Financial authorities announce construction loan restructuring plan to prevent collapse

The FSC and FSS will use a new evaluation standard and offer incentives to construction companies in a bid to promote restructuring.

Financial Services Commission Secretary-General Kwon Dae-young speaks during a press briefing on the government's latest plan to induce a soft landing for project financing loans in the real estate sector at the government complex in central Seoul on Monday. [NEWS1]

Korea’s financial authorities will facilitate a restructuring of the cash-strapped real estate sector with a possible 5 trillion won ($3.7 billion) in funding and a new evaluation standard to assess business feasibility.

The plan was announced on Monday by the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), in a bid to achieve a “soft landing” of the 230 trillion won in real estate project financing loans.

The potential liquidity crunch in the real estate sector has been considered Korea’s “economic powder keg,” as FSS Gov. Lee Bok-hyun put it earlier this year, since the Legoland-related debt default incidence in 2022.

Amid high interest rates and strong inflation, the delinquency risk of project financing loans in the construction sector has further soared due to slow market demand and a steep increase in operational costs.

The latest plan by FSS and FSC aims to encourage companies to enter the restructuring process instead of merely delay the resolution of liquidity risks.

Under the plan, the government will implement a stricter standard in assessing the financial feasibility of projects by refining the evaluation grade from the current three to four, and expanding the scope of evaluations to additional risk factors such as land mortgage loans. With the categorical expansion, the total value of projects subject to a feasibility assessment is upped from the previous estimation of 135 trillion won to 230 trillion won.

The authorities will encourage those in the bottom two segments — which are estimated to account for about 5 to 10 percent of the total — to engage in a restructuring, such as a voluntary sale or auction, through incentive measures and funding support.

The financial firms will use the new assessment standard starting next month.

For companies that undertake a restructuring, banks and insurance firms will establish a 1-trillion-won syndicated loan to provide temporary liquidity support, which will be expanded to up to 5 trillion won if necessary.

“The excessive accumulation of project financing loan risks may cause a liquidity crunch in the funding supply even for unproblematic projects, leading to a potential delay in construction and ultimately to a supply shortage in the real estate market,” said FSC Secretary General Kwon Dae-young.

“The government will continue to closely communicate with the media, the financial sector and construction companies to improve predictability and reduce any uncertainties,” said Kwon.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]