Banks Moving to Rescue Small Builders
By Na Jeong-ju
Staff Reporter
Banks will soon take measures to rescue small- and medium-sized construction firms that are suffering from financial difficulties due to sluggish home sales, bank officials said Tuesday.
Officials in charge of corporate loans will meet at the Korea Federation of Banks building in Seoul late this month to discuss ways to deal with soaring default risks of loans to smaller builders.
``One of the key topics of the meeting is the worsening financial conditions of small construction firms,'' a spokesman for the Korea Federation of Banks said. ``Participants will exchange views on loans extended in the form of project financing (PF) 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 comes 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 received PF loans from banks to complete construction of apartments on the condition that they pay back the debts after selling the apartments.
When the housing market is bullish, project financing is gainful for both lenders and builders. However, builders can go under if they fail to sell homes, and it can hurt banks too.
``Banks will announce necessary measures early next month to ease default rates on the PF loans,'' the spokesman said. ``It will be inevitable for some builders to scrap investments and tighten their belts to improve cash flow. This 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 the 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.