Capital Companies Cut 9 Trillion Won in Real Estate PF Loans... Regional and Non-Residential Risks Remain

PF Loans Outstanding at 27 Capital Firms: 18.4 Trillion Won
Substandard Loan Ratio Rises from 5.7% at End-2022 to 7.2% in June
7.6 Trillion Won Maturing Within a Year; 17.8% Classified as "Watch or Below"
Rising Interest Rates Intensify Refinancing and Funding Pressures

Although capital companies have reduced their real estate project financing (PF) loans by nearly 9 trillion won over the past four and a half years, concerns about asset soundness remain high. Recently, non-performing loan indicators have deteriorated again, and as interest rates rise, both PF refinancing and capital companies' fundraising conditions have worsened, fueling additional concerns over potential defaults.

According to NICE Ratings on September 21, the outstanding balance of real estate PF loans at 27 capital companies rated by the firm stood at 18.4 trillion won as of the end of June this year. This is a decrease of 8.8 trillion won from 27.2 trillion won at the end of 2022. The proportion of PF loans relative to equity also fell from 95.1% to 47.9% over the same period.

While PF normalization efforts have led to a reduction in lending volume, recent asset quality indicators have been deteriorating again. The ratio of substandard and below loans for PF lending rose by 1.5 percentage points, from 5.7% at the end of last year to 7.2% at the end of June this year. Substandard and below loans refer to non-performing loans classified as "substandard," "doubtful," or "presumed loss" in terms of asset quality. This is the highest level among the core operating assets of capital companies.

The composition of the remaining PF portfolio also presents challenges. High-risk non-residential projects account for 46.0% of all PF exposures, and projects in non-metropolitan areas—where the real estate market recovery remains sluggish—make up 30.4%. Additionally, mid- and subordinated tranches, which have a lower priority for repayment, account for 27.3%. If the real estate downturn in regional areas is prolonged or project profitability declines, the potential for losses could increase significantly.

In particular, signs of distress are more evident in PF loans approaching maturity. As of the end of June, 13.6% of overall PF assets were classified as "watch or below," indicating that they require heightened oversight due to potential default. However, this ratio jumps to 17.8% when looking solely at the 7.6 trillion won in PF exposures maturing within the next year. PF loans maturing within one year account for about 41% of the total PF portfolio. In the third quarter of this year, 2.6 trillion won in PF loans will reach maturity, of which 23.1% are classified as "watch or below."

Jongil Park, Principal Researcher at NICE Ratings, stated, "In the case of PF, even if a project has weak fundamentals, the exposure is typically maintained as performing until maturity. However, if refinancing fails or conversion to main PF does not proceed, the asset quality classification can rapidly deteriorate. PF currently classified as performing may quickly become problematic as maturities approach, greatly increasing the financial burden on capital companies."

Previously, Korea Ratings also analyzed around 50 trillion won in PF loans held by securities firms and capital companies, and found that among the PF loans classified as "performing" or "watch," about 6.8 trillion won could be downgraded to the "substandard" category—the stage equivalent to non-performing loans—under stress scenarios.

Financial authorities, through the August 13 real estate measures, are pushing initiatives such as expanding PF guarantees for stable projects, supporting bridge loan conversion to main PF, and providing liquidity support to address rising construction costs. While these measures to facilitate housing supply can help refinancing and project execution for healthy projects, there are concerns that increased maturity extensions for less viable projects could further amplify loss risks at capital companies, depending on future developments in the real estate market.

Interest rate hikes are another burden. Since the second half of last year, market rates have rebounded, requiring companies to refinance existing low-rate bonds at higher interest rates. Funding rates on asset-backed securities issued by non-bank financial institutions have also risen sharply. According to the Korea Financial Investment Association, the average interest rate on three-year asset-backed bonds rated AA+ was 4.586% per year as of September 18, up 1.249 percentage points from 3.337% at the beginning of the year.

As capital companies have increasingly issued lower-rate short-term bonds, the average maturity of new bonds issued by both AA and lower-rated capital companies fell to just 2.2 years in the first half of this year. While this helps ease immediate funding burdens, it also means that if high rates persist, refinancing risks could grow much more quickly as debts come due sooner.

An industry official said, "Although the overall size of PF exposures has been substantially reduced, unresolved risks remain, particularly in regional and non-residential projects. If rising interest rates simultaneously worsen refinancing conditions for PF projects and funding conditions for capital companies, it is necessary to monitor whether additional defaults will emerge even among assets currently classified as performing."

This content was produced with the assistance of AI translation services.