Rollover Refusal and Bankruptcy

The Financial Supervisory Service (FSS) announced on April 14 that the local non-banking sector’s real estate project financing (PF) loan is estimated at 27.7 trillion won in total as of the end of last year: 12.2 trillion of it was held by savings banks; 4.9 trillion by insurance firms; 4.7 trillion by asset management companies; 3 trillion by finance companies; 2.2 trillion by brokerage firms; and 100 billion by merchant banks.

If the 600 billion won in the mutual finance special account of the National Agricultural Cooperative Federation (NACF) deposited by its NH Bank is included, the entire balance amounts to over 28 trillion won, which is about 42% of the total PF loan at 66.5 trillion won.

The problem is that the non-banking sector’s PF loan status is severely unhealthy. The default rate of the entire financial sector has risen from 4.4% at the end of 2008 to 6.4% a year later and then 12.9% late last year. The non-banking sector’s rate is higher than the overall average: brokerage firms at 30%; savings banks at 25%; hire-purchase finance companies at 18%; NACF special account at 15%. In particular, the non-performing loan (NPL) ratio of at least three months overdue has been at 40% for securities firms, 18% for hire-purchase finance companies and 9% for savings banks.

Those in the non-banking sector are calling in loans in a hurry as the PF loan situation is getting deteriorated. Among them, savings banks are more aggressive in rollover refusal. According to relevant regulations, they have to maintain their PF to total loan ratio below 25% from July this year.

Savings Banks’ PF Loans Should Be

Burdened by Commercial Banks?

Under the circumstances, the financial authorities have recently decided to lead some city banks to shoulder around 400 billion won of savings banks’ PF loans. FSS governor Kwon Hyeok-se had a breakfast meeting with local commercial bank heads on April 26 and then told reporters, “Some of them are willing to take charge of those savings banks whose PF businesses can be set in order.” He added, “It seems the government does not have to step in because the matter is supposed to be tackled with the help of the restructuring fund.”

Also, with regard to the creditor consent issue related to Sambu Construction and Dongyang Engineering & Construction both of which filed under the court recently, he remarked that discussions are underway with banks jibbing at it. Earlier, the two construction companies of medium standing sold part of their PF loans in the form of asset backed commercial paper.

Nevertheless, the 400 billion won to be born by commercial banks is seen to arouse controversy. They already have a large amount of PF loans themselves and the action could be a kind of managerial pressure. As of late last year, their PF loans reached a total of 38.7 trillion won. Though the authorities said that they are of their own volition, it could be mentioned that the load was shifted onto them by the government.

As of the end of 2010, 1.1 trillion won out of the 12.2 trillion of PF loan balance of local savings banks falls in the category of NPL. According to what the governor said, it seems that the city banks will be in charge of the healthier portion of the loans excluding the NPL.

Some in the industry, in the meantime, are forecasting that the government may take two measures at a time, i.e. buying in toxic loans with the funds of the Korea Asset Management Corporation (KAMCO

) while handing over the rest of the PF loans to the commercial banks. In fact, Financial Services Commission (FSC) governor Kim Seok-dong said at the recent National Assembly hearing, “We are mulling over spending 3.5 trillion won out of 5.2 trillion of the KAMCO’s restructuring funds to that end.”

The financial authorities announced on April 18 that the unhealthy PF loan issue will be dealt with by means of private bad banks. However, specific solutions regarding savings banks’ loans were not mentioned then.

As of now, it seems that those savings banks will dispose of their toxic loans to the KAMCO in or around June this year, when they settle their accounts for the first half of the year in order to reduce their troubled assets and raise their BIS capital adequacy ratios.

With the amount of the toxic PF loans standing at around 1.1 trillion as mentioned above, the default rate is forecast to be soaring. In the case of savings banks, real estate loans take up no less than 48.5% of their entire loans. As such, the current housing market doldrums could trigger a troublesome chain reaction.

“Every savings bank whose BIS ratio is 5% or below is subject to corrective measures or business suspension after the first-half settlement and that is why they need to deal with the matter without delay,” said the FSC.

Constructors Likely to Feel the

Pinch

Real estate project financing (PF) loans worth 25 trillion won come to maturity within this year. According to the Financial Supervisory Service (FSS), 15.01 trillion won of PF loans mature until this year’s end for the banking and non-banking sectors, respectively. In particular, as many of the expiry dates are in the second quarter, concerns about a PF loan crisis are increasing.

