Emart and GS Construction Secure Liquidity Through 'SPC Loans' Instead of Corporate Bonds

Rising Procurement Interest Rates and Incidents Lead to Reputation and Credit Deterioration
Difficulty in Bond Issuance Spurs Search for Alternative Funding Sources

Jung-gu Sunhwa-dong Emart Headquarters. Photo by Jo Yongjun jun21@

Emart and GS Construction raised funds by borrowing from special purpose companies (SPCs). As market interest rates rose and individual companies faced credit rating issues, conditions for issuing corporate bonds worsened, leading them to secure liquidity through alternative financing routes.

According to the investment banking (IB) industry, Emart received a 150 billion KRW five-year loan from an SPC established by Hana Bank. The SPC issued short-term securitized bonds worth 120 billion KRW to institutional investors, using Emart-directed loan receivables as the underlying assets to raise loan funds. The remaining 30 billion KRW was secured through asset-backed lending (ABL). When Emart repays the principal and interest on the loan in the future, these funds will be used to repay the securitized bonds and ABL.

The SPC that lent to Emart must refinance the 120 billion KRW securitized bonds every three months. Usually, investors in the securitized bonds at issuance extend their investments, but if market conditions change rapidly, existing investors may choose not to reinvest. To prepare for this, the lead manager Hana Securities provided a purchase agreement for the securitized bonds. This agreement stipulates that if refinancing fails, the lead manager will purchase the securitized bonds that were not refinanced.

GS Construction also received a 100 billion KRW SPC loan using a similar method. The SPC issued 50 billion KRW worth of securitized bonds and obtained 50 billion KRW in ABL, then lent this money back to GS Construction. This loan was also arranged by Hana Bank, which provided credit support to the SPC. SGCE Tech Construction, mainly engaged in constructing logistics facilities, also received a 50 billion KRW loan through the same method under the lead of Yuanta Securities. The loan maturity is two months, making it a very short-term loan.

Emart is a high-quality large corporation with a credit rating of AA. However, its profitability has stagnated in recent years, and with increased borrowings due to expansion in non-retail sectors, its actual creditworthiness has been deteriorating. Due to recent market interest rate hikes, the private bond issuance rate exceeded 6% for two-year maturities. Considering that Emart issued public corporate bonds at the 4% level in July, the issuance rate has risen by about 2-3% over 3-4 months. For this reason, the IB industry views Emart’s choice of SPC loans as a way to reduce financing costs.

GS Construction Geomdan Accident Entire Complex Reconstruction
[Image source=Yonhap News]

GS Construction is facing difficulties issuing bonds amid growing negative perceptions of construction companies, compounded by the collapse of the parking lot at the Incheon Geomdan apartment construction site. Although its current credit rating is A+, it is under review for a downgrade following the accident. With a 10-month business suspension, performance deterioration due to reconstruction of the accident site, and reputational damage, credit improvement is expected to be difficult in the near term.

SGCE Tech Construction initially had low creditworthiness, but recently gained the negative distinction of having the highest number of fatalities among domestic construction companies, making fundraising even more challenging. Recently, it privately issued a two-year maturity option bond with both call (early redemption right) and put options (early redemption request right), with a high financing rate set at 10%.

An IB industry official said, "Recently, many companies facing credit issues that make bond issuance difficult or large corporations seeking to reduce financing costs have been opting for SPC loans with securitized loan structures as an alternative to corporate bonds," adding, "From the company’s perspective, there is no disclosure or demand forecasting burden, and from the financial institution’s perspective, since it is not a direct loan, the capital burden is lower, benefiting both sides." The official predicted, "As market interest rates continue to rise, banks holding specialized finance accounts and securities firms engaged in IB business are actively marketing, so SPC loans are expected to continue increasing for some time."

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