The funding conditions for large construction companies are changing. While they have avoided a chain reaction of credit rating downgrades amid a deteriorating market, challenges such as delays in collecting construction receivables, the burden of refinancing project financing (PF) liabilities, and risks from unsold properties in local markets persist.
According to credit rating agencies and investment banks on July 9, Daewoo Engineering & Construction is among the top 10 construction firms that have seen their credit ratings or outlooks downgraded. A representative from Daewoo stated, "The long-term credit rating outlook has been lowered due to previous performance deterioration, but if performance improves, the credit rating will follow suit."
POSCO E&C is also identified as a company facing downward pressure on its credit rating. Although it maintains an A+ rating, its outlook is negative. Factors such as loss recognition, increased borrowing, and safety risk incidents are cited as monitoring points for the second half of the year.
In contrast, DL E&C retained its AA- (stable) rating in the recent regular evaluation by NICE Credit Rating, attributed to its diversified business portfolio, improved cost rates in the housing sector, cash generation capacity, and financial stability.
While credit rating downgrades have been avoided, attention must be paid to construction companies' cash flow and financial conditions in the second half of the year. Timely collection of construction payments, fluctuations in PF guarantee burdens, and the maturity of corporate bonds and short-term loans will serve as criteria for assessing creditworthiness.
Korea Ratings recently noted in its regular evaluation of the construction industry that while cost rates have improved, financial burdens persist. Additional losses related to construction receivables, the improvement of cost rates for new construction projects, and the control of borrowing burdens remain key variables. Korea Credit Rating also highlighted the sluggishness in local housing and non-residential sales, sales risks, and the level of financial burden control as major factors to monitor in its outlook for the construction industry in the second half of the year.
Examining the funding status of individual construction companies, Hyundai Engineering & Construction, based on