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More companies face credit downgrade risks due to project financing exposure
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By Lee Kyung-min
A growing number of small brokerages and construction firms have suffered either credit ratings downgrades or lower credit outlook prospects over the past month due mostly to elevated risks associated with real estate project financing, market watchers said Monday.
The development follows fears of a combined 12 trillion won ($9.1 billion) in project financing risk exposure certain to wipe out bridge loan-tied credit by next June. A bridge loan is a high-risk, high-interest loan operated mostly by securities firms and savings banks for the short term.
According to Korea Ratings, Korea Investors Service and NICE Investors Service, five companies with heightened exposure credit risks were Hi Investment & Securities, Daol Investment & Securities, Daishin F&I, Shinsegae Construction and M Capital. They are among 12 companies facing overall credit downgrade risks.
The credit outlook for Hi Investment & Securities was downgraded to “stable” down from positive. Its A-plus rating was maintained.
Korea Ratings said the brokerage had a risk exposure of about 980 billion won as of September, 57 percent of which was in bridge loans. About 73 percent of its borrowings were of medium to low priority.
“The insolvency risk of bridge loans is increasing since most short-term loans are not being rolled over into main long-term borrowing due to delays in real estate project financing,” Korea Ratings said.
“Even if the long-term project financing loans materialize, deterioration of the firm’s financial soundness is highly likely to accelerate due to a high proportion of subordinated non-apartment construction projects in their portfolios. We need to monitor the asset quality of brokerages in the context of the prolonged project financing market slump.”
The ratings agency also lowered ratings outlook for the unsecured bonds of Daol Investment & Securities to “negative” from “stable.”
The bleaker outlook came despite the selloff early this year of Daol Investment, the brokerage’s investment arm, which market watchers said narrowly dodged a full-fledged credit crunch.
The securities firm has a combined 483 billion won in project financing-related debt and corporate loans, taking up 64.7 percent of its equity capital, the agency said.
“Over 90 percent of the debts are of medium to low priority. Its bridge loans amount to 30 percent of the total, raising the debt quality concerns,” it said.
NICE Investors Service and Korea Investors Service both lowered their credit outlooks for M Capital, a lease financing lender, to “stable” from “positive.”
Korea Investors Service and Korea Ratings lowered their credit outlooks for unsecured bonds of Shinsegae Construction to “negative” from “stable.”
Korea Investment & Securities researcher Kim Ki-myoung said more credit downgrades are in store in the real estate project financing industry.
“A sustained slowdown in the project financing industry will lead to downgrades of credit ratings and credit outlooks in the months to come,” Kim said.