'Rising Concerns Over Poor Quality' Secondary PF Securitization Bond Yields Soar

Concerns Over PF Loan Deterioration Ahead of Restructuring Expand
Focus on Dongbu Construction and HLD&I Hanla Local Business Subordinated Loans

Interest rates on subordinated PF securitization bonds for some construction sites with declining project viability are soaring ahead of project financing (PF) restructuring. This indicates heightened anxiety about the potential default risk of PF loans provided to specific projects. In particular, securitization bonds guaranteed by construction companies such as Dongbu Construction and HLD&I Hanra are attracting market attention due to their high interest rates.

According to the short-term funding market on the 7th, PF securitization bonds issued through special purpose companies (SPCs) such as HODIUM First, Natural Eight J, and LT6 have recently been traded at high interest rates ranging from 9% to 12%. PF securitization bonds are a type of bond issued secured by PF loans. When loan repayment is expected to be stable, market interest rates decrease; conversely, when repayment stability is uncertain, interest rates rise.

A source from the funding market explained, "PF securitization bonds issued based on PF loans are mostly ultra-short-term securities with maturities of 1 to 3 months, and generally have lower interest rates compared to long-term bonds with longer maturities. The fact that short-term bond rates are around 10% means that the effective circulating interest rate, when annualized, is in the mid-teens."

The SPC HODIUM First was established by the Duryu Outdoor Music Hall Regional Housing Association to borrow PF project funds. This association is constructing multi-family housing (apartments) in the area of 638-19 Duryu-dong, Dalseo-gu, Daegu, with Dongbu Construction as the contractor. After receiving a PF loan in 2021 underwritten by Hyundai Motor Securities, the association issued securitization bonds based on this loan. In this process, Dongbu Construction provided a credit facility (fund replenishment agreement) as a guarantee for the PF loan.

Natural Eight J was established as an SPC by the developer Dioro D&C to borrow a bridge loan (initial construction funds before groundbreaking) for building a mixed-use residential facility in Hapjeong-dong, Mapo-gu, Seoul. Dioro D&C received approval for the management disposition plan for this project in December last year and selected HLD&I Hanra as the contractor, planning to start construction this month. HLD&I Hanra guaranteed the principal and interest repayment of the bridge loan.

LT6 was established by the Andong Regional Housing Association to borrow funds for the multi-family housing project (Gimhae Andong Hanra Vivaldi) in Andong-myeon, Gimhae-si, Gyeongnam. HLD&I Hanra provided a fund replenishment agreement for the PF loan.

The PF loans received by the three SPCs are all subordinated loans, which rank lower in repayment priority. Financial institutions that provide subordinated loans receive principal and interest repayments only after senior lenders have been fully repaid. Therefore, if the PF project does not proceed properly or sales performance is poor, it may become difficult to recover the loan principal and interest.

An IB industry insider said, "The multi-family housing projects in Duryu-dong, Daegu, and Andong-myeon, Gimhae are regional housing projects in provincial areas with accumulated unsold units and relatively few general sale units. However, if the contribution fees are raised or units are sold at high prices reflecting soaring construction costs, unsold or unoccupied units may increase, potentially leading to project insolvency."

Concerns over the creditworthiness of construction companies have also been analyzed as a factor influencing the soaring interest rates on PF securitization bonds. Dongbu Construction has recorded poor sales performance in several projects, including its own multi-family housing project in Pah-dong, Suseong-gu, Daegu. Its financial condition has recently deteriorated, causing its short-term credit rating to drop one notch from A3+ to A3 last year.

HLD&I Hanra has shown signs of financial structure improvement recently as net borrowings decreased due to construction cost recovery. Its current short-term credit rating is A3+.

A PF industry insider stated, "PF securitization bonds traded at high interest rates are those that have been circulated in the market, and among the PF-related securities that have not been traded, many are in situations with high default risk. As financial authorities begin full-scale PF restructuring, market anxiety about defaults is increasing."