This article was displayed on the ChosunBiz MoneyMove (MM) site at 5:49 p.m. on Jul. 20, 2026.
As the slump in the real estate market and the burden of contingent liabilities from project financing (PF) continues, construction companies are moving one after another to issue hybrid capital securities. With investor sentiment toward the construction sector still weak in the public corporate bond market and the need to manage the debt ratio growing, perpetual bonds that can be recognized as equity in accounting are being used as a tool to defend financial statements.
According to the investment banking (IB) industry on the 20th, major construction companies such as Lotte Engineering & Construction, GS Engineering & Construction, HL D&I Halla Co., Ltd., Kumho E&C, and POSCO E&C have recently issued or are pursuing the issuance of hybrid capital securities. Hybrid capital securities typically have a maturity of 30 years or more and are structured so that if the issuer does not exercise a call option, the maturity can be extended. If certain conditions are met, they are classified as equity rather than liability in accounting, which reduces the debt ratio.
On the 29th, Kumho E&C issued 30 billion won of hybrid capital securities at an annual interest rate of 7.0%. Following large construction companies last year, mid-sized construction firms now also appear to be increasing their issuance of hybrid capital securities.
POSCO E&C is also set to issue 400 billion won of hybrid capital securities. The interest rate is a floating rate that adds 1.20 percentage points to the base rate. It is understood that a step-up clause applies, under which the rate rises each year if the call option is not exercised after three years.
Lotte Engineering & Construction issued hybrid capital securities totaling 700 billion won in two tranches of 350 billion won each in Dec. last year and Jan. this year. The issuance rate was 5.8% per year, and Korea Investment & Securities Co. acquired the entire amount through a special purpose company (SPC). Lotte Engineering & Construction has said that issuing hybrid capital securities lowered its debt ratio from 214% in the third quarter of last year to the 170% range.
GS Engineering & Construction also issued 200 billion won of hybrid capital securities in Dec. last year for the first time since its founding. After the issuance, its debt ratio, which had been in the 240% range, fell to the 227% range. HL D&I Halla Co., Ltd. issued 80 billion won of hybrid capital securities at an annual rate of 6.525% in Sep. last year, reducing its debt ratio from around 305% to about 250%.
The biggest reason construction companies choose hybrid capital securities is that they can be recognized as equity, but not all hybrid capital securities are recognized as equity. If the contract has clauses that effectively force repayment or if it is structured so that interest payments cannot be deferred, there is room to treat them as liabilities.
For that reason, some view hybrid capital securities as effectively close to high-interest borrowing. Even if they are classified as equity in accounting, issuers must pay interest regularly, and in many cases a step-up clause is attached under which the rate rises if the call option is not exercised after a certain period. In the case of Kumho E&C, the initial rate is 7.0% per year but rises to 9.5% after two years. Lotte Engineering & Construction is also known to have a step-up clause after three years. If operating cash flow does not recover, the interest burden can grow over time.
The risk is not low for investors either. Hybrid capital securities are subordinated, with repayment priority behind that of ordinary corporate bonds. If the issuer's credit risk increases, the likelihood of recovering principal and interest may be lower than for ordinary bonds, and this risk premium is reflected in the rate.
A structure in which securities firms underwrite hybrid capital securities through SPCs and then sell them down is also spreading. Construction companies can secure large amounts of capital even when it is difficult to gather demand directly in the public bond market, and securities firms can spread investor demand through structuring and sell-downs. In this process, partnerships between securities firms and construction companies stand out. However, if sell-downs do not go smoothly or issuer credit concerns grow, securities firms may be burdened with holding the inventory.
Another funding method that corporations have accounted for in a way that does not raise book debt ratios is the price return swap (PRS) transaction. But as uncertainty has grown recently over PRS accounting treatment, new deals have stalled. The Korea Accounting Standards Board is continuing discussions on PRS accounting treatment but has not yet reached a conclusion. If PRS is recognized as a liability, the effect of improving financial indicators will be limited for issuers.
Some say that for construction companies with high debt ratios to begin with, issuing hybrid capital securities is a better option than PRS transactions. PRS largely functions to secure liquidity using holdings such as stocks as underlying assets, whereas hybrid capital securities increase total equity and directly lower the debt ratio. For construction companies with limited assets, such as stakes in listed subsidiaries, that can be used for PRS, perpetual bonds are more useful.
An IB industry source said, "PRS transactions are often done with an eye to actually selling the shares, but construction companies appear to be different," and added, "Hybrid capital securities are one of several funding tools, but some companies prefer them because they are recognized as equity even if the rate is set slightly higher than for corporate bonds."