[Donmaekgyeonghwa] Struggling Construction Firms Reach Out to Parent Companies and Tackle Low-Credit Bonds for Financing

Direct Hit Expected for Urban Renewal Developers
Short-Term Risks for Developers with Unsold Units
Interest Rate Hikes and Economic Downturn Make Next Year Bleaker

[Asia Economy Reporters Minyoung Kim, Hyemin Kim] As the real estate project financing (PF) loan crisis triggered by Legoland in Gangwon Province spreads, the alarm over funding procurement for construction companies has intensified. Reflecting concerns over PF loan defaults, the nationwide housing developers’ funding procurement index recorded its lowest level since May 2015. Experts predict that as the current trend of interest rate hikes continues and the housing market remains sluggish, it will become increasingly difficult to secure external funding for the time being.

◇ Construction Companies Feel ‘Worst’ Funding Procurement Conditions = According to the Korea Housing Industry Research Institute on the 25th, this month’s funding procurement index plunged 12.5 points from last month’s 52.7 to 40.2. Compared to October last year (71.2), it dropped a staggering 31.0 points. This is the lowest figure since May 2013 (39.1).

Researcher Kang Hyun Cho from the Housing Industry Research Institute explained, "The sharp decline in the funding procurement index appears to be largely influenced by the base interest rate hikes," adding, "The deterioration of liquidity due to avoidance of real estate and PF loans amid the worsening real estate market is also a major contributing factor."

As cash flow through corporate bond issuance and bank loans dried up, some construction companies, mainly those with credit ratings of BB+ or lower, began exploring the issuance of primary collateralized bond obligations (P-CBOs). Daewoo Construction issued a P-CBO worth 80 billion KRW in August with support from the Korea Credit Guarantee Fund. Lotte Construction also issued P-CBOs worth 30 billion KRW.

With the PF loan avoidance phenomenon sparked by the Legoland incident spreading to the market, construction companies’ funding difficulties are expected to deepen. Especially, developers with a high proportion of urban renewal projects such as redevelopment and reconstruction in their business portfolios, and those primarily engaged in self-developed projects, are likely to be hit hardest. Due to the nature of their business, which is heavily influenced by the construction market, poor sales performance makes fund recovery difficult, potentially leading to liquidity crises.

In the case of Ssangyong Construction, corporate commercial paper (CP) worth 20 billion KRW is due at the end of this month, followed by 12 billion KRW next month. Initially, there were expectations that the major shareholder, the global SeAH Group, would provide liquidity support. However, it is understood that Ssangyong Construction repaid the 20 billion KRW maturing at the end of this month with its own cash.

An official from Construction Company A, who requested anonymity, said, "Urban renewal projects mainly rely on PF loans for project costs because redevelopment and reconstruction associations lack capital," adding, "Even in the case of Dunchon Jugong, general sales need to proceed quickly to trigger PF loans, but only interest costs are piling up."

Construction companies with many unsold units are also highly exposed to short-term liquidity risks. A representative from Construction Company B said, "Companies that aggressively expanded their sales projects by taking on too many orders may face funding shortages or crisis rumors if PF loans come due beyond their capacity," adding, "Especially, companies with many unsold units after completion could become quite vulnerable."

A representative from Construction Company C said, "It seems true that companies heavily involved in housing projects are facing difficulties," adding, "Private apartments require self-funding to proceed, but as unsold units increase, repaying PF loans is becoming increasingly difficult, particularly affecting regional areas."

◇ Continued Interest Rate Hikes and Housing Market Slump... More Difficult Next Year = The problem is that this atmosphere is likely to persist into next year. If the trend of interest rate hikes continues and the housing market remains sluggish, funding procurement conditions will inevitably worsen. Among construction companies, there is a widespread sentiment that cases like Woosuk Construction, which was processed as a primary default due to failure to settle bills approaching their due date, are only a matter of time.

Researcher Cho said, "Unless there are significant changes in the housing market or interest rate hike trends, the current PF-driven liquidity crisis is expected to continue through next year," adding, "Especially for small and medium-sized construction companies, it will be a time to worry about survival as it is harder to attract funds compared to large corporate-affiliated construction companies."

To extinguish the urgent fire, construction companies are expected to focus on enhancing ‘survivability’ when planning their business portfolios for next year. It is anticipated that they will concentrate on public projects that can be carried out without requiring large amounts of their own capital, rather than new businesses or large-scale projects requiring significant resource input.

A representative from Construction Company D said, "Many companies will adopt a conservative bidding strategy," adding, "During boom periods, they expanded supply without hesitation, but in downturns, they have no choice but to select bids in regions with good sales prospects and favorable locations."

A representative from Construction Company E said, "Internally, there is a policy to tighten belts in the fourth quarter," adding, "The discussion is about minimizing expenditures and securing liquidity as much as possible."

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