Capital Industry Shaken as Real Estate PF Crisis Triggered by Taeyoung Construction Becomes Reality

The possibility of a workout (corporate rehabilitation) for Taeyoung Construction is increasing due to problems with real estate project financing (PF) defaults, causing tension in the capital industry. The performance and financial soundness of capital companies are worsening, as the feared risk of loan defaults related to real estate PF is becoming a reality.

According to the industry on the 28th, Taeyoung Construction, ranked 16th in construction capability, is expected to apply for a workout to creditors as early as today. Although Taeyoung Construction remained tight-lipped until the day before, saying they are "reviewing various options," the industry consensus is that it will be difficult to hold on any longer as the loan amount maturing this month alone reaches 400 billion KRW.

Capital companies are concerned that the real estate PF default trigger might explode, led by Taeyoung Construction. In the past, during the real estate boom under ultra-low interest rates, they expanded their business from installment and leasing to lending. However, with prolonged high interest rates shrinking the funding environment and the recent downturn in the real estate market, concerns about real estate PF loan defaults are spreading throughout the industry. According to Financial Services Commission statistics, as of the end of September, the total outstanding real estate PF loans across the financial sector amounted to 134.3 trillion KRW. Among these, the scale of real estate PF loans in the credit industry (capital, card companies, etc.) is 26 trillion KRW, ranking third after banks (44 trillion KRW) and insurance companies (43 trillion KRW). The problem lies in the delinquency rate. The delinquency rate of capital companies is 4.44%, higher than banks (0%) and insurance companies (1.11%).

PF is divided into 'bridge loans' and 'main PF' by stage. Bridge loans are short-term loans borrowed from secondary financial institutions such as capital companies for land acquisition and permits at the early stage of real estate development projects. Due to the high business risk, the interest rate is high. Before starting construction, the developer obtains a relatively low-interest main PF loan from primary financial institutions and repays the bridge loan. When the real estate market is poor, as recently, the main PF loan from banks does not come out, increasing delinquency rates and the possibility of project failure. The higher the proportion of bridge loans, the greater the risk of real estate PF loan defaults. The repayment priority is 'main PF, senior bridge loan, bridge loan.' As of the end of June, the proportion of bridge loans in total PF loans was highest in savings banks (58%), followed by capital companies (39%) and securities companies (33%). A senior official from a mid-sized capital company said, "If real estate PF defaults become a reality, even senior bridge loans will inevitably be affected," adding, "Large capital companies backed by financial holding companies or small capital companies focused on installment and leasing will endure, but others will suffer considerable damage."

The asset soundness of capital companies is also deteriorating. As of the end of September, Shinhan Capital's non-performing loans under watch amounted to 842.2 billion KRW, a 202% increase compared to 278.8 billion KRW in the same period last year. During the same period, the ratio of non-performing loans under watch rose about threefold from 3.4% to 10.3%. DB Capital's non-performing loans under watch as of the end of September were 24.5 billion KRW, a 492% increase compared to 4.4 billion KRW in the same period last year. The ratio of non-performing loans under watch increased more than sixfold from 0.9% to 6.1%. During the same period, Meritz Capital's non-performing loans under watch increased by 141.8%, and the ratio rose from 3.6% to 8.94%, more than doubling.

Credit rating agencies are consecutively downgrading the credit ratings of capital companies. On the 22nd, Korea Ratings downgraded OK Capital's credit rating from A- (negative) to BBB+ (stable). On the 20th, it lowered M Capital's credit rating outlook from A- (positive) to A- (stable) by one notch. Korea Credit Rating changed DB Capital's credit rating outlook from 'BBB0 (positive)' to 'BBB0 (stable)' in the regular evaluation in the first half of this year.

Capital companies plan to respond by adjusting their business portfolios. A capital company official said, "Since last year, the risk level of real estate PF assets has increased, so we have increased relatively low-risk SME loans and other real estate loans including facility and operating funds," adding, "For the time being, we will focus our business on strengthening retail operations rather than real estate PF." Another capital company official said, "We plan to shift direction toward purchasing high-quality real estate non-performing loans (NPLs) cheaply or the initial public offering (IPO) market."