Major credit rating agencies have downgraded their credit rating outlook for mid-sized construction company BS Hanyang. BS Hanyang was previously a key affiliate of Hanyang Group and constructed the Hanyang Apartments in Apgujeong, Seoul. It was acquired by Bosung Group in 2004 and is currently supplying apartments under the 'Sujiin' brand. The construction capability evaluation rank is 37th (based on 2024).
In the regular evaluation conducted in the first half of this year, Korea Ratings and Korea Credit Ratings downgraded BS Hanyang's outlook for its unsecured bonds from 'BBB+ positive' to 'BBB+ negative.' The assessments from the credit rating agencies noted that short-term borrowing funds have rapidly increased, and the scope of business guarantees in project financing has also expanded significantly, leading to a deterioration in financial condition.
According to the credit rating industry on the 9th, Korea Ratings and Korea Credit Ratings have both downgraded their outlook for BS Hanyang's unsecured bonds in the first half of this year. Both companies adjusted the credit ratings outlook for BS Hanyang after the company's first-quarter (end of March) financial indicators were finalized in April and May. Korea Ratings made its adjustment on April 15, while Korea Credit Ratings did so on May 12.
The company's bond rating of BBB+ indicates that while its debt repayment ability is acknowledged, there is a possibility that its capacity to repay debt may decline depending on economic conditions or environmental changes, compared to companies rated A or higher. It is the lowest rating among investment-grade ratings. The adjusted outlook by Korea Ratings and Korea Credit Ratings for BS Hanyang is an indicator of whether the credit rating may change. A positive outlook means that the credit rating is expected to improve within the next 1 to 2 years, while a negative outlook suggests a potential downgrade.
Both agencies cited the deterioration of BS Hanyang's financial indicators as the reason for adjusting the credit rating outlook. They analyzed that the increase in external borrowing funds and business guarantees related to affiliates and other special relationships have worsened the financial condition. This means that borrowing money from outside and lending money to affiliates and other related companies is impacting corporate financial soundness.
According to Korea Credit Ratings, BS Hanyang's net borrowing funds as of the first quarter (end of March) amounted to 424.9 billion won (based on separate accounts). This reflects an increase of more than 15 times compared to the end of December 2022 (28.2 billion won) in just over two years.
The funds lent to affiliates exceeded 170 billion won. The affiliate development company 'Solar Cido Golf & Village' is developing a golf course and 2,000 housing units (apartments) over an area of 20.9 million square meters (about 6.32 million pyeong) in Sani-myeon, Haenam-gun, Jeollanam-do and Samho-eup, Yeongam-gun, and BS Hanyang loaned 30.8 billion won as of the end of March. The golf course has opened, but construction and sales of the housing units have not yet begun. Funds were also lent to Gwangyang G-IA (46 billion won), Haewon ST (38 billion won), and Healthy People (20 billion won).
Investments in energy projects, including Gwangyang Green Energy (80% stake), Northeast Asia LNG Hub Terminal (60% stake), and floating solar energy, have also exceeded 200 billion won. Jeon Ji-hoon, a research fellow at Korea Credit Ratings, said, "Since affiliates are engaged in many development projects, lending has continued, and there have been many equity investments and guarantees related to energy projects and biomass development, which has increased the financial burden."
An industry source noted, "BS Hanyang's cash flow is relatively good compared to some mid-sized companies that have extremely poor cash flow," adding, "Its liability ratio is stable compared to other construction companies."
BS Hanyang explained, "Due to the nature of energy projects, large-scale capital expenditures are required until completion, which has led to increased borrowing funds," and noted, "Due to procedures such as business licensing and site development, it takes a long time to complete, and revenue generation is possible in the operational phase thereafter."
This suggests that the judgment of credit rating agencies, which analyzed investments in energy projects as financial risks, may be problematic. BS Hanyang stated, "The credit rating agencies only focused on the quantitative increase of increased borrowing funds," adding, "They did not reflect the change due to investments aimed at diversifying construction risks and the conversion of investment funds into revenue-generating assets."