Hanshin Rating "Reviewing Construction Companies' Credit Ratings in H1... Faster Pace of Rating Adjustments"

Hanshin Rating '2024 Industry Outlook' Webinar
Taeyoung Construction Workout, Negative Factors in Construction Sector
"Speed and Scale of Change Are Different from Before"

Taeyoung Construction, which applied for workout due to liquidity issues in real estate project financing (PF), has completed a creditors' briefing session. On the 4th, the traffic light in front of Taeyoung Construction's headquarters in Yeouido, Seoul, turned red. Yoon Se-young, the founding chairman of Taeyoung Group, acknowledged management's mistakes during the briefing and requested consent for the workout, but the main creditor bank, the Korea Development Bank, demanded an additional self-rescue plan. Photo by Kang Jin-hyung aymsdream@

Korea Credit Rating (KCR) announced on the 4th that "we plan to review the credit ratings of construction companies whose burden has increased due to project financing (PF) contingent liabilities or unsold units through the first half of this year," indicating that the pace of credit rating adjustments may accelerate compared to before. The scale of adjustments could also be larger than usual.

On the same day, KCR held a '2024 Industry Outlook' webinar and stated, "The outlook for the construction sector this year is 'unfavorable,' and the credit outlook is also 'negative.'"

This year, negative factors such as sluggish global demand, sustained high interest rates, a strong dollar and weak yen, and a downturn in the real estate market are all present. Investment sentiment is severely dampened, the high interest rate environment continues, and financing is becoming more difficult.

PF risks have also increased due to delays in sales caused by the economic downturn. This directly lowers the credit ratings of individual companies, leading to increased financial cost burdens. Since the Legoland incident at the end of 2022, construction companies' financial burdens have surged during the refinancing process of PF contingent liabilities. As of the end of September last year, the PF guarantee amount for construction companies rated by KCR was 28.3 trillion KRW, a 1.75-fold increase from 16.1 trillion KRW in 2020 over three years.

As financial burdens accumulate, credit pressure on individual companies has also increased. Rating downgrade pressure has intensified for small to mid-sized construction companies with weakened liquidity management capabilities. In particular, it is necessary to verify the business and financial response capabilities of some A-rated construction companies as well as those rated BBB or below.

The combined project financing (PF) guarantee scale of construction companies was recorded at 28.3 trillion KRW as of the end of September 2023. Data provided by Korea Credit Rating.

KCR identified four major companies as key monitoring targets. ▲Lotte Construction (A+/Negative, A2+) was assessed to have an excessive scale of PF contingent liabilities. It was pointed out that the refinancing burden is significant, especially due to asset-backed securities maturing within one year (accounting for 83%). ▲GS Construction (A+/Negative, A2+) saw an increase in short-term financial burdens due to funds related to an accident. The government’s suspension of business operations related to the Incheon Geomdan accident and a 552.4 billion KRW loss related to reconstruction were reflected in the second quarter of last year. There is a possibility that pre-sales will be restricted due to the Geomdan accident. ▲Shinsegae Construction (A/Negative, A2) is experiencing deteriorating performance due to construction cost burdens and losses related to unsold units. Since the fourth quarter of 2022, there has also been recognition of bad debts amounting to around 50 billion KRW related to a site in Daegu. Net borrowings increased to 237.4 billion KRW as of the end of September due to construction costs and others. ▲HDC Hyundai Development Company (A/Negative) is being hampered by the Hwajeong I-Park accident and a downturn in the housing market. There is a possibility of pre-sale restrictions due to suspension of business operations.

In response to questions about concerns over the deterioration of domestic construction companies, Hong Seok-jun, Head of Corporate Ratings at KCR, said, "Whether Taeyoung Construction’s workout (corporate restructuring) will spread as a systemic risk to the entire PF market remains to be seen, but in the short term, a significant negative impact on the construction industry is inevitable."

He added, "Construction companies with large contingent liabilities will inevitably face restructuring similar to Taeyoung if they fail to resolve financial risks early. This incident is likely to deepen the financial market’s aversion to the construction and PF sectors, making it difficult for construction companies to secure new financing, borrow, or refinance PF."

KCR plans to closely monitor the refinancing progress of companies with short-term debt or PF maturity structures. It also emphasized that how meaningfully individual construction companies can secure liquidity in the short term will be crucial from a credit perspective.

The pace of credit rating adjustments will also accelerate this year. Hong said, "Based on the changed external environment, from early this year through the first half, we plan to review the credit ratings of construction companies whose burdens have increased due to PF contingent liabilities or unsold units. It is not possible to rule out the possibility of rapid restructuring by financial institutions for some construction companies, as seen in the Taeyoung case."

He continued, "Depending on the level of control over unsold units or PF risks, the speed and magnitude of credit rating changes could be greater than previous adjustments. Companies with currently negative outlooks and those rated BBB or below with heavy financial burdens should be prioritized for review."