Concerns Over Second Taeyoung Construction Incident, 9 Financial Firms Participate
Fund Maturity Extended to 3 Years with Single-Digit Interest Rates
Significant Easing of PF Contingent Liability Liquidity Concerns
KDB Industrial Bank and the four major commercial banks, along with securities firms, have actively stepped up to support Lotte Construction's liquidity. They have mostly completed the formation of a fund worth 2.3 trillion KRW to support real estate project financing (PF) contingent liabilities. The aim is to prevent Lotte Construction, which has raised liquidity concerns, from becoming a second Taeyoung Construction and causing financial institutions to fail together. Lotte Construction will be able to significantly reduce its PF-related liquidity burden over the next three years until the fund matures.
Participation from Banks, Securities Firms, and Lotte Affiliates... Fund Structure Finalized
According to the investment banking (IB) industry on the 7th, four securities firms agreed to invest a total of 400 billion KRW as mezzanine capital, completing the formation of the 2.3 trillion KRW fund created to support Lotte Construction. A senior executive from a major securities firm stated, "Four securities firms including KB Securities and Daishin Securities each agreed to provide 100 billion KRW in mezzanine funds to the fund," adding, "With the mezzanine loans confirmed, the entire fund formation has been finalized."
In addition to the mezzanine loans, KDB Industrial Bank and the four major commercial banks will inject 1.2 trillion KRW as senior capital into the fund. Lotte Group affiliates will provide 700 billion KRW in subordinated capital. Last year, in the 1.5 trillion KRW fund formed with Meritz Securities to support Lotte Construction, Lotte Group affiliates contributed 600 billion KRW as subordinated capital. This time, the burden on Lotte affiliates has increased by an additional 100 billion KRW.
Lotte Construction plans to use the total fund capital to prioritize repaying the 1.5 trillion KRW fund created last year with Meritz Securities, which is set to mature in mid-February. Additionally, the funds will be used to repay or extend maturing PF contingent liabilities. Considering that the fund formed last year with Meritz Securities was worth 1.5 trillion KRW, this means they have succeeded in securing an additional 800 billion KRW in liquidity.
A senior IB industry executive said, "Last year, there was high uncertainty regarding Lotte Construction's liquidity issues, so financial companies were reluctant to provide large-scale funding," adding, "Thanks to Lotte Construction creating a 1.5 trillion KRW fund with Meritz Securities and significantly improving the situation, we were able to get commercial banks and securities firms to participate as fund investors."
Reducing Liquidity Burden Over 3 Years... Interest Rates Also in Single Digits
Lotte Construction will be able to significantly reduce its liquidity burden over the next three years until the fund matures. According to Korea Ratings, as of January 9, Lotte Construction holds about 5.4 trillion KRW in contingent liabilities. Of this, 2 trillion KRW is expected to be repaid through conversion to main PF and sales proceeds. Additionally, 1 trillion KRW in long-term loans will require maturity extension after next year. The remaining 2.4 trillion KRW in contingent liabilities is expected to be repaid or extended through the 2.3 trillion KRW fund, allowing for a stable debt maturity structure. As of the end of last year, Lotte Construction also held about 2 trillion KRW in cash equivalents.
An IB industry official said, "Last year, we succeeded in reducing about 1.4 trillion KRW worth of PF contingent liabilities (guarantees) through the fund formed with Meritz Securities," adding, "Many of the contingent liabilities maturing this year are related to high-quality projects with strong sales prospects, such as Centum City in Haeundae, Busan, and Homeplus Sangdong in Bucheon, so there should be no major difficulties in repaying or extending PF loans."
Lotte Construction will also be able to significantly lower its funding costs. The average loan interest rate for the newly formed fund is reported to be around 9% per annum all-in, including fees. This consists of about 7.5% interest plus approximately 1.5% in fees. An industry insider analyzed, "Considering that the average interest rate of the fund formed last year with Meritz Securities was around 13% per annum, this represents a reduction of about 4 percentage points in funding costs."
A senior IB industry official evaluated, "Lotte Construction's contingent liability scale and debt maturity structure have greatly improved compared to last year," adding, "This is the reason why the maturity of support funds has lengthened and loan interest costs have decreased compared to the special situation when liquidity problems peaked last year."
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