expected to have limited financial burdens from PF losses, it is necessary to monitor the financial burden levels and response capabilities of mid-to-large firms as well as small and medium-sized firms."
However, when comparing risk levels according to the characteristics of each PF project site, the assessment is that securities firms are in a better position than capital companies and savings banks. As of the end of March 2023, the PF project site risk level measured by Korea Ratings showed an average of 2.65 for securities firms, followed by small and medium-sized firms (2.91) and mid-to-large firms (2.85).
The average risk-weighted PF exposure relative to the equity capital of the 23 securities firms was 18.7%. Researcher Jung explained, "The capital buffer against PF risk is at a favorable level. Mid-to-large firms and small and medium-sized firms recorded 27.5% and 29.6%, respectively, which is about twice the risk burden compared to large firms." This is because large firms have superior capital buffers against PF risk due to their strong capital base.
There remains a difference in PF risk response capabilities between large securities firms and general securities firms. Researcher Jung analyzed, "While the risk levels of PF projects did not differ significantly between the two groups, differences in PF risk response capabilities appeared depending on the proportion of mezzanine and subordinated exposures and the share of real estate PF in total operating assets."
It was also pointed out that PF risk response capabilities vary among securities firms even within the same group, which is significant from a risk analysis perspective. Researcher Jung stated, "Over the next year, it is important for securities firms to maintain stable capital buffers and profit-generating capabilities to respond to PF risk. The effectiveness of financial authorities’ policy implementation, the direction of market interest rates, the real estate market, and the stabilization of the funding market will be key variables affecting PF risk."
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