Woori Bank, which has 6.1 trillion won-worth PF loans, sees 1.3 trillion won of them maturing between May and June. For Kookmin Bank, the sum amounts to a trillion during the period. “We are planning to call in some 1.5 trillion won out of the 3.5 trillion maturing this year,” said a Kookmin Bank executive.

In the meantime, local savings banks are finding their PF loans expire mostly in the third quarter. 100 billion won of PF loans of Solomon Mutual Savings Bank and its affiliates mature in the second quarter while the figure goes up to 130 billion for the third. For Hyundai Swiss Savings Bank and its subsidiaries, the sums for the second and the third amount to 100 billion and 1200 billion each while those for Korea Mutual Savings Bank are at 30 billion and 70 billion, respectively.

Construction companies are likely to be more cash-strapped under the circumstances. As of late last year, city banks were engaged in 810 PF businesses and savings banks in 623. “With PF loans maturing soon and creditors’ credit risk assessments scheduled, it seems a lot of construction firms are exposed to some difficulties,” said an industrial expert.

Currently, 31 out of the 100 biggest local constructors are under corporate workout or court receivership. This year alone, five of them ranked between 34th and 49th had to bite the bullet - Dongil Construction, Chinhung International, LIG E&C, Sambu Construction and Dongyang Engineering & Construction. Among them, the last one had recorded surpluses for 17 years in a row and had almost no unsold houses. Nevertheless, it failed to cope with some 200 billion won of PF loans and tumbled in a moment of time.

Local construction companies are in fear of financial institutions, mostly savings banks, retrieving loans cutting them no slack. Some in the industry are even commenting that the 10 biggest are not in a position to ease themselves.

The situation was different a year or so ago. At that time, rollover was commonplace. However, things are the other way around now. Banks are demanding that at least one third of the loan amount be redeemed, and even healthier businesses and more promising construction sites are no exception. Those redevelopment and reconstruction sites in Seoul are the cases in point. There, presale success rates have been at 100% and the projects have been led by the nation’s top 20 constructors.

As of the end of last year, the top 10 local construction firms’ total PF loan guarantee amounted to 22.15 trillion won, over two trillion for each on average. The sum reached 3.95 trillion for Daewoo E&C, 3.31 trillion for SK E&C, 3 trillion for Lotte E&C and 2.51 trillion for GS E&C. Under the circumstances, if financial institutions refuse to roll over the debts, even a market leader with six to seven trillion won of annual turnover could wobble.

“Last year, the trouble was limited mostly to housing constructors, but this year, even civil engineers are finding themselves in danger,” said Kim Seon-deok, head of the Construction Industry Strategy Research. He continued, “The situation is not good for the absolute majority of them, due mainly to the housing market downturn, decrease in government-ordered projects, fiercer competition overseas, etc.”

In fact, the total value of orders local constructors received domestically between January and February this year stood at slightly over 10.87 trillion won, showing a 19.2% year-on-year decrease from 13.45 trillion last year. During the same period, the aggregate from the public sector fell by 36.2% from 4.22 trillion to 2.66 trillion. “Builders are finding it hard to restructure themselves,” said research fellow Kim Hyeon-a at the Construction Association of Korea, adding, “Things are likely to go worse for most of them, with the exception of only a small number of top rankers.”

FSS Goes Dual-track in Tackling Real Estate PF Loan Issue

Meanwhile, the Financial Supervisory Service (FSS) takes a twofold approach of supervision and support to address the real estate project financing (PF) loan matter.

FSS governor Kwon Hyeok-se had a breakfast meeting with 18 local banks’ presidents on April 26 in Seoul. There, he asked them to enhance asset quality while paying more attention to better-performing businesses. Specifically, he called on them to adjust their bad loan ratio target down to 1.5% from last year’s 1.7% and to secure enough bad debt allowance at each PF project site.

“Projects deemed unhealthy should be corrected as soon as possible, but projects with sufficient business values or constructors in a temporary cash flow problem deserve debt rollover and fresh funds,” he emphasized, continuing, “If real estate PF loans are avoided, housing supply could go awry in two or three years and that is why economically viable PF loans of savings banks have to be treated with more care via funds of longer term and larger amount.”