The operating loss of Shinsegae Construction increased by 60% compared to the previous quarter in the third quarter of 2024 (July-September), exceeding 50 billion won. Cumulatively, the operating loss reached nearly 110 billion won by the end of the third quarter. If this trend continues into the fourth quarter, there is a possibility that the annual operating loss for 2024 could exceed 150 billion won. There is a high likelihood of continuing deficits for three consecutive years since 2022.
Shinsegae Construction raised 650 billion won in the financial market last year through 30-year maturity new capital securities (perpetual bonds). The interest rate on the perpetual bonds is in the 7% range, resulting in annual interest payments exceeding 46 billion won. Starting from 2027, three years later, there is also a stepping-up clause that increases the interest rate. In February, it will be delisted and incorporated as a wholly-owned subsidiary (100% equity) of its parent company, Emart, which may have long-term negative effects on Emart's financial structure. The credit rating industry is concerned that if the leasing performance of the projects that Shinsegae Construction is undertaking does not improve, there could be additional losses such as receivables.
According to the construction industry and the Financial Supervisory Service on the 8th, the operating loss of Shinsegae Construction in the third quarter of 2024 (July-September) is 52.814 billion won, an increase of 60.2% (19.866 billion won) compared to the previous quarter (32.948 billion won). The cumulative operating loss by the end of last year's third quarter was 109.088 billion won. Accordingly, it is expected that it will continue to post deficits for three consecutive years following operating losses of 12.042 billion won in 2022 and 187.781 billion won in 2023.
Shinsegae Construction will be incorporated as a wholly-owned subsidiary of Emart following delisting in February. If the financial structure of Shinsegae Construction does not improve rapidly, there is a possibility of negatively impacting the overall financial situation of the Emart Group. On February 4, Emart plans to acquire all the remaining 915,252 shares at a cash price of 18,300 won per share, excluding the 6,845,302 shares (88.21%) that Emart holds.
After being incorporated as a wholly-owned subsidiary of Emart, Shinsegae Construction will need to pay interest on the 650 billion won it borrowed from NH Investment & Securities, Korea Investment & Securities, and Shinhan Investment & Securities, through 30-year maturity new capital securities (perpetual bonds) issued on May 29 last year. The interest will be paid quarterly, with the first interest payment this year set for February 28. Based on the current interest rate (7.078%), Shinsegae Construction's annual interest burden is 46.007 billion won.
Starting from May 29, 2027, the date marking three years since the issuance of the perpetual bonds, early redemption of the perpetual bonds can be made on each interest payment date. However, if not redeemed, a stepping-up clause will apply, increasing the loan interest rate each year. From May 29, 2027, to May 29, 2028, a rate of 9.578%, which is 2.5 percentage points added to the existing rate, will apply, and from May 29, 2028, to May 29, 2029, a rate of 10.078%, which is 3 percentage points added to the initial interest rate of 7.078%, will apply. After that, the interest rate will rise by 0.5 percentage points each year. Emart has entered into a funding supplement agreement regarding the Shinsegae Construction perpetual bonds, obligating it to lend funds if there is a shortage of repayment funds. As of the end of the third quarter, Shinsegae Construction's project financing (PF) contingent liabilities were 250 billion won (300 billion won in PF + 220 billion won in bridge loans).
Korea Ratings evaluated Shinsegae Construction, stating, "While group-level support has intensified, alleviating short-term liquidity risk, the practical burden of borrowing has significantly increased, considering the stepping-up clause related to the new capital securities." Additionally, it expressed concern that if cash flow improvements do not accompany enhanced leasing performance in ongoing projects, additional losses related to poor leasing performance and construction receivables could arise, further deteriorating the financial structure due to interest expenses from the new capital securities. Choi Han-seung, Deputy Minister of the Corporate Evaluation Department at Korea Ratings, explained, "Since Shinsegae Construction is applied on a consolidated basis with Emart, the 650 billion won borrowing fund should be regarded as Emart's borrowing. We are already analyzing Emart's credit rating based on this."
Seo Min-ho, a senior researcher at Korea Credit Rating, stated, "It is a point in time to monitor how Emart will quickly improve Shinsegae Construction's financial structure through the restructuring of distressed PF projects after being incorporated as a wholly-owned subsidiary."
An Emart official noted, "The group believes that it is important to improve Shinsegae Construction's financial status," adding, "We expect the financial status to improve once the current unsold inventory is resolved." The official added, "After incorporating as a wholly-owned subsidiary, we plan to continue business primarily focusing on stable establishments."