Credit crunch crisis looming for builders

                                                                                                 Legoland, an amusement park in Gangwon Province, remains closed, Nov. 15. Korea Times file
Legoland, an amusement park in Gangwon Province, remains closed, Nov. 15. Korea Times file

By Lee Kyung-min

The local construction industry is bracing for a series of bankruptcies at builders in a much-dreaded chain reaction prompted and exacerbated by widespread project financing (PF) failures over the past few months, industry watchers said Sunday. PF is the financing of long-term infrastructure, industrial projects and public services using limited recourse financing schemes. The debt and equity used to finance the relatively high-risk projects are paid back from the cash flow generated by the project, rather than from collaterals put up before the projects.

At the center of the concern is the default of a local developer of Legoland in October, which was guaranteed and operated by the municipal government of Gangwon Province. The unexpected failure to refinance the maturing debt of about 205 billion won ($159 million) led to a rapid tightening of borrowing conditions for mid- to small-sized construction firms, already devastated by post-pandemic, inflation-countering sharp key rate hikes.

Further compounding the predicament are soaring prices of key global commodities, and a two-week walkout by unionized truckers that incurred at least 4 trillion won in economic damages.

Experts say the harsh business and consumer sentiment should be able to find a breakthrough, as enabled by eased real estate and related financial market regulations to induce a soft landing of the country’s key growth drivers.

Domino effects

According to the Construction Association of Korea, five large construction firms have defaulted on their loans since January. Three were in Busan and two were in South Gyeongsang Province.

Data from Korea Information Service for Construction, a land ministry-affiliated web data provider, showed 180 builders have closed down in the second half of this year, up more than 30 percent from a year earlier.

Among them are Dongwon Construction, a mid-sized construction company in Changwon, South Gyeongsang Province, with reported annual sales of 50 billion won last year. The 18th-largest firm in the province and the 388th nationally, the builder with over two decades of experience defaulted after failing to pay a combined 2.2 billion in accounts receivables last month.

The worst has yet to come.

The Construction and Economy Research Institute of Korea said 31 out of 233 construction sites operated by 40 builders said in October that their projects were being delayed or had been suspended.

Two-thirds of the respondents attributed difficulties in PF to the project delays. It was followed by stagnant construction costs and raw input materials supply disruptions.

More than 66 percent said the business conditions will turn around in the next month or two.

Source: Korea Times