Korean public housing agencies up bond issuance amid property slump

Korea Housing Finance Corp. [Courtesy of KHFC]

The slowdown in the South Korean real estate market since last year has fueled bond issuance by public housing agencies as they struggle to raise funds due to sluggish construction and sales.

According to the Korea Housing Finance Corp. (KHFC) and the Korea Financial Investment Association (KOFIA) on Tuesday, the KHFC issued 3.31 trillion won ($2.55 billion) in corporate bonds in the first five months of this year, up 65.5 percent from 2 trillion won a year ago. The increase is the second largest among all public companies that issued corporate bonds.

The increase in debt issuance is attributed to the slowdown in the property market rather than new business expansion.

When the housing market is active, a large amount of funds is drawn to the corporation as previous borrowers pay off their existing loans early to purchase new homes.

The housing agency uses a considerable portion of that money to pay off matured mortgage-backed securities (MBS). However, it had to issue bonds as real estate transactions dipped from last year.

Korea Land and Housing Corp. (LH), which ranked fourth in terms of bond issuance growth with an increase of 800 billion won, also took a hit by the real estate slump.

LH, along with the Korea Electric Power Corp. (KEPCO), was one of the institutions that saw a large increase in bond issuance in the past few years to finance the land compensation for the third-phase new town development, but bond issuance was expected to fall from this year as the land compensation drew to a close.

However, the size of bond issuance increased as concerns grew over possible insolvencies of real estate project financing (PF) and an increasing number of developers failed to pay for land purchased from LH.

“A prolonged real estate downturn may severely damage the financial soundness of public companies in the frontlines,” said an unnamed industry insider who asked to be unnamed.