Financial risks weigh on Lotte E&C's bids for construction projects

Daewoo E&C CEO Baek Jung-wan, left, and Lotte E&C CEO Ha Suk-joo / Courtesy of each company

Jungheung-owned Daewoo E&C wins battle to build redevelopment project

By Park Jae-hyuk

Concerns over Lotte E&C's financial soundness are widely being seen as the main reason the builder lost to Daewoo E&C in a bid to win a 790-billion-won ($563 million) order to redevelop a 115,000-square-meter site in Yongsan District in central Seoul, according to industry officials, Sunday.

During last Saturday's vote to select the builder to take charge of the largest redevelopment project for the second half of this year, Daewoo E&C won 410 votes, while Lotte E&C got 342 votes. As a result, Daewoo E&C will be able to build its Hannam Summit apartment complex in Area 2 of the Hannam Redevelopment Zone.

In order to win the hearts of landlords, Daewoo E&C had particularly emphasized that the company has 2.2 trillion won in cash, unlike its competitor, which had been rumored to have gone bankrupt.

“Without fundraising from external investors, we can brace for potential risks regarding the repayment of short-term debts and guarantee of project financing,” a Daewoo E&C official told the land owners.

A rendered image of the Hannam Summit apartment complex to be built in Area 2 of Hannam Redevelopment Zone in Yongsan District, central Seoul / Courtesy of Daewoo E&C

Amid the bond market crisis last month in the wake of a default in project financing for the construction of the Legoland Korea Resort in Gangwon Province, a rumor spread among securities industry officials that Lotte E&C is facing difficulties repaying its debts for project financing.

Although the company immediately denied the rumor, concerns have grown further since the builder borrowed money from its parent, Lotte Chemical, as some investors regard the move as proof that Lotte E&C is on the verge of bankruptcy.

Against this backdrop, Lotte E&C tried to defeat Daewoo E&C, mentioning the fact that Daewoo E&C had been under the control of financial authorities until recently and the builder was acquired by its smaller rival, Jungheung Construction, a mid-size construction company based in Gwangju.

In addition, Lotte E&C reported a Daewoo E&C employee to the police earlier this month, claiming that the worker trespassed in the absentee voting venue. Daewoo E&C refuted the claim, saying that the employee was a part-time worker helping with parking and elderly landlords.

Despite Lotte E&C's attempts to win the battle, more land owners picked its competitor. Lotte E&C has yet to raise an objection to the ballot.

Given that some of the landlords expressed concerns over Lotte E&C's financial soundness before their voting, the builder is feared to lose in bids for other redevelopment projects, unless it dispels worries over its liquidity by proving its capability in risk management.

Jungheung Construction, on the other hand, hit the jackpot, only a year after it took over Daewoo E&C for 2.1 trillion won last December from the state-run Korea Development Bank.