'PF Risk' Large Construction Companies, Credit Rating A? [Why&Next]

Affiliated Large Corporations See Credit Rating Increase Thanks to Parent Company Support Despite Worsening Liquidity and PF Risks
Daebo, Seohui Construction Remain Below 'A'
"Mid-sized Firms Face Funding Difficulties Despite Financial Stability"

In the first half of this year, many construction companies that were mentioned in the 'April Project Financing (PF) Crisis' were found to have received credit ratings of 'A'. Most of these companies are affiliates of large conglomerates, maintaining their 'A' credit ratings despite deteriorations in liquidity, debt ratios, and PF risks. On the other hand, mid-sized companies without parent companies did not receive an A rating despite having stable financial structures.

Industry experts analyzed this as a long-standing structural issue where small and medium-sized enterprises without parent companies face discrimination in financing, and criticized it as behavior that encourages reckless business expansion and insolvency among large corporations.

The Secret Behind Credit Rating A

According to the credit rating industry, including Korea Ratings and NICE Investors Service, Shinsegae Construction's credit rating was adjusted to 'A-, Stable' in the regular evaluation last month. Although it was downgraded from last year's rating (A, Negative), it still maintained an A rating or higher.

Shinsegae Construction recorded a large operating loss of 187.8 billion KRW (separate basis) at the end of last year due to rising construction costs and poor sales performance in Daegu and other areas. The PF contingent liability risk expanded significantly as PF conversion and construction were delayed in Pohang, Gyeongbuk, increasing the PF guarantee amount to 280 billion KRW. However, Korea Ratings stated that it assigned a 'Stable' rating considering the financial support from the group, including the issuance of hybrid capital securities backed by the parent company's credit enhancement.

Lotte Construction maintained its credit rating of 'A+, Negative' in the first half of this year, continuing from the end of last year. Lotte Construction's net borrowings increased by more than 200 billion KRW over the past year due to securing cash liquidity, and as of the end of March this year, PF contingent liabilities stood at 4.31 trillion KRW, an excessive level compared to its equity capital of 2.65 trillion KRW. Korea Ratings explained, "However, the extension of the maturity of contingent liabilities to three years by raising funds from commercial banks and funds through affiliate support in the first quarter of this year had a positive effect."

High Ratings Supported by Parent Companies

GS Construction was not mentioned in the April crisis rumors, but it experienced a collapse accident in the underground parking lot of an apartment complex in Geomdan, Incheon, last April and received a business suspension order this year. Nevertheless, it received an 'A, Stable' credit rating.

GS Construction incurred large losses due to re-construction and compensation costs related to the accident, recording an operating loss of 388.5 billion KRW last year due to re-examination of site costs. Its borrowings increased significantly to 5.7 trillion KRW at the end of last year, and the debt ratio rose to 262% due to large current losses. However, credit rating agencies considered the GS Group's creditworthiness and support capacity and assigned a rating one notch higher than the rating it would normally receive.

KCC Construction also received an A rating or higher this year with an 'A-, Negative' rating. Due to poor sales performance in Daegu and Busan and delayed collection of construction payments, net borrowings increased to 215.7 billion KRW as of the end of March this year, and the PF guarantee scale for contract projects expanded to 535 billion KRW, increasing external borrowings and PF contingent liability burdens. However, Korea Ratings evaluated that "considering KCC Group's excellent external creditworthiness and support capacity, the possibility of support for KCC Construction is recognized."

'No Big Brother' Construction Companies Receive B Ratings

The situation is different for mid-sized construction companies that cannot receive support from group companies. Daebo Construction's credit rating changed from 'BBB-, Stable' at the end of last year to 'BBB-, Negative' in the first half of this year. Despite a stable financial structure, it remained below the A rating. The reasons cited for the evaluation included setbacks in new orders due to the business suspension order related to the Geomdan apartment underground parking lot collapse accident and the expanded financial burden. Korea Ratings stated, "Although it maintains a stable financial structure through cash generation centered on public construction projects, considering weak cash generation and uncertainties in the collection of accounts receivable and loans, it will be difficult to resolve the expanded financial burden in the short term."

Seohui Construction received a 'BBB+, Stable' rating in the first half of this year. Seohui Construction's debt ratio significantly decreased from 113% (860.1 billion KRW) in 2022 to 82% (695.1 billion KRW) last year. In the first quarter of this year, it further decreased to 73% (657.7 billion KRW). The reliance on borrowings dropped from 8.6% in 2022 to 7% last year, and the current ratio in the first quarter of this year was 178%, similar to Hyundai Construction's 179%. However, the lack of group support appears to have limited it to a B rating.

An official from the credit rating industry explained, "In a deteriorating financing environment, whether liquidity is secured through direct or indirect support from the group is a key differentiating factor," adding, "Large construction companies receive a rating one notch higher by considering the possibility of support from the group in addition to their own creditworthiness." A representative from a mid-sized construction company pointed out, "Although group support is reflected in creditworthiness in emergencies, small and medium-sized construction companies inevitably face disadvantages in financing despite high financial safety."