The mid-sized construction company Shin Dong-A Construction, famous for its housing brand "Familie," entered court receivership at the beginning of the year. Several financial institutions that provided loans for Shin Dong-A Construction's real estate project financing (PF) business were surprised by the sudden court management news, while the capital sector sighed in relief. This is because the capital companies transferred bonds worth more than 40 billion won to other financial institutions just before Shin Dong-A Construction's court receivership. Within the financial sector, there are whispers that this dramatic bond transfer was a matter of "good luck."
According to a recent report from NICE Credit Rating (NICE), the exposure of capital companies to Shin Dong-A Construction's real estate PF as of the end of last year stood at 13.3 billion won. This marks a decrease of 44 billion won compared to the end of September last year (57.3 billion won). NICE explained that the reason for the short-term reduction in exposure was that "the exposure balance was significantly reduced due to refinancing."
Refinancing is the term used when renewing existing real estate PF loans under new conditions or switching to loans from other financial institutions. Last September, three mid-sized capital companies participated as the main lenders in projects by Shin Dong-A Construction. As time passed, two capital companies had their bonds mature in the fourth quarter of last year. These two capital companies did not extend the maturity and transferred their bonds to other financial institutions. Refinancing occurred. Then, on January 6 of this year, Shin Dong-A Construction submitted an application to initiate corporate rehabilitation proceedings (court receivership) to the Seoul Rehabilitation Court.
The two capital companies that disposed of their bonds breathed a sigh of relief internally. When a borrowing corporation starts the rehabilitation process, financial institutions find themselves in a difficult position. Until the court approves the corporation's rehabilitation plan, the bonds remain in a state of limbo. Financial institutions cannot immediately recover the loan amounts or sell the bonds to other financial institutions. Depending on the court's decision, some of the loan amounts may be repaid, and there are numerous cases where financial institutions do not recover 100% of their loans.
As a result, the two capital companies managed to protect 44 billion won in full, but they did not foresee the troubles facing Shin Dong-A Construction nor did they dispose of the bonds because of it. Until the end of last year, the capital sector did not show particular interest in Shin Dong-A Construction. Dong Young-ho, the chief researcher at NICE, noted that "the capital sector did not anticipate signs of Shin Dong-A Construction's troubles and retrieve the bonds in advance." He added, "Bond transfers between financial institutions are usually active," and emphasized that "coincidentally, the two capital companies exited the main lending group without extending their maturity just before Shin Dong-A Construction's application for rehabilitation."
Within the capital sector, this is viewed as a case where conservative risk management yielded unintended results. Following the workout of Taeyoung Construction, major construction companies strengthened their risk responses, and in this case, the successful avoidance of the previously neglected risks associated with Shin Dong-A Construction came to light. A senior official in the capital sector said, "It seems more like a result of conservative fund management considering the risks in the construction industry rather than focusing on managing Shin Dong-A Construction specifically."