Market sentiment and investor confidence hit by recent filings for receivership by mid-sized developers
(Seoul)
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LOOKING FOR HELP
Among South Korea’s 100 largest construction firms, 29 builders have applied for financial support or filed for court receivership since late last year due to their inability to repay debts |
SOUTH Korea’s financial watchdog said in early May that it will establish a bad bank, a special entity to purchase soured loans owed by builders and property developers.
The Project Financing Stabilisation Bank (PFSB), often called bad bank, will take on as much as one trillion won (S$1.1 billion) worth of non-performing project financing loans starting June, according to the Financial Services Commission (FSC).
The bad bank aims to restructure and stabilise the ailing builder loan market by pooling together soured loans taken out from real estate development projects and simplifying the valuation.
The PFSB will have a form of private equity fund (PEF), which will be operated under the United Asset Management Company (UAMCO), the formerly established private debt clearer funded by a group of commercial banks to purchase non-performing loans. Local lenders, which want to sell off their project financing loans, can participate in the PEF as limited partners.
Participating banks will fund the purchase of insolvent real estate loans according to their individual sell-off size, and the bad bank will raise additional funds necessary to stabilise and revitalise the troubled property development projects. Eight local banks are reportedly considering their participation in the debt restructuring programme.
Market watchers here said the bad bank plan would help ease problems in the construction industry and the troubled builder loan market.
‘The debt restructuring programme will ease risks in the property project financing loan market, the construction sector and the savings bank industry, consequently having a positive impact on the local commercial banks,’ Lee Soo-jung, a credit analyst at SK Securities in Seoul, said in a weekly report.
Some experts, however, warned that mid-sized builders will continue to have trouble refinancing loans connected with their development projects as market conditions have weakened following the recent court receivership filed for by several mid-sized builders.
‘Even though financial institutions are discussing the maturity extension of project financing debts, they are expected to urge mid-sized builders to repay debts. Mid-sized builders need to secure ample liquidity against the refinancing risk,’ Louis Shin, a Seoul-based credit analyst at Woori Investment & Securities, said in a monthly report.
South Korea’s property market started booming in 2005 amid low interest rates. Financial institutions, including savings banks and insurers, ramped up efforts to compete for real estate project financing loans amid the property boom.
The loans owed by builders and developers, however, have reduced since 2008 when the global financial crisis set in. The property market slump, triggered by Lehman Brothers’ collapse, prompted the local financial institutions to collect their real estate debts in a bid to strengthen their credit risk management.
As of the end of 2010, the outstanding project financing loans held by the financial institutions came in at 66.5 trillion won, down 20 per cent from 83.1 trillion won in 2008, according to the Financial Supervisory Service (FSS).
Outstanding loans held by savings banks expanded to 12.2 trillion won at the end of last year from 11.5 trillion won in 2008, but the savings banks are expected to aggressively collect their property loans as they are in the process of restructuring driven by the financial watchdog.
Default rate also rose amid the property slump. The average default rate of the project financing loans in the entire financial sector jumped to 12.86 per cent as of the end of 2010 from 4.39 per cent in 2008, according to the FSS. The default rate for savings banks soared to 25.1 per cent at the end of last year.
Several mid-sized builders applied for financial support due to the banks’ unwillingness to lend money to development projects. Mid-sized builder LIG Engineering & Construction filed for court receivership in March due to its inability to service existing debts. Sambu Construction and Dongyang Engineering & Construction also came under court receivership in April.
Among the country’s 100 largest construction firms, 29 builders have applied for financial support or filed for court receivership due to their inability to repay debts since late 2010. The recent collapse of mid-sized builders worsened market conditions, which also put smaller builders at risk of failing to refinance existing debts.
Despite the fall in project financing loans by commercial banks, local builders and developers have been able to secure necessary funds via securitising future cash flows that will come from their development projects. Project financing securitisation amounted to 25.6 trillion won as at the end of 2010, up from 16.9 trillion won in 2008, according to the FSS.
Builders, however, expanded asset-backed commercial paper (ABCP) with shorter maturities instead of asset-backed securities (ABS) with longer maturities. The outstanding project financing ABCP grew from 14.7 trillion won in 2008 to 21.8 trillion won at the end of last year, while project financing ABS rose by just 1.6 trillion won over the same period.
The project financing ABCP, which is issued by developers and is guaranteed by mid-sized builders, has been mainly sold to retail investors who pursue high-yielding assets. But market confidence among retail investors has been hit following the recent court receivership filed by several builders.
‘Project financing ABCP have been heavily issued since the global financial crisis, raising the refinancing risks due to its shorter maturity compared with ABS. Signs are emerging that mid-sized builders will face the risks at every rollover period amid worsening sentiment of retail investors,’ Mr Shin at Woori said. — Xinhua
Source: The Business Times 17th May 2011