As the Financial Supervisory Service put a brake on Sangji Construction's paid-in capital increase, a "red light" has turned on for securing pre-main PF operating funds for the residential project "Sangji Kyle Room Escala" in Nonhyeon-dong, Gangnam, Seoul. There are concerns that if securing operating funds through the paid-in capital increase is delayed, it could also disrupt the push for the main PF.
According to the Financial Supervisory Service's electronic disclosure system on the 22nd, Sangji Construction's securities registration statement was suspended after it was asked by the Financial Supervisory Service to submit a correction report on the 19th. As a result, the paid-in capital increase schedule of 18.7 billion won, which had been pursued with payment targeted for July 30, is expected to change. The company said it will immediately submit a supplemented correction report and will recalculate and disclose the issue price and issuance schedule.
The Financial Supervisory Service explained the grounds for the correction request, saying, "This falls under cases where there is a false entry or indication regarding important matters in the securities registration statement, where important matters have not been entered, or where the entries or indications of important matters are unclear, potentially hindering investors' rational investment decisions or causing significant misunderstanding." Earlier, in May, the Financial Supervisory Service also requested a correction report once, and Sangji Construction submitted a correction report on the 5th of this month but was asked again to make corrections.
Sangji Construction plans to lend the entire 18.7 billion won to be raised through this paid-in capital increase as operating funds to its subsidiary Kyle Room Dosan. Kyle Room Dosan is the project developer of "Sangji Kyle Room Escala." The company estimates that about 19.1 billion won will be needed to push the project forward until the main PF approval. The funds are slated to be used for supervision fees, design fees, financing costs, promotion hall operating expenses, and preparations for the start of the main construction. The project is currently in bridge loan refinancing prior to the main PF and is carrying out foundation and civil engineering work.
The market is voicing concerns that if the paid-in capital increase schedule is prolonged, securing the operating funds needed before conversion to the main PF could be hindered. The developer typically raises initial project costs such as land costs through a bridge loan and then secures long-term funds through the main PF. If it cannot cover interest, design fees, and permitting costs incurred before main PF approval, the project schedule could be delayed.
Sangji Construction wrote in the securities registration statement, "If fundraising is not smooth in the stage before conversion to the main PF, permitting delays, disruptions to the start of the main construction, and delays in PF approval may occur." To receive payment for the paid-in capital increase on July 30 as planned, the securities registration statement must take effect by early July, so if the Financial Supervisory Service's correction requests continue, securing operating funds could be hindered.
Even if the securities registration statement is approved again, whether the paid-in capital increase will draw strong demand remains a variable. This paid-in capital increase is being conducted as a shareholder-priority public offering, and there is a precedent where a large volume of convertible bonds (CB) converted during a period when the stock surged as part of a presidential election theme was dumped on the market, creating downward pressure on the share price and undermining market trust.
In particular, because this paid-in capital increase is for operating funds, the burden of arranging alternative funds is expected to grow if the fundraising fails. A Sangji Construction official said, "We view this fundraising as the last financing before the main PF," and explained, "If the paid-in capital increase fails, we will have to raise funds through borrowing." If the company turns to borrowing, market interest rates are said to be around 10%.
The market is also watching the feasibility of executing the main PF itself. Sangji Construction plans to pursue procedures to raise zoning and change use to improve the project's profitability. After the target site is selected for the zoning upgrade, it must go through subsequent steps such as review by the Urban Architecture Committee, design changes, a reassessment of profitability, and recruitment of lenders. If permitting is delayed, the timing for executing the main PF could also be pushed back. In that case, the burden of financing costs such as bridge loan interest could increase, and the need to secure additional operating funds could arise.
Whether the main PF is executed is also expected to affect Sangji Construction's revenue recognition. Of the company's roughly 70 billion won in contract volume, 57.4 billion won is under conditional contracts premised on executing the main PF or completing financing. If the PF conversion is delayed or falls through, the certainty of that amount could become unclear.
The possibility of recovering funds from Kyle Room Dosan is also a variable. Sangji Construction holds about 70.1 billion won in receivables related to Kyle Room Dosan, including construction accounts receivable, long-term lending, and accrued income. While it views the execution of the main PF and pre-sales proceeds as the primary sources of recovery, if the project is delayed or the PF is not approved, repayment of the lending could be delayed or impaired.
However, the company explained, "It is currently possible to execute the main PF with the existing permits alone, but we are implementing a zoning upgrade in permitting to maximize the project's profitability from the company's standpoint." It said that if, after the zoning upgrade, luxury villas are arranged in high-rise configurations, higher pre-sale rates, including through pre-subscriptions, are expected.