KCC Construction Borrowed Funds Using 'Jamwon-dong Office Building' as Collateral

Difficulty in Self-Financing Due to Taeyoung Construction Incident
Issuance of 62.5 Billion Secured Bonds... Guaranteed by KAMCO
Increased Financial Burden on Projects with Low Sales Rates

KCC Construction secured a guarantee from the Korea Asset Management Corporation (KAMCO) by putting up its headquarters building in Gangnam, Seoul, as collateral to raise funds. This move came as concerns over construction company insolvency grew following Taeyoung Construction's workout (corporate financial restructuring), making it difficult to raise funds independently without collateral or guarantees.

According to the investment banking (IB) industry on the 15th, KCC Construction will issue a total of 62.5 billion KRW worth of secured bonds. This includes 50 billion KRW of secured bonds guaranteed by KAMCO and 12.5 billion KRW of general secured bonds without KAMCO's guarantee. The maturity period for all bonds is reported to be two years.

KCC Construction put up its headquarters building located in Jamwon-dong, Seocho-gu, Seoul, as collateral for the bonds. The building is an office structure situated at 587 Gangnam-daero, Seocho-gu, Seoul, with a land area of 3,043.3㎡ (approximately 922 pyeong) and a total floor area of 16,323.9㎡ (approximately 4,947 pyeong).

The KCC Construction headquarters building was originally owned by its holding company, KCC, but ownership was transferred to its subsidiary, KCC Construction, in 2020. This was due to a shortage of funds after KCC acquired the global silicone company Momentive. At that time, the building's sale price was around 160 billion KRW. With the rise in Gangnam office prices over the past 3 to 4 years, its value is estimated to have exceeded 200 billion KRW.

However, KCC Construction is also known to have provided this building as collateral when borrowing funds from several banks. Currently, a lien of about 150 billion KRW is established on the property, leading to assessments that the building's collateral capacity has reached its limit. Experts believe this is why KCC Construction obtained KAMCO's guarantee for this secured bond issuance.

The reason KCC Construction resorted to this method of fundraising is that its ability to raise funds independently has weakened due to concerns over project financing (PF) defaults. Since issuing 90 billion KRW worth of private bonds in April last year, KCC Construction has not been able to issue bonds. At that time, domestic securities firms such as Kiwoom Securities underwrote the bonds and sold them in the market. The bonds had a two-year maturity with an interest rate of about 7%.

The Hana Financial Economic Research Institute recently cited data from Korea Ratings to evaluate that KCC Construction belongs to a high-risk group among mid-sized construction companies, with a high ratio of PF contingent liabilities relative to equity capital. Other mid-sized construction companies with similar risks include Hanshin Engineering & Construction and Shinsegae Construction.

An IB industry insider said, "While KCC Construction's absolute contingent liability burden is not necessarily higher than other construction companies, some local project sites have low sales rates, and pre-investing construction costs in these sites is increasing the financial burden."

As the burden of construction cost investment in project sites increases, operating cash flow (OCF) deficits continue. By the end of September last year, free cash flow (FCF) recorded a deficit of 79.8 billion KRW, more than double the 28.5 billion KRW deficit recorded in the same period a year earlier.

With the increased financial burden, net borrowings rose to 112.7 billion KRW, nearly tripling from 40.3 billion KRW at the end of 2022. This increase is attributed to the injection of construction costs into housing sites with low sales rates.

Meanwhile, concerns over construction company insolvency triggered by Taeyoung Construction have made it generally more difficult for construction companies to raise funds. Although KCC Construction maintains a long-term corporate bond credit rating of A-, its short-term commercial paper (CP) rating dropped from A2 to A2- at the end of last year.

A bond market official said, "Although Taeyoung Construction has started a workout, concerns over PF and construction company insolvency will not disappear anytime soon. It will be difficult to raise funds on their own credit without putting up high-quality assets as collateral or obtaining government guarantees."