[Funding] 'Concerns of Insolvency' Daeto Shin Secures Liquidity with Shinhan Bank Support

[Asia Economy Reporter Lim Jeong-su] Daehan Land Trust, a real estate trust company affiliated with the Military Mutual Aid Association, has raised 20 billion KRW in funding with support from Shinhan Bank. This is interpreted as a result of the heavy burden of loan repayments, making it difficult to independently secure funds with maturities over one year without external support. Daehan Land Trust expanded its loan-type land trust business, but due to poor sales performance, its financial condition has deteriorated significantly.

According to the investment banking (IB) industry on the 5th, Daehan Land Trust recently obtained a one-year maturity loan through securitization. Shinhan Bank, the lead manager, lent 20 billion KRW to Daehan Land Trust through a special purpose company (SPC), which then issued three-month maturity securitized bonds backed by the principal and interest of the loan to secure the loan funds.

During the loan securitization process, Shinhan Bank provided credit support to the SPC. If Daehan Land Trust fails to repay the loan, Shinhan Bank will provide funds to the SPC to repay the securitized bonds. With Shinhan Bank’s support, the credit rating of the securitized bonds was evaluated at A1, which is four notches higher than Daehan Land Trust’s short-term credit rating of A3+.

The raised funds are known to be for loan repayment. Among real estate trust companies, Daehan Land Trust is considered to have the heaviest short-term loan repayment burden relative to profitability. As the loan-type land trust business expanded, sales performance deteriorated mainly in regional business sites, worsening profitability and financial conditions. External borrowing was made to the trust account, but sales performance of projects, especially in regional areas, was poor.

In this process, Daehan Land Trust’s borrowings surged from 27 billion KRW in 2016 to 448 billion KRW last year. As orders for loan-type land trusts decreased, borrowings fell to 377 billion KRW in the first quarter of this year. Also, a significant portion of borrowings consists of short-term loans with maturities under one year, increasing short-term repayment pressure. The debt dependency ratio, which is the proportion of total borrowings to total assets, rose from 11.7% to 52.2% during the same period.

The asset soundness indicators, including trust accounts, also deteriorated. Trust accounts refer to proprietary account loans for loan-type trust accounts. As of the end of March this year, out of a total classified credit of 635.7 billion KRW, 93.4% or 593.7 billion KRW is classified as substandard or below. As the soundness of substandard loans continues to worsen, the ratio of non-performing loans also approached 43.8%, indicating a high likelihood of an increase in the scale of bad debts.

An IB industry official said, "In the case of Daehan Land Trust, the number of completed projects in loan-type land trusts is increasing, and especially the proportion of regional business sites in the loan-type trust business is high, so the burden of capital injection into trust accounts will continue to rise," adding, "It is uncertain whether funding demand can continue to be met through credit support from financial companies such as Shinhan Bank." A credit rating agency official predicted, "Unless the parent company, the Military Mutual Aid Association, injects capital through a paid-in capital increase, it will be difficult to improve creditworthiness in the short term."

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