2024-01-03 21:20:20
[딜사이트 박성준 기자] As Taeyoung Construction applies for a joint management procedure (workout) with a creditor bank, the PF (project financing) risk, which had been concerned about insolvency, is rising to the surface.
There are many opinions that the possibility of the Taeyoung Construction crisis spreading to PF system risks throughout the construction industry is limited, but the impact on the construction and financial industries and the bond market is expected to continue for the time being. Above all, as it becomes more difficult for small and medium-sized construction companies to secure financing than large construction companies with high financial stability, there are predictions that the competition between construction companies’ PF businesses will begin in earnest.
◆ Real estate PF restructuring begins… Work on reorganizing insolvent businesses begins in earnest
According to the related industry on the 3rd, Taeyoung Construction’s workout application has raised refinancing risks in the construction industry, drawing attention to the possibility of a liquidity crisis for individual construction companies.
According to an analysis by Korea Credit Rating, the size of bridge loans that have not started construction after approval due to the slowdown in the domestic real estate market is around KRW 12.7 trillion, and the main PF projects that are starting construction are continuing to face financial pressure due to the cost burden and low sales rate. Accordingly, construction companies whose business portfolios are focused on housing are expected to continue to experience liquidity pressure. Accordingly, the government is considering increasing the market stabilization program, the Debt Fund, from the current 20 trillion won to 30 trillion won.
Taeyoung Construction’s PF business classification policy. (Provided by = Financial Services Commission)
However, some say that the crisis is not new in that Taeyoung Construction’s workout application is due to the slowdown in the real estate economy that has continued for the past year. In fact, on December 28 last year, the day Taeyoung Construction announced its workout, the yield on the 68th public offering bond issued with Taeyoung Construction’s own credit soared to the 99% range during the day, but the interest rate on PF loan bonds (ABSTB) in the entire market There was no significant change. The market views Taeyoung Construction’s workout situation as a limited phenomenon limited to Taeyoung Construction.
In particular, the reason why Taeyoung Construction’s public bonds received attention in the market is because it is expected that Taeyoung Construction will enter a workout at the creditors’ meeting on the 11th. If Taeyoung Engineering & Construction does not go into court receivership and the company normalizes through workouts, the bonds will return as profits equal to their current value.
Kang Kyeong-tae, a researcher at Korea Investment & Securities, said, “PF restructuring, which is left to market logic, has already begun, and insolvent businesses will find new owners at a low price.” He added, “If the workout proceeds in an orderly manner with the government’s active response, the temporary pain experienced now will be alleviated.” “This will accelerate the recovery of the market,” he said.
◆ Limited liquidity crisis for large construction companies… Concerns about disruption in financing for small and medium-sized businesses
It is expected that the PF crisis theory, which arose due to Taeyoung Construction’s workout application, will have different effects depending on the weight class of each construction company. While large companies, so-called first-tier construction companies, are expected to get through this crisis without a major crisis, small and medium-sized construction companies may face a liquidity crisis.
PF guarantee ratio to equity capital of major construction companies as of the 3rd quarter of 2023 (data = Korea Credit Rating)
Looking at the ratio of PF guarantees to equity capital of large construction companies, Taeyoung Construction’s was 373.6% as of the third quarter of last year, which is the highest among major construction companies. Lotte Engineering & Construction ranked highest among the top 10 contractors at 212.7%.
In the case of Lotte Engineering & Construction, last year’s PF guarantee size was lowered to KRW 5.8 trillion (including KRW 900 billion for maintenance projects), a KRW 1 trillion reduction from KRW 6.8 trillion at the end of 2022. Although the level is still high, Lotte Engineering & Construction has steadily attempted to secure liquidity and holds cash equivalents of approximately 2.1 trillion won as of the end of September last year. The industry believes that Lotte Engineering & Construction has the ability to respond to short-term liquidity.
Hyundai Engineering & Construction has a PF guarantee ratio of 121.9% to equity capital, providing a guarantee exceeding 100% of equity capital. It is believed that the risk is not large compared to the size of the PF guarantee due to Hyundai Engineering & Construction’s abundant cash assets and many business sites with high business potential.
HDC Hyundai Development Company, which suffered from poor construction, is at 77.9%, and GS Engineering & Construction is at 60.7%, and both companies are appropriately managing the amount of PF guarantee compared to their equity capital. In the case of Shinsegae Construction, this ratio is around 50%, so the PF guarantee is not large compared to equity capital.
However, the debt ratio of large construction companies was high on average. This means that there are a lot of actual borrowings in addition to PF contingent liabilities. Among the construction companies in the top 10 in the contract rankings, only two companies had a debt ratio of less than 100%: Samsung C&T (69.1%) and DL E&C (91%). In particular, the debt ratio was high at GS E&C at 250.3%, Lotte E&C at 233.5%, and SK Eco Plant at 209.8%.
Among construction companies outside the top 10 in terms of contract rankings, Taeyoung Construction had the highest debt ratio at 478%, followed by Shinsegae Construction at 467%. Kolon Global also had a debt ratio of 313%, exceeding 300%.
The financial world’s view is that the Taeyoung Construction incident could make it more difficult for small and medium-sized construction companies to raise short-term private loans. As of January this year, the size of PF electronic short-term bonds amounted to about 32 trillion won, with most of them maturing within 1 to 2 months. Most of these are PF guns that have not yet begun construction. There have been many cases of interest deferment and maturity extension through the government’s ‘PF Lenders Council’, but if Taeyoung Construction’s workout does not proceed smoothly, there is a possibility that small and medium-sized construction companies may experience difficulties by lowering the market’s credit rating.
Choi Seong-jong, a researcher at NH Investment & Securities, said, “Construction companies have secured cash equivalents through existing policies, and considering the government’s will to actively respond to policies, the possibility of it turning into a systemic risk is judged to be limited.”
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