Real Estate PF with Warning Signs... 'Bridge Loan' Defaults Are the Biggest Risk

Interest Rate Hike, Legoland ABCP Default Crisis Dries Up Funding
Concerns Over Financing, Difficult to Connect from Bridge Loan to Main PF
"Despite Government Support, More Time Needed to Ease Market Tightening"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The 'bridge loan' has emerged as the biggest trigger of defaults in the real estate PF (Project Financing) business, which used to be a lucrative source of income for securities firms. As the real estate market tightens due to rising interest rates and soaring raw material prices, the ABCP (Asset-Backed Commercial Paper) payment guarantee refusal incident triggered by Legoland in Gangwon Province has rapidly dried up the market's liquidity.

According to the investment banking (IB) industry on the 25th, cases of transitioning from bridge loans to main PF are virtually nonexistent. With increased concerns over unsold properties due to interest rate hikes and rising raw material and construction costs, and heightened credit caution following the Legoland ABCP payment guarantee incident, lenders who had intended to provide funds to projects moving into main PF are showing reluctance.

In real estate PF, the role of securities firms is to gather funds from lenders such as banks and insurance companies and provide financing to developers. Among these, bridge loans refer to loans from securities firms to developers for down payments, interim payments, and final payments before starting the main PF, primarily for land acquisition.

The most crucial aspect of bridge loans is the connection to the main PF. Developers must handle issues such as land acquisition and permits through bridge loans and then initiate the main PF for securities firms to recover the money they lent. If lenders cannot be found during the bridge loan phase and the project does not transition to the main PF, the possibility of losses for securities firms increases significantly.

If the project fails to convert to the main PF, maturity extensions or fund recoveries are enforced. If fund recovery is executed and the developer lacks sufficient cash mobilization ability to repay, securities firms inevitably face substantial losses. Even if a maturity extension is decided, the high interest rates remain a burden for developers. A representative from a small to mid-sized securities firm said, "The risk of defaults is increasing mainly in regional projects in places like Daegu, Gyeongbuk, and Sejong rather than Seoul," adding, "While the average interest rate on bridge loans used to be 6-7%, it has now doubled to over 15%."

[Image source=Yonhap News]

Considering that PF is virtually stalled due to the tightening of the real estate finance market, concerns over defaults are bound to grow, especially among securities firms with a high proportion of bridge loans. As of the first quarter of this year, the proportion of bridge loans relative to capital in securities firms is as follows: Hi Investment & Securities (47%), BNK Investment & Securities (35%), Hyundai Motor Securities (31%), Daol Investment & Securities (31%), Kyobo Securities (29%), and Eugene Investment & Securities (26%), most of which are small to mid-sized firms. Of course, within bridge loans, there are senior, mezzanine, and junior tranches, so the risk varies by asset. Securities firms holding senior tranches, assuming a loan-to-value (LTV) ratio of 50% on real estate collateral, can generally execute principal recovery smoothly. However, small to mid-sized securities firms tend to hold a higher proportion of mezzanine and junior tranches, which typically earn higher fees than senior tranches.

Although the government has introduced liquidity support measures to alleviate the tightening in the real estate finance market, it is unlikely to invigorate the market. Previously, the government announced plans to provide about 3 trillion won in support to securities firms struggling to refinance ABCP maturing in PF projects, but the monthly volume of ABCP maturing until the first half of next year is about 10 trillion won.

A representative from a small to mid-sized securities firm analyzed, "Since the scale of financial support is not substantial, it will be difficult to completely resolve the market tightening," adding, "The current market atmosphere is largely influenced by psychological factors, so more time will be needed."

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