[Exclusive] Authorities Move to Block Hormuz-Driven Construction Risks... PF Guarantees Expanded from 2.5 Trillion to 4 Trillion Won

Preemptive Measures Amid Naphtha Supply Instability and Growing Crisis in the Construction Industry
30% Reduction in PF Guarantee Fees
Support for Refinancing Primary Collateralized Bond Obligations (P-CBO)
Minimum Principal Repayment Requirement Lowered from 10% to 5%

Financial authorities are expanding the scale of project financing (PF) guarantees from the previous 2.5 trillion won to 4 trillion won as a preemptive response to the liquidity crisis in the construction industry. They also decided to reduce PF guarantee fees by 30 percent. Additionally, companies will be allowed to refinance their primary collateralized bond obligations (P-CBO) by repaying only 5 percent of the principal. These measures are proactive steps taken amid concerns that instability in naphtha supply, resulting from the blockade of the Strait of Hormuz, could significantly disrupt the entire construction process.

According to the financial sector on April 15, financial authorities have outlined a financial support plan containing these measures. This is a follow-up to the agenda discussed at the "Construction Industry-Financial Sector Meeting" held on April 8. Authorities have been focusing on examining the impact of supply chain disruptions in naphtha and other petrochemical raw materials on the construction industry following the Hormuz crisis. Naphtha is a key ingredient in major construction materials such as ready-mixed concrete, insulation, and plastics. Since a large portion of construction materials—including concrete mixes—are composed of petrochemical products, disruptions in supply could halt the entire construction process.

Authorities have decided to expand the "Construction Cost Plus PF Guarantee" provided by Korea Housing Finance Corporation to 4 trillion won. The funding will be sourced from the corporation's surplus funds rather than through a supplementary budget. The Construction Cost Plus PF Guarantee is a scheme designed to provide liquidity to construction sites experiencing temporary cash flow shortages despite having sound business fundamentals. The program increases the guarantee limit up to 90 percent of the total project cost, supporting not only land acquisition costs but also construction costs. Additionally, the guarantee fees charged by Korea Housing Finance Corporation for PF guarantees will be reduced by 30 percent to alleviate the financial burden on construction firms resulting from the Hormuz crisis.

The burden of raising funds for construction and petrochemical companies with lower credit ratings will also be eased. Authorities have decided to lower the minimum principal repayment requirement for refinancing P-CBOs issued by the Korea Credit Guarantee Fund from 10 percent to 5 percent. Previously, companies had to repay at least 10 percent of the principal when their debt matured to be eligible for refinancing. Going forward, the requirement will be reduced to 5 percent, making it easier to extend maturities.

P-CBOs are a policy finance tool used by companies with low credit ratings that have difficulty issuing bonds directly. This structure bundles bonds from multiple companies into a single asset-backed security, which is then guaranteed by the Korea Credit Guarantee Fund, allowing companies to raise funds in the market. Companies can obtain financing at lower interest rates compared to individual issuances, and investors benefit from reduced credit risk due to the guarantee.

Refinancing, in this context, refers to extending maturity by repaying part of the principal and reissuing the remainder upon maturity. The additional interest rate and the proportion of subordinated asset-backed securities that a company must acquire depend on the amount of principal repaid. Authorities have introduced a new tier with a minimum principal repayment ratio of 5 percent; the previous minimum was 10 percent. This measure ensures that even companies facing liquidity difficulties can refinance their debts without having to repay substantial amounts of cash immediately, helping them overcome short-term liquidity crises.

The financial sector expects the impact of the Strait of Hormuz blockade on the construction industry to be significant. Since the domestic market is heavily dependent on Middle Eastern naphtha, any prolonged disruption in supply could lead to increased construction costs. Rising logistics costs due to higher fuel expenses are also cited as a burden. A source from the financial sector stated, "A substantial portion of construction materials, including concrete mixes, are based on petrochemical products. Therefore, any disruption in raw material supply could have a significant impact on the entire construction process."

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