(Bloomberg) -- South Korea’s financial market regulator has asked lenders with exposure to troubled real estate project finance loans to finalize their cleanup plans by Sept. 6, setting a tight deadline after growth in risky loans exceeded the regulator’s previous estimates.
Project finance exposure of all financial institutions stood at 216.5 trillion won ($162 billion) as of June 2024, of which at least 21 trillion won, or 9.7%, was risky, the Financial Supervisory Service, the Korean financial watchdog, said on Thursday. Three months ago, the regulator had expected only about 5% of the loans to be stressed.
“The principle is to put projects on auction in case loans are overdue for more than three months,” Park Sang Won, deputy governor at the Financial Supervisory Service, told reporters at a briefing, adding that if the government’s plan goes ahead, it will improve the health of financial institutions and restore the confidence in the real estate project finance market.
A series of high-profile credit events including a debt restructuring by distressed builder Taeyoung Engineering & Construction Co. earlier this year have kept policymakers on high alert to stem any further scares from the property sector.
South Korean authorities said in May that they would revamp criteria to evaluate the feasibility of real estate project finance sites and support the restructuring of those that no longer viable. Projects where debt repayments are six months overdue would be put up for sale under new guidelines, according to a statement by the Financial Services Commission and FSS at the time.
For sites assessed as “normal”, Financial Supervisory Service will actively guide financial companies to supply funds through maturity extensions to ensure that business proceeds normally, deputy governor Park added.
Of the total exposure, about 33.7 trillion won were considered high risk of insolvency, and 21.0 trillion won were found to be problematic.
A default on project finance debt in 2022 by the developer of a Legoland amusement park in South Korea caused short-term corporate borrowing costs to surge to over a decade-high. Spreads have since compressed back to levels before the crisis, after policymakers rolled out measures worth more than $66 billion to support the credit and property markets.
Delinquency rates for project finance loans climbed the most at non-bank lenders, reaching 17.6% for securities firms in the first quarter, according to the FSC in June.
Efforts to address souring property loans have been complicated by rebounding home prices in the capital, a key concern for the BOK, which held its key policy rate steady earlier this month. While higher home sales in Seoul may boost developer balance sheets, many delinquent projects are outside the capital where prices continue to drop.
The BOK and government authorities are eager to clamp down on rising Seoul property prices because of the already high burden of household debt in the economy, so a slower unwind of BOK interest-rate increases may weigh further on region project finance projects.
Read also: Bank of Korea Edges Closer to Pivot as Rhee Hedges on Cut Timing
©2024 Bloomberg L.P.
