A1 Grade 3% Level Transactions... Short-Term Interest Rate Stabilizes Downward
Concerns Over Large-Scale Defaults Decrease, Risk Factors Resolved
PF Loan Funding Squeeze Persists Due to Restructuring Delays
The interest rates on project financing (PF) securitization bonds, which had soared due to the Legoland incident and concerns over PF defaults, are showing a downward stabilization trend. This is the result of a significant reduction in the risk of large-scale defaults on PF securitization bonds as the real estate market has locally revived and market interest rates have fallen. However, since PF restructuring has not progressed rapidly, the funding squeeze phase in the PF loan market is still considered to be ongoing.
PF Securitization Bonds Trading at 3% Interest Rates... Market Stabilizes
According to the investment banking (IB) industry on the 26th, the secondary market interest rates for A1-rated securitization bonds backed by PF loans recently dropped to around 3-4%. The rates have shown a long-term downward trend due to stabilization in the short-term funding market and a decline in market interest rates. A market insider stated, "The interest rates on PF securitization bonds, which soared during unstable times in the PF market, have been steadily stabilizing downward over the past one to two years."
PF securitization bonds refer to asset-backed commercial papers (ABCP) or asset-backed securities (ABSTB) issued by financial companies using the repayment principal and interest of PF loans as underlying assets (serving as collateral). The better the creditworthiness of the construction company or financial institution guaranteeing the PF loan, or the higher the business viability of the PF project, the lower the interest rate at which these bonds trade. A decline in interest rates is interpreted as a reduction in the repayment risk of PF securitization bonds.
Recently, PF securitization bonds issued by special purpose companies (SPCs) such as Woori Acro Hogye First (Anyang Hogye-dong redevelopment), KB Seongnae First (Hillstate Cheonho Station), MA Hakseong (Ulsan Hakseong-dong regional housing association), Richgate Angsana (Yeouido Angsana Residence), Almighty Ulsan (Ulsan Daldong mixed-use complex), Hana Gocheok First (Seoul Gocheok-dong knowledge industry center), and Seongsu-dong First (Seongsu-dong office) have mostly traded at interest rates in the 3% range. These cases involve high repayment stability due to guarantees or purchase agreements provided by reputable financial companies or construction firms.
Interest rates on relatively lower credit-rated A2-class (A2+, A2, A2-) PF securitization bonds have also fallen to the 5-8% range. This is about half the secondary market rates compared to last year when rates were well into double digits. Interest rates on A3-rated PF securitization bonds have also dropped below 9%.
A PF industry insider said, "The workout (corporate financial restructuring) of Taeyoung Construction is progressing smoothly, and Lotte Construction has overcome its crisis with support from commercial banks," adding, "As market interest rates show a long-term downward trend, many of the short-term financial market uncertainties triggered by the Legoland incident and PF defaults have been largely resolved."
Funding Squeeze in PF Loans Persists
Despite the decline in PF securitization bond interest rates, the funding squeeze in the new PF loan market is still understood to be ongoing.
An executive in charge of PF at a securities firm explained, "With interest rates falling and the real estate market in Seoul and Gyeonggi regions recovering, financial companies are providing new PF loans mainly to projects with high business viability and stability," but added, "However, since the PF restructuring phase is still underway, it is difficult to say that the PF market is fully recovering." He further predicted, "It will take some time for the stabilization of the short-term PF securitization bond market, which has shorter maturities, to extend to the PF loan market, which has longer maturities and more risk factors."
Another PF market insider said, "Investments are limited to projects guaranteed by top-tier construction companies such as Hyundai Construction and GS Construction, or PF projects with some secured sales viability like reconstruction and redevelopment," and forecasted, "Until the PF restructuring led by financial authorities is completed and unsold inventory is resolved, and the real estate market fully recovers, the funding squeeze phase will continue."
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