[Construction Company Financial Check②] Shinsegae Construction "Borrowed 900 Billion Won Due to Liquidity Shortage"

Raised 900 Billion KRW in Perpetual Bonds and Corporate Bonds in Q2
Short-Term Borrowings Decrease While Long-Term Borrowings Increase
7 Consecutive Quarters of Operating Losses
From Fundraising to Voluntary Delisting

As construction companies face urgent challenges in securing performance this year, Shinsegae Construction has taken emergency measures with support from its parent company, Emart. The company is utilizing 900 billion KRW raised through the issuance of perpetual bonds and other means to repay short-term borrowings. However, with seven consecutive quarters of losses recorded up to the second quarter of this year, Emart has even launched a tender offer to delist Shinsegae Construction from the KOSPI.

900 Billion KRW Raised in Q2 This Year

According to the Financial Supervisory Service’s electronic disclosure system (DART) on the 8th, Shinsegae Construction raised a total of 900 billion KRW during the second quarter of this year (on a separate basis). As a result, cash and cash equivalents increased to 793.4 billion KRW in Q2, up more than 740 billion KRW from 51 billion KRW in the previous quarter. This fund was mainly used to repay short-term borrowings maturing during this period.

Of the 900 billion KRW, 650 billion KRW was raised on May 29 through the issuance of perpetual bonds (hybrid capital securities) following a capital replenishment agreement with parent company Emart. This helped reduce the debt ratio (which was 976.2% at the end of last year) and increase operating funds. Through the issuance of hybrid capital securities worth 619 billion KRW, the total capital increased from 117 billion KRW to 731.6 billion KRW during the same period, lowering the debt ratio. The 610.9 billion KRW in hybrid capital securities is the amount after deducting issuance costs from the original 650 billion KRW.

The remaining 200 billion KRW was procured from Shinhan Bank. Shinhan Bank raised 50 billion KRW by issuing the first tranche of asset-backed securities (ABS) through the special purpose company (SPC) S Project New World and transferred the funds to Shinsegae Construction. Additionally, 150 billion KRW was provided as asset-backed loans (ABL). According to Korea Credit Rating’s 'Structured Finance Evaluation Report,' Shinsegae Construction borrowed funds to repay existing debts including borrowings. The company repaid 55 billion KRW in commercial paper (CP) and 50 billion KRW in short-term borrowings from Standard Chartered Bank Korea during Q2. Consequently, long-term borrowings increased from 4.2 billion KRW in Q1 to 204.2 billion KRW, while short-term borrowings decreased from 167 billion KRW to 62 billion KRW over the same period.

On April 29, the company issued 50 billion KRW in private bonds. It had previously raised 100 billion KRW through private bonds in January. The total corporate bond issuance by Shinsegae Construction increased from 270 billion KRW in Q1 to 320 billion KRW in Q2 this year. Approximately 130 billion KRW of these bonds are set to mature between April and August next year.

Enduring Through Debt

Shinsegae Construction is raising cash through debt amid sluggish operations. After posting an operating profit of 6.6 billion KRW in Q3 2022, the company has recorded operating losses for seven consecutive quarters, with operating cash flow showing net outflows during the same period. The losses from operating activities are being offset by financing activities. As debt increases, interest expenses are also rising. Shinsegae Construction’s interest expenses have been on an upward trend for over a year, reaching 9.9 billion KRW in Q2 this year.

The interest rates on corporate bonds are also climbing. The private bonds issued in January amounting to 70 billion KRW had an interest rate of 7.50%, and another 30 billion KRW bond had a rate of about 7.60%. In April, 35 billion KRW was raised through private bonds with an interest rate of 7.68%.

The interest rate on hybrid capital securities has also increased. The 650 billion KRW hybrid capital securities issued in May carry an interest rate of 7.078%. In June, Shinsegae Construction repaid 30 billion KRW of previously issued hybrid capital securities, which had an interest rate of 5.40%. The interest rate on the securities issued in May will soar to 9.578% if not repaid within three years.

Losses due to unsold inventory continue to weigh heavily. The construction receivables at multi-family housing sites under construction by Shinsegae Construction reached 217.1 billion KRW in Q2 this year, a 10% increase from 197.3 billion KRW in the previous quarter. The sites include 'Belief Premier' in Samdeok-dong, Suseong-gu, Daegu (construction progress 100%, receivables 41 billion KRW), 'Belive Lucent' in Chilseong-dong, Buk-gu, Daegu (construction progress 51.37%, receivables 23.7 billion KRW), and 'Belive Ridiche' in Bondong, Dalseo-gu, Daegu (construction progress 43.29%, receivables 64.7 billion KRW).

In this situation, Shinsegae Construction is pushing for delisting from the KOSPI to initiate restructuring. To facilitate delisting, parent company Emart is conducting a tender offer for shares excluding its 70.46% stake and Shinsegae Construction’s 2.21% treasury shares. For a KOSPI-listed company to voluntarily delist, the major shareholder must hold more than 95% of the capital excluding treasury shares. The tender offer price is 18,300 KRW per share.

A Shinsegae Construction official stated, "We secured sufficient liquidity this year by raising 900 billion KRW in Q2. Along with voluntary delisting, we plan to restructure by disposing of non-performing business sites and reorganizing our business structure to strengthen profitability."