[PF Soft Landing] Experts and Industry "Agree on Direction... Concerned About Traditional Methods"

Speeding up restructuring with new business feasibility evaluation... New money up to 5 trillion
"Overall direction positive, but financial sector mobilization support measures criticized"

Regarding the policy direction for the smooth landing of the real estate project financing (PF) market announced by the government on the 13th, related industries and experts gave a positive evaluation of the overall direction but expressed cautious views on its effectiveness.

Experts noted that while the criteria for normal and distressed projects have become more specific, increasing predictability, the point of mobilizing the financial sector to support the PF market was criticized as an undesirable traditional method.

According to financial authorities on the 14th, under the revised business feasibility evaluation criteria, 5-10% of the total PF projects worth 230 trillion won are expected to be subject to restructuring through reorganization and auction sales. The financial authorities plan to form a syndicated loan (joint loan) of 1 trillion won (up to 5 trillion won) primarily led by banks and insurance sectors and execute it from the third quarter.

Experts evaluated the revised business feasibility evaluation criteria as a consistent policy direction pursued by the financial authorities. Eunhyung Lee, a research fellow at the Korea Institute of Construction Policy, said, “The government’s policy direction to support mainly normal projects remains the same as before,” adding, “It is meaningful in that the criteria for selecting sound projects have been made more specific and objective.”

Yongman Lee, a professor of economics at Hansung University, explained, “There has been a delay in clearing distressed projects, so the government intends to speed up the process,” adding, “The current three-tier evaluation rating will be subdivided into four tiers, and if projects with feasibility face funding shortages, new funds will be injected, while projects without feasibility will be quickly resolved.”

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@

Opinions on the syndicated loan to be formed mainly by banks and insurance sectors were somewhat divided. Seongjin Kang, a professor of economics at Korea University, criticized, “It is asking those without responsibility to take responsibility.” He explained, “Since commercial banks and insurance companies made significant profits last year, they are being asked to support savings banks, which is an undesirable traditional method,” but added, “However, since the PF crisis must be prevented and if savings banks face problems, commercial banks and insurance companies will also be affected, this seems to be a preventive measure.”

On the other hand, Jiyong Seo, a professor of business administration at Sangmyung University, positively evaluated the syndicated loan because it operates on a capital call basis. He said, “A capital call does not invest the target capital all at once but executes it whenever additional capital demand arises,” adding, “It is desirable because banks or insurance companies can participate in new fund injections while monitoring risk situations.” He also added, “It is also positive that the financial authorities continue to present concrete plans.”

There are also experts who proposed new measures. Professor Yongman Lee suggested, “It would be good to consider the ‘Debt-Equity Swap’ method of converting debt into equity as needed.” He explained, “The government’s measures involve new fund injections or auction sales, but there is an intermediate step of equity conversion,” adding, “If the project is expected to succeed in the future, converting debt into equity allows the construction company not to pay interest immediately, and the financial institution can share profits later according to equity.”

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

The industry generally took a cautious stance on the effectiveness of this measure. A representative from the savings bank sector said, “Since sufficient provisions have been accumulated and retained earnings and the BIS (Bank for International Settlements) capital adequacy ratio are at a reasonable level, savings banks will not be greatly affected.” Regarding the syndicated loan, he said the sale price is key. He explained, “The fact that ‘new money’ is being injected likely means an intention to activate the auction market, but an appropriate sale price must be achieved for this to be possible,” adding, “It is necessary to observe under what conditions banks and insurance sectors participate in the auction.”

A representative from the mutual finance sector said, “Although there are plans for active guidance at the central association level, it is questionable how much this guideline will be applied to each vault and cooperative,” adding, “Since the situations of each vault and cooperative are very different and there is a cautious atmosphere, it is expected that it will take considerable time to see effects.”

Banks and insurance sectors, which agreed to participate in forming the syndicated loan, admitted that liquidity support of 1 to 5 trillion won is burdensome but said they would participate sincerely. A bank official said, “1 to 5 trillion won may be a small amount for the construction industry, but it is linked to provisions in the banking sector and could directly impact operating profits,” adding, “Although it is burdensome, all banks and insurance companies have prepared with the authorities to prevent a major crisis, so we will participate on a principled basis.” Another official said, “It is burdensome because funds will go to projects with low feasibility,” but added, “Since the financial authorities believe the syndicated loan will dispel market concerns, we will follow considering various incentives.”

An insurance industry official said, “Although the actual risks of real estate PF vary by sector and company, we plan to sincerely discuss the financial authorities’ real estate PF management direction and orderly landing measures with the financial sector.” Another official stated, “The scale of real estate PF invested by insurance companies is quite large. Naturally, insurance companies have no choice but to participate in the syndicated loan.”