Real Estate PF Crisis Temporarily Eased... "The Real Crisis Has Not Yet Arrived"

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] The liquidity crisis triggered by Legoland is shaking the financial market. Although the government has announced that it will inject more than 50 trillion won to prevent the spread of anxiety in the corporate bond and short-term financial markets, there are concerns that funding difficulties may worsen during the current period of rising interest rates and falling housing prices, so the future developments of the situation need to be closely monitored.

According to the Korea Securities Depository on the 25th, as of the 24th, the issuance amount of domestic Asset Backed Commercial Paper (ABCP) stood at 124.8502 trillion won. Among this, the size of ABCP maturing within the year was found to be about 6.0194 trillion won.

ABCP (Asset Backed Commercial Paper) is a structure combining asset-backed securities and commercial paper, typically used for short-term financing with a maturity of 90 days. When a developer undertakes a project, a securities company participates and lends money on a short-term basis. Real estate development projects usually take about 2 to 3 years, and since longer maturities come with higher interest rates, developers generally seek short-term funds with lower interest rates. Considering the cash flow inflows during the project, they opt for short-term financing followed by multiple refinancing until the project completion. ABCP is issued precisely for this short-term refinancing purpose and continues through rollover issuance. The securities company guarantees on behalf of the developer with low creditworthiness and collects fees and interest.

The problem arises because new ABCP must be issued to refinance maturing ABCP, but due to the Legoland incident, investor sentiment toward short-term funds has frozen. The ABCP market is experiencing soaring interest rates and difficulties in rollover issuance, intensifying liquidity shortages. In this case, the construction companies as contractors and the securities companies that provided debt guarantees suffer direct damage. If rollover issuance fails, contractors usually make purchase commitments for the developer’s insolvency, so construction companies often bear the burden entirely, and if the developer’s repayment ability is insufficient, the responsibility shifts to the securities companies that provided the debt guarantees.

A representative example is the Dunchon Jugong reconstruction project. When Dunchon Jugong failed to refinance 825 billion won in electronic short-term bonds, the construction consortium that guaranteed the project decided to raise 700 billion won of its own funds to repay. The amounts were Hyundai Construction 196 billion won, HDC Hyundai Development Company 175 billion won, Daewoo Construction 164.5 billion won, and Lotte Construction 164.5 billion won, respectively.

Although the government has announced a '50 trillion won + alpha' liquidity supply program to put out the urgent fire, there is a possibility of payment default if unsold housing increases during the real estate downturn.

Researcher Park Sera of Shin Young Securities said, "If the usual pattern was real estate downturn → increase in unsold units → deterioration of developer cash flow → PF (Project Financing) insolvency, the current situation starts differently as a PF payment guarantee crisis caused by financial market tightening," adding, "This could be even more frightening, and the real crisis depends on how many unsold units occur."

Researcher Park also added, "The real crisis will be the payment default caused by unsold real estate units, and since the real crisis has not yet arrived, we need to carefully watch the future developments."

This content was produced with the assistance of AI translation services.