'PF Maturity Extension' Higher Threshold, What Has Changed in the 'Lender Group Agreement'?

'Daejudan Agreement' Conditions Significantly Strengthened... Difficult to Sustain Zombie Businesses
If Over 75% of Daejudan Do Not Agree to Maturity Extension, Foreclosure and Liquidation Procedures Effectively Initiated
PF Projects with More Than Two Maturity Extensions Must Undergo Mandatory Evaluation by External Experts Such as Accounting Firms
Most Distressed Projects Linked to Secondary Financial Institutions
Industry Shock Expected to Be Significant Depending on 'Okseok Garigi' Results

As extending maturities and granting interest payment deferrals for distressed real estate project financing (PF) sites become more stringent, a considerable number of troubled projects are expected to undergo auction or liquidation procedures. Financial authorities estimate that distressed projects account for about 5-10% of all projects. However, given the total project scale of 230 trillion won and the high likelihood that many distressed projects are linked to the secondary financial sector, the impact on the industry and market is expected to be significant.

According to the revised creditor agreement applicable to all financial sectors, finalized and announced by financial authorities on the 27th, loan maturity extensions require the consent of at least 75% of creditors based on evaluations by external professional institutions, and interest deferrals are only allowed if overdue interest has already been repaid. Representatives from 11 associations and central organizations, including the Korea Federation of Banks, as well as seven related institutions such as the Korea Credit Guarantee Fund, Korea Technology Finance Corporation, and Korea Housing Finance Corporation, have held regular PF creditor meetings and revised the 'PF Creditor Agreement' for all financial sectors as a follow-up to the May policy direction for an orderly soft landing of real estate PF.

The financial sector has been conducting restructuring of PF projects through the PF creditor agreement revised and implemented under the leadership of financial authorities in April last year. However, criticism has persisted that indiscriminate maturity extensions were granted even to projects with extremely low viability. In fact, as of the end of March this year, among 329 projects undergoing joint management procedures under the agreement, maturity extensions (including duplicates) were the most frequent at 263 cases, followed by interest deferrals at 248 cases, principal reductions at 31 cases, and new funding support at 21 cases.

Accordingly, the revised agreement requires PF projects that have extended maturities more than twice to first undergo a viability evaluation by external professional institutions such as accounting firms or credit rating agencies. The creditor autonomous council may decide on maturity extensions based on the evaluation results from these professional institutions.

In particular, the consent threshold for maturity extensions by creditors has been significantly raised. The revised agreement strengthens the approval requirement from two-thirds (66.7%) to three-quarters (75%) or more. Previously, unlike other deliberation and resolution matters requiring approval from at least three-quarters of creditors, an exception was made for maturity extensions, allowing approval with consent from creditors holding two-thirds or more of the claims. This exception has now been removed.

Interest deferrals are also only permitted if overdue interest has been repaid. Projects unable to repay overdue interest are restricted to liquidation or auction procedures. Even if more than 50% of overdue interest is repaid, a repayment schedule for the remaining overdue amount must be submitted for the autonomous council’s resolution process to proceed.

Conscious of critical voices, financial authorities expect that the strengthened standards compared to the previous agreement will reduce cases where so-called distressed projects survive through maturity extensions. A financial authority official stated, "Projects deemed viable by external professional institutions will be granted sufficient maturity extension periods, enabling stable project operation, while cases of indiscriminate maturity extensions and interest deferrals for projects with extremely low viability are expected to decrease." The official added, "PF creditor agreements for individual sectors such as savings banks, credit finance companies, and mutual finance will also be sequentially revised by early July."

However, the secondary financial sector is expected to face deeper challenges with the upcoming PF project evaluations starting in July and the strengthened creditor agreement. This is because a significant portion of the 230 trillion won PF projects that have been sustained through maturity extensions and interest deferrals are linked to the secondary financial sector. According to the Bank of Korea, the delinquency rate on real estate PF loans stood at 3.55% as of the end of the first quarter, continuing to rise since 2021. Securities firms had the highest delinquency rate at 17.6%, followed by savings banks (11.3%) and credit finance companies (5.3%). The Bank of Korea’s inspection found that bridge loans are increasingly being extended without converting to the main PF loans, resulting in longer loan durations and higher interest rates.

A financial sector official explained, "The soundness of the secondary financial sector is likely to deteriorate further due to additional provisioning burdens for projects that fail to receive maturity extensions and interest deferrals," adding, "Whether through liquidation or auction, the impact on securities firms and savings banks as a result of sorting out viable and non-viable projects could be even greater."