2024-05-13 21:13:39
Government “Induces reorganization of insolvent businesses”
Financial authorities are starting to restructure businesses worth up to 23 trillion won to ensure a soft landing in the real estate project financing (PF) market. In the private sector, banks and the insurance industry create a syndicated loan (joint loan) worth 1 trillion won to supply funds for restructuring of ‘zombie’ businesses, and in the public sector, priority is given to the Korea Asset Management Corporation (CAMCO) fund worth 1 trillion won. We plan to strengthen our ability to execute funds by introducing purchase rights.
On the 13th, the Financial Services Commission and the Financial Supervisory Service jointly announced ‘future policy directions for an orderly soft landing of real estate PF’ in collaboration with related organizations. The key is to identify the pros and cons of PF business sites by strengthening business feasibility assessments and to quickly promote restructuring and reorganization of some insolvent businesses. The financial authorities subdivided the PF business feasibility evaluation grade from the existing 3 levels (good – normal – concerns about deterioration) to 4 levels (good – moderate – significant – concerns about insolvency). If the loan is classified as ‘concerned about insolvency’, which is the lowest level, 75% of the loan amount must be accumulated as a reserve. In effect, it is encouraging business reorganization (auction/public auction).
The size of businesses subject to restructuring (significant/insolvent concern level) is estimated at 5-10% of the total. Considering the size of the entire real estate PF business at the end of last year (230 trillion won), it amounts to a maximum of 23 trillion won.
Where business feasibility is judged to be insufficient, the public and private sectors provide the necessary funds together. Preferential purchase rights are granted to the KAMCO Fund, providing financial companies that sold PF bonds with the opportunity to repurchase them at a later date. In the private sector, the banking and insurance industries create a syndicated loan worth 1 trillion won to help purchase bonds of PF businesses conducting auctions and public auctions and also provide temporary liquidity.
Procedure for eviction of insolvent PF business worth 7 trillion won, supply of additional funds to normal business
[부동산 PF 정상화 방안]
Breaking down the pros and cons through business feasibility assessment… Maturity extension 4 times – when auction or public auction fails 3 times
Evaluation of ‘concerns about insolvency’… Inducing business reorganization
Up to 5 trillion won in new money invested in banking and insurance… Expansion of liability coverage for financial company executives and employees
The core of the plan to normalize real estate project financing (PF) announced by the financial authorities on the 13th is to shake off concerns about insolvency through more detailed ‘identifying the rocks’. The goal is to prevent the crisis from spreading to the construction and financial industries by creating an environment in which insolvent businesses can be quickly liquidated.
● Pressure to liquidate insolvent businesses worth 7 trillion won
The financial authorities believed that a ‘strict’ business feasibility assessment was essential for the normalization of PF business sites. Park Sang-won, Deputy Director of the Financial Supervisory Service, explained, “The current real estate PF business feasibility evaluation standards do not sufficiently reflect the characteristics and risk factors of each business site,” and “We have prepared a plan to improve the business feasibility evaluation.”
Accordingly, in the existing business feasibility evaluation grade, which is classified into three levels (good – average – concerns about deterioration), ‘concerns about deterioration’ is subdivided into two grades. A workplace with concerns about deterioration refers to a place where it is difficult to carry out normal business due to delays in business progress, etc. This is divided into ‘caution’, which is expected to cause significant disruption to the business, and ‘fear of insolvency’, which makes it difficult to proceed with additional business. In the case of concerns about insolvency, the ratio of reserves accumulated in preparation for loan insolvency increases to up to 75% (20-30% in case of concerns about deterioration), increasing the burden on financial companies. As such, the pressure to liquidate PF businesses through auctions and public auctions is increasing.
The business feasibility evaluation system will also be strengthened. Previously, the checklist, such as delinquency and bankruptcy, was fragmented, but in the future, key risk factors at each stage of the business, such as maturity extension and auction/public auction cancellation, must be comprehensively considered. Businesses whose maturity period has been extended more than four times or whose auction or public auction has been canceled more than three times are assessed as concerned about insolvency. According to the Financial Services Commission, among all PF businesses worth about KRW 230 trillion, the level of insolvency concerns is estimated at 2-3%, so auctions and public auctions worth up to KRW 7 trillion are expected to take place.
Financial companies will re-evaluate their PF businesses according to new standards starting next month. The Financial Supervisory Service plans to begin follow-up management inspections starting in July.
● Banks and insurance companies invest up to 5 trillion won in ‘new money’
Financial authorities plan to differentiate support measures for PF businesses depending on the results of the business feasibility assessment. In places where business feasibility is poor, restructuring and liquidation is the principle. Businesses whose maturity is extended more than twice must obtain the consent of more than three-quarters of the lenders (previously two-thirds), and PF bonds that are overdue for more than six months must be auctioned or sold every three months.
Financial support is also provided at the private and public levels. Starting from the second half of this year (July to December), 10 companies in the banking and insurance industry will create a syndicated loan worth 1 trillion won that will jointly lend funds to purchase real estate PF auctions and public auctions. Depending on the situation, we plan to expand the scale up to 5 trillion won. In addition to the 1.1 trillion won provided to Saemaul Geumgo last year, Korea Asset Management Corporation (KAMCO) decided to acquire an additional 400 billion won worth of non-performing loans from Saemaeul Geumgo and the savings bank industry this year.
Additional funds will be provided to normal businesses with sufficient business viability. Kwon Dae-young, Secretary-General of the Financial Services Commission, said, “A total of 56 trillion won in support is being provided, including guarantees for PF business operators (worth 30 trillion won), and there is still room for 32 trillion won.”
Various incentives are also provided to ensure smooth supply of funds. When a financial company provides new funds to an insolvent business, its soundness will be classified as ‘normal’ and the scope of liability for financial company executives and employees in the event of a loss will also be expanded. Kim Sang-bong, professor of economics at Hansung University, said, “Restructuring is an essential measure before PF insolvency spreads to the overall economy.” He added, “Some small and medium-sized financial and construction companies with a high proportion of high-risk PF loans such as bridge loans will suffer a major blow, but they must endure it to normalize the market.” “It is,” he said.
Reporter Jeong Soon-gu [email protected]
Reporter Kim Soo-yeon [email protected]
2024-05-13 21:13:39