Banks to Extend Emergency Loans to Construction Firms
By Na Jeong-ju
Staff Reporter
Banks are seeking to take measures to rescue small and mid-sized construction firms that are suffering from financial difficulties due to sluggish home sales, bank officials said Tuesday.
Officials in charge of corporate loans met at the Korea Federation of Banks building in Seoul last week to discuss how to deal with soaring default risks of loans to smaller builders.
``One of the key topics of the meeting was worsening financial conditions in small construction firms,'' an Woori Bank spokesman said. ``Participants exchanged views on the loans extended in the form of project financing and what measures they can take to ease debt burden on the builders.''
Banks may agree to extend the maturity of asset-backed securities and bonds issued by builders to give them more time to service their debts. Some firms in deeper financial trouble may get bailout funds, the spokesman said.
The meeting came amid concerns that construction firms will be exposed to greater risks of bankruptcy if home sales remain sluggish.
A number of cash-strapped smaller builders got project financing loans from banks to complete construction of apartments on condition that they will pay back debts after selling the apartments.
When the housing market is bullish, the project financing is gainful for both lenders and builders. However, builders can go under if they fail to sell homes, and it can damage banks too.
``Banks will announce necessary measures soon to ease default rates on the PF loans,'' the Woori official said. ``It will be inevitable for some builders to scrap investments and tighten their belts to improve cash flows. It is bad news for the whole construction industry, too.''
Strict regulation on housing mortgages and tax policies have cooled down the real estate market, and unsold new apartments have been piling up around the country. While new apartments in popular metropolitan areas continue to draw investors, the number of unsold new apartments in the provinces has increased.
Mid-tier constructors Shinil and Sejong have declared bankruptcy and a number of other builders, especially those based in provinces are projected to be on the verge of bankruptcy.
``Some builders have lowered the prices of new apartments to sell them as quickly as possible,'' an official from the Construction Association of Korea said. ``However, demand for homes is showing no signs of picking up amid strong anti-speculation measures and tougher lending standards at banks.''
Analysts say they are paying keen attention to how the country's mortgage market will respond to the global financial market turmoil.
The average mortgage delinquency rate at banks and other lending institutions may soar in the coming months with more households and firms finding it increasingly difficult to cover interest payments and pay debts amid rising interest rates, they said.