[PF Soft Landing] 'Okseokgari' New Business Feasibility Evaluation to be Implemented in June... 'Up to 5 Trillion' New Support Planned

Financial Authorities Improve 'Feasibility Evaluation Criteria' for Smooth Landing of PF Market
Include Todamdae and Debt Guarantee Agreements in Evaluation Targets... 'Saemaeul Geumgo' Also Subject to Institutional Evaluation
PF Project Evaluation Grades Refined from 3 to 4 Levels
Bridge Loan Projects Also Evaluated... Specify 'Key Risk Factors' Such as Land Purchase, Permits, and Delinquency
Post-Management Standards Established... Financial Supervisory Service to Monitor Compliance Including Auctions and Public Sales

The financial authorities will significantly improve and immediately apply the business feasibility evaluation criteria for distressed projects to ensure a smooth landing of the real estate project financing (PF) market, which has been plagued by ongoing crisis rumors following Taeyoung Construction's workout (corporate financial restructuring). The scope of business feasibility evaluations will be expanded to include land-secured loans and debt guarantee agreements, and Saemaeul Geumgo, where frequent financial accidents have occurred, will be added to the target institutions. Additionally, the current three-tier evaluation grading system will be subdivided into four tiers, and a 'core risk factor' will be added to enable comprehensive evaluations based on specific characteristics. The number of PF projects subject to restructuring is expected to increase.

Furthermore, to support new funding for normal projects and restructuring of distressed projects, a capital call-based syndicated loan of approximately 1 trillion KRW will be initially established, focusing on banks and insurance sectors, with plans to gradually expand it to 5 trillion KRW. For post-management, the Financial Supervisory Service (FSS) will monitor whether financial companies implement submitted plans such as auctions, write-offs, and restructuring, and will conduct on-site inspections if progress is insufficient.

On the 13th, the Financial Services Commission announced the 'Future Policy Direction for the Orderly Landing of Real Estate PF' with these details and plans to implement the enhanced business feasibility evaluation starting in June. The first evaluation will prioritize application to delinquent and distressed projects and will be phased in according to the maturity status of each project. This improvement plan is a response to the rapid increase in real estate PF delinquency rates, revealing limitations in the PF market's ability to self-select and resolve projects. The delinquency rate sharply rose from 0.37% at the end of 2021 to 1.19% at the end of 2022, and 2.70% at the end of last year. Kwon Daeyoung, Secretary General of the Financial Services Commission, diagnosed, "If this situation continues, it raises concerns about the deterioration of financial institutions' asset soundness, worsening management difficulties for construction companies, and housing market imbalances due to non-conversion of bridge projects to main PF and construction delays."

Accordingly, the financial authorities decided to include land-secured loans and debt guarantee agreements in the business feasibility evaluation, which had previously been conducted only for main PF and bridge loans. Saemaeul Geumgo, which has managed land trusts and joint loans, will also be added to the target institutions, expanding the total evaluation scale to about 230 trillion KRW. Land-secured loans refer to loans from small and medium financial sectors for land acquisition funds for real estate development projects, treated as general loans if the effective collateral value exceeds 130%. Debt guarantee agreements have been provided by financial companies as collateral for securitized bonds issued against PF loan receivables.

The evaluation grades per project will also be subdivided from three to four tiers. The current three-tier system of 'Good - Normal - Risk of Deterioration' will be improved to 'Good - Normal - Caution - Risk of Distress.' The 'Risk of Deterioration' grade is divided into two segments, 'Caution' and 'Risk of Distress,' to actively encourage post-management of projects lacking feasibility. The 'Caution' grade will be assigned to projects expected to face significant progress difficulties, while the 'Risk of Distress' grade will be given to projects where progress is further hindered, requiring provisions to be set aside at a level questioning recoverability.

Kwon Dae-young, Secretary General of the Financial Services Commission, is announcing the future policy direction for an orderly soft landing of real estate PF at the Government Seoul Office in Jongno-gu, Seoul on the 13th. Photo by Jo Yong-jun jun21@

Bridge Loans + Main PF: Major Improvements in 'Distressed Project Evaluation Criteria'... Restrictions on Maturity Extensions and Interest Deferrals

Bridge loan projects are now included in the business feasibility evaluation, and the evaluation system to distinguish between 'Caution' and 'Risk of Distress' grades has been significantly improved. The financial authorities plan to specify core risk factors at each PF project progress stage in the evaluation criteria for each grade and assign 'Caution' or 'Risk of Distress' grades to distressed projects that meet two or more evaluation criteria. For projects lacking feasibility, conditions for maturity extension and interest deferral will be tightened.

Specifically, for the 'Caution' grade, both main PF and bridge loan projects will be commonly evaluated on criteria such as ▲three extensions of loan maturity ▲maturity extension without payment of overdue interest ▲two failed auctions or sales ▲whether the project is currently delinquent. For bridge loan projects, additional criteria include land acquisition, permits/main PF conversion, and profitability. Comprehensive evaluations will be conducted for cases such as ▲the initial loan maturity has arrived but land acquisition is incomplete ▲a significant period (6 months) has passed after the initial loan maturity without permit completion, or a significant period (12 months) has passed after permit completion without main PF conversion ▲significant deterioration in total project cost and market supply-demand conditions ▲suspension of developer restructuring such as voluntary agreements or workouts.

