As the status of commercial banks’ total bad project financing (PF) loans deteriorates, the government will unveil measures to support bad PF loans
As early as next month, South Korea’s financial authorities are poised to announce a package of measures to support bad PF loans to prevent a chain of construction companies going bankrupt.
According to an industry source on July 12, 11 trillion won worth of debt, which accounts for 30 to 40 percent of total PF loans (28.1 trillion won), will be due this year. More specifically, an average of 39.2 percent of PF loans from South Korea’s four major commercial banks – KB Kookmin Bank, Shinhan Bank, Woori Bank, and Hana Bank – will mature this year. For some other banks, more than 50 percent of their loans will mature.
Commercial banks plan to recover bad or unprofitable loans among matured PF loans, a result of the depressed construction market.
The Financial Supervisory Service (FSS) estimates that risky loans make up around nine percent of the total PF loans in the entire banking system. That figure comes to 2.6 trillion won of the total 28.1 trillion won.
The real concern is that PF loan defaults for commercial banks is very likely to ratchet up the risk of PF loan defaults for shadow banks. In a number of cases, a consortium of shadow banks made PF loans to construction companies, with commercial banks making such loans to the same companies.
Accordingly, financial authorities are going all out to come up with a set of measures to avoid PF loan default.
The FSS plans to increase financial support from the PF Normalization Bank – a bad bank set up to buy bad loans from banks with huge toxic assets and normalize the financial state. In other words, after banks make additional investments in the private equity fund of the PF Normalization Bank, the bad bank will buy their bad PF loans at a discounted price.
At a special guest meeting at the Korea Chamber of Commerce & Industry (KCCI) on July 11, Kim Seok-dong, chairman of the Financial Services Commission (FSC), said, “As part of the plan to supply liquidity to construction companies, we will purchase nonperforming PF loans and issue additional primary collateralised bond obligations (CBO) via the PF normalization bank.”
One Third of Construction Companies Cannot Make Interest Payments
Meanwhile, studies show that one third of general construction companies are not generating enough operating profits to cover interest expenses. The Construction Association of Korea released a report that analyzed the financial statements of 10,275 general construction companies called “The 2011 Analysis of the Management of Korean Construction Companies” on July 17.
According to the report, 17.2 percent of these companies incurred net losses last year. The figure is equivalent to 1,761 companies. 36.4 percent (3,740) of these companies maintained an interest coverage ratio of less than 100 percent, up 12.3 percent from 24.1 percent in 2010.
The interest coverage ratio measures the number of times a company can cover the interest on its debt with its earnings. A ratio below 100 percent means that a company’s operation profits cannot pay off the entire interest.
The ratio of operating profit to net sales stood at 4.1 percent, down 0.9 percent from 5.0 percent in 2010. The interest coverage ratio fell from 269.4 percent in 2010 to 227.1 percent in 2011. As construction companies sold their assets to improve their financial portfolio, their total asset growth rate dropped 1.8 percent from 2010.
The sales growth rate jumped from 3.9 percent in 2010 to 8.1 percent in 2011 on the back of a rise in sales in the non-construction sector. The liquidity ratio (136.6 percent) and the debt-to-equity ratio (147.1 percent) this year remained unchanged from 2010.
The number of general construction companies declined to 11,545 in late 2011, down 411 from 11,956 in late 2010. 847 companies had their registration cancelled last year and 536 new companies started business during the same period.