Construction firms scramble for funding amid loan default concerns

Industry

Published: 19 Feb. 2024, 18:52

Construction firms scramble for funding amid loan default concerns

A pedestrian walks past a halted construction site of Taeyong E&C in Jungnang District in eastern Seoul on January 23. [YONHAP]

Major construction companies are scrambling to secure footing amid lingering liquidity concerns stemming from potential project financing loan defaults, offloading assets or funneling in additional funding.

Lotte Engineering & Construction (Lotte E&C) has recently raised a 2.3 trillion won ($1.7 billion) fund to refinance its project financing loan.

Commercial banks, including Shinhan, KB Kookmin, Hana and Woori, contributed a combined 1.2 trillion won to raise the fund, while security firms pitched in 400 billion won and other Lotte companies poured in 700 billion won in total.

The fund will be used to refinance a 1.5-trillion-won project financing loan lent by Meritz Financial Group in January of last year, which was set to mature in March, as well as to reduce contingent liabilities.

As project financing loans tend to have higher interest rates with short maturity periods, the refinanced funding, which will mature in three years, is likely to lessen the company's interest burden.

Lotte E&C also issued corporate bonds worth 200 billion won on February 7, which will expire after a year, to repay debts.

Meanwhile, Shinsegae Engineering & Construction said on Thursday that the company’s board of directors approved the sale of its resort businesses to Josun Hotels & Resorts, a Shinsegae affiliate, for some 180 billion won.

The company also issued corporate bonds worth 200 billion won through private placements in January.

According to the latest report by the Federation of Korea Industries that surveyed 102 construction companies out of 500 top players in the local industry, 76.4 percent of the respondents answered that they are struggling to cover their interest payments with operating income with a current base rate of 3.5 percent. Only 17.7 percent of the companies responded that their operations are sustainable at the current or higher base rates.

The report also found that 38.3 percent of the construction companies are struggling to stay afloat with strapped liquidity, while those who said that their financial status is favorable accounted for 18.6 percent of the total. Those who said that their financial situation remains as usual accounted for 43.1 percent.

As of last September, the outstanding loan balance in the real estate industry funneled through project financing amounted to 134.3 trillion won in total.

Many of such project financing loans are set to reach maturity this year. Korea Ratings expects that financial firms may lose up to 2.8 trillion won due to project loans by this June.

Addressing potential liquidity risks, the financial authorities have been calling for a prompt restructuring of the local real property industry, and urged banks to bolster loss-absorbing capabilities, with the Financial Supervisory Service governor referring to potential liquidity risks stemming from construction project funding as Korea’s “economic powder keg” during a press conference early February.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]