Main PF projects will also be evaluated for 'Caution' grade if progress is 'significantly delayed' compared to plans, including ▲significantly poor sales compared to plans (less than 60% sales 18 months after sales commencement), ▲a significant period (12 months) has passed after the expected completion date without sales or other disposals, ▲significant deterioration in profitability, or ▲suspension of developer or contractor restructuring.

The evaluation criteria for bridge loan and main PF projects under the 'Risk of Distress' grade have also been specified. Common criteria include loan maturity extended four or more times, maturity extension without payment of overdue interest, three or more failed auctions or sales, or current delinquency. For bridge loan projects under 'Risk of Distress,' comprehensive evaluations include cases where a long period (6 months) has passed after the initial loan maturity without land acquisition, or ▲a significant period (12 months) has passed after the initial loan maturity without permit completion, or a significant period (18 months) has passed after permit completion without main PF conversion ▲very severe deterioration in total project cost and market supply-demand conditions.

Main PF projects under 'Risk of Distress' will be evaluated for items such as 'very poor' progress compared to plans, ▲significantly poor sales compared to plans (less than 50% sales 18 months after sales commencement), ▲a significant period (18 months) has passed after the expected completion date without sales or other disposals, and ▲very severe deterioration in profitability.

Additionally, the financial authorities will strengthen conditions for maturity extensions and interest deferrals through amendments to PF creditor group agreements and create an environment where financial companies can actively restructure and resolve projects themselves. Specifically, if maturity is extended more than twice, an external expert institution's PF business feasibility evaluation will be mandatory, and the consent threshold for maturity extension will be raised from two-thirds to three-quarters. Even if maturity is extended, overdue interest must be repaid in principle, and the criteria for auctions and sales of PF bonds by financial companies will be expanded to prevent deferral of distress. PF bonds delinquent for more than six months must undergo auctions or sales within three months, or projects with inadequate auctions or sales will be evaluated at official land prices.

Secretary General Kwon explained, "We differentiated evaluation criteria for bridge loans and main PF according to project characteristics and strengthened the evaluation system for bridge loans. By reflecting core risk factors at each PF project progress stage and specifying them, the final evaluation grade considers various risk factors comprehensively rather than relying on a single indicator, thereby relaxing the rigidity of evaluation standards." He added that exceptions to evaluations can be made with approval from the Risk Management Committee for projects with special characteristics such as large-scale urban development projects.

FSS to Conduct Continuous Monitoring of Post-Management Compliance Including Auctions and Sales... Banks and Insurance Sectors to Establish 1 Trillion KRW 'Syndicated Loan'

The post-management system to monitor whether financial companies properly implement follow-up measures has also been improved. When financial companies submit post-management plans to the FSS, the FSS will review them and conduct on-site inspections if implementation is insufficient. Financial companies must promote restructuring and voluntary sales for 'Caution' grade projects and proceed with write-offs and auctions or sales for 'Risk of Distress' grade projects. However, for main PF projects and projects related to companies subject to restructuring, post-management may be pursued individually according to circumstances rather than uniformly through auctions or sales.

Secretary General Kwon stated, "Previously, insufficient post-management standards delayed project restructuring or resolution of distressed loans. We have now specified post-management standards and tasked the FSS with monitoring implementation. To prevent instability in real estate PF and regularly check and supplement progress, we plan to operate a joint task force (TF) with related agencies such as the Financial Services Commission, FSS, and Ministry of Land, Infrastructure and Transport, as well as the financial and construction industries. Through the TF, we will maintain ongoing communication with the financial and construction sectors and continuously identify additional necessary measures."

The financial authorities expect that this institutional improvement will expand new funding supply to 'normal' projects and reactivate a virtuous cycle of funds through restructuring of projects lacking feasibility and their re-entry into the PF market. As a market support measure, banks and insurance sectors will first establish a 1 trillion KRW syndicated loan using a capital call method to supplement private demand for normal projects, and actively consider expanding the scale up to 5 trillion KRW based on support status and market conditions. The financial authorities aim to launch a consultative body in May and activate it in June regarding the syndicated loan.

The target projects are those selected for resolution based on financial sector PF business feasibility evaluation results and undergoing auctions or sales. The five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup), two life insurance companies (Samsung, Hanwha), and three non-life insurance companies (Meritz, Samsung, DB) will participate first. The raised funds will be allocated into three types according to borrower type and fund use: auction loan support, non-performing loan (NPL) purchase support, and selective support for temporary liquidity crises.

Furthermore, since the syndicated loan aims to support normalization of real estate PF and stabilize financial markets, the financial authorities will actively consider exemption from inspection and sanction regulations and issuance of non-action opinions.

Secretary General Kwon said, "If objective and rational business feasibility evaluations are conducted for PF projects, it is expected to restore trust and foster normalization of the PF market. We will also steadily implement ongoing measures such as amendments to creditor group agreements and activation of auctions and sales for distressed projects to meticulously manage the real estate PF market for a smooth landing."