Despite construction companies suffering cash shortages amid a slump in the construction market, major mutual aid associations, which function as a kind of construction-focused bank, have recently received successive A+ credit ratings from global rating agencies.
According to the construction industry on the 10th, the Construction Guarantee has recently received an insurer financial strength (IFS) rating of A+ from Fitch Ratings, one of the three major global credit rating agencies. This is one notch higher than the previous A rating and means strong claims-paying ability and low default risk based on a sound financial structure. The outlook was assigned as stable.
Construction Guarantee's capital adequacy is considered strong. As of the end of 2024, the regulatory capital ratio was 231.6%, above the supervisory standard of 100%, and total capital also remained at about 650 billion won. In this assessment, Fitch said, "Construction Guarantee plays a very core policy role in Korea's construction industry and has strong links with the government." Under the supervision of the Ministry of Land, Infrastructure and Transport, it has contributed to trust and stability across the construction industry.
Construction Guarantee also had its insurer financial strength credit rating of A2 reaffirmed by another global rating agency, Moody's, and its outlook was raised to stable from negative. Moody's also said, "Although Construction Guarantee does not hold government equity, there is a high likelihood of business and financial support from the government through the Ministry of Land, Infrastructure and Transport in times of need," adding, "The rise in the association's regulatory risk-based capital ratio and the mitigation of risks following changes to subcontract payment guarantee terms have contributed to improved capital adequacy."
The Specialty Contractors' Mutual Aid Association also received an A+ credit rating from Fitch in June, up one notch from A. In Sept., it received an A+ rating from Standard & Poor's (S&P), one of the three major rating agencies. As of the end of last year, the specialty association's risk-based capital ratio was 485%, and its capital stood at 620.36 billion won. Last year's operating profit was 297.7 billion won, and net profit was 153.5 billion won.
These mutual aid associations provide guarantees and loans needed by member general construction companies. If a construction company fails to pay lending funds to a partner or subcontractor, the mutual aid association that provided the guarantee pays on its behalf and later recovers the money. In other words, an increase in subrogation payments can be seen as a barometer of a deteriorating construction market.
However, as the construction slowdown continues, more construction companies are failing to repay their dues. According to the construction industry, Construction Guarantee's subrogation payments surpassed 150 billion won in the first half of this year. That was up 30.4% from the same period last year (115 billion won). They were reported to have exceeded 190 billion won in Sept. Annual subrogation payments have increased every year: 61 billion won in 2022, 183.1 billion won in 2023, and 221.8 billion won in 2024.
A construction industry official said, "With high interest rates and a strong dollar-won exchange rate, financial soundness is weakening, especially among small and midsize builders, increasing reliance on mutual aid associations," adding, "Even under a more conservative underwriting stance than usual, guarantee performance has remained relatively solid, and revenue from fund management and other operations has increased, which appears to have led to the ratings upgrades."