551 construction companies go belly up

There is an imminent risk that construction companies are about to fall like ninepins due to the growing pressure of interest rate hikes and the stagnating housing market. This year, the largest number of general contractors closed down in 17 years. There are rumors that some mid-sized and large builders may go bankrupt. In the meanwhile, credit rating agencies have downgraded general contractors overall while financial investors seem jittery after lending money to them.

A total of 551 general contractors have shut down so far this year, 70 percent up from 327 last year. It is the largest number recorded since 2006. Indeed, a growing number of local construction companies are put under court receivership due to financial difficulties. When a rumor recently spread that one of the top 10 construction companies in the construction capacity eval‎uation rankings would perform restructuring, its stock price saw a sharp decline. As such, there is widespread anxiety and fear across the market that even large general contractors can be put at risk.

The financial adversity of construction companies is attributable to the fact that many construction sites poorly run by “off-balance-sheet” financing have not yet done groundbreaking or parceling-out as high-interest rates have stagnated and construction costs have only increased. Things have gotten so bad that construction work has stopped even at a construction site in the middle of the Gangnam area, Seoul. As many as 120 sites have been put up for auction or public sale across the country. Under a typical project finance structure, the developer takes out a project finance loan, and the general contractor offers joint surety for the sake of greater financial credibility. With many developers going bankrupt, general constructors have ended up assuming the liabilities. The more construction sites undergo such issues, the more likely builders, albeit sound and large, are to go into bankruptcy.

Financial authorities and creditors are also to blame for relying on quick fixes such as extending loan maturity or postponing interest payments while leaving unaddressed issues arising from poor project finance programs, thus contributing to the dismal situation. As of late September, the balance of real estate PF loans reached 134.3 trillion won, 20 trillion won up from a year ago. The default rate recorded 2.42 percent, up by 4.4 times over the past three years. They have only extended loans without considering business feasibility and the ability to repay, increasing potential insolvency and deteriorating the soundness of both general contractors and financial institutions.

Given the ongoing trends of high-interest rates and the slowing real estate market, it is urgent to resolve non-performing loans. Severely insolvent companies are to be restructured as soon as possible, while liquidity support programs must start to help those with merely temporary issues stand back on their feet. It should be remembered that one rotten apple, left in the basket, will end up ruining the others – not only construction companies but also the overall financial industry.