[Bond Market Diagnosis] Hanshin Gongyeong Only 10% Filled... Mid-sized Construction Companies' Corporate Bonds on Red Alert

Hyundai Construction, GS Construction, and Other Major Firms Also Face High Interest Rates
Small and Medium-Sized Construction Companies Shunned by Market
49% of Low-Credit Corporate Bonds Matured in First Half of Year

[Asia Economy Reporter Hwang Yoon-joo] While the corporate bond market is warming up mainly among large corporations, construction companies are not smiling. Due to the continued project financing (PF) risks caused by the increase in unsold units and the stagnation of the real estate market, the outlook on the construction industry remains cold.

According to the investment banking (IB) industry on the 23rd, large construction companies such as GS Construction and Hyundai Construction, which conducted corporate bond demand forecasts this year, all filled their issuance volumes. However, unlike other high-quality large corporations such as KT and POSCO, they issued corporate bonds at rates higher than the average interest rate of individual private bond rating companies (market average rate).

Specifically, GS Construction (A+) received orders worth 219 billion KRW for a 150 billion KRW 2-year bond on the 22nd. The condition was around +140 basis points (1bp=0.01 percentage point) above the market average rate. Hyundai Construction (AA-) also raised a total of 320 billion KRW from a 150 billion KRW demand forecast. However, the 2-year and 3-year bonds were finalized at +10bp and +3bp above the market average rate, respectively.

Lotte Construction (A+, negative outlook), which attracted market attention, received orders totaling 620 billion KRW for a 350 billion KRW issuance. The bonds were composed of 70 billion KRW for 2 years, 250 billion KRW for 3 years, and 30 billion KRW for 5 years. However, Lotte Construction's issuance rates remain relatively high, set at +30bp for 2 years, +50bp for 3 years, and +5bp for 5 years above the market average rate.

Mid-sized construction companies are facing defeats in demand forecasts. Hanshin Engineering & Construction (BBB) had 45 billion KRW unsold out of a 50 billion KRW 1-year bond demand forecast, receiving only 5 billion KRW in orders. Despite offering high interest rates ranging from 7.5% to 9.5%, it was practically ignored. Kim Sang-soo, a researcher at Korea Ratings, analyzed, "Hanshin Engineering & Construction's high dependence on the private construction sector and poor sales performance at many sites that started sales after last year seem to have acted as a burden for investors."

Among mid-sized construction companies, SK Eco Plant (A-) is the only one that somewhat succeeded in issuing corporate bonds. SK Eco Plant gathered effective demand of 96 billion KRW for a 30 billion KRW 1-year maturity issuance, 199 billion KRW for a 40 billion KRW 1.5-year maturity issuance, and 213 billion KRW for a 30 billion KRW 2-year bond issuance. However, it is evaluated that SK Eco Plant benefited from the halo effect of being an SK Group affiliate.

[Image source=Yonhap News]

This contrasts with the situation at the beginning of the year when record-high funds poured into corporate bonds of large corporations such as KT and POSCO, and credit market investment sentiment was hot. The clear temperature difference in the construction company corporate bond market is due to increasing financial uncertainties among construction companies. As the housing market rapidly declines, the high-interest rate trend continues, and investment sentiment is shrinking, concerns about tightening in the capital market are emerging.

Amid worsening conditions, the refinancing burden of construction company corporate bonds is concentrated in the lower credit rating A and BBB grades. According to Korea Ratings, as of the end of January this year, the total corporate bond issuance amount by construction companies reached 8.2 trillion KRW. The amount of corporate bonds maturing this year is 2.6 trillion KRW, with 49% (1.3 trillion KRW) concentrated in the first half of the year.

The total volume of A-grade construction company corporate bonds is 4.4 trillion KRW, with 1.4 trillion KRW maturing this year. The volume of maturing bonds is expected to increase from the second quarter. For BBB grade, 41% (500 billion KRW) of the total issuance amount of 1.3 trillion KRW matures in the first half of this year.

Moreover, as of the end of January this year, about 90% of construction company credit-linked short-term asset-backed commercial papers (ABCP·ABSTB) mature in the first half of this year. A significant portion of these mature in February and March. Jeon Ji-hoon, a researcher at Korea Ratings, said, "The issuance volume of A1 grade, which has high credit and dispersed maturities, or A3 grade, which has limited access to the securitization market, is not large. The refinancing burden will continue mainly around A2 grade asset-backed securities, which account for about 70% of the total issuance volume."

The recovery of investment sentiment in construction company corporate bonds depends on this year's sales performance, according to the consensus. The trend of unsold units due to economic slowdown is expected to affect construction companies' cash flow. Currently, construction companies are burdened with working capital due to profitability decline caused by rising construction costs and financial expenses, poor sales performance, and delayed collection of construction payments. External funding for refinancing borrowings and working capital response is urgently needed this year as well. A head of coverage at a major securities firm said, "Although the corporate bond market has been strong since the beginning of the year, we are taking a conservative view. Market participants believe the real estate market will remain difficult for the time being, and related issues such as real estate PF are expected to periodically emerge until the end of the year."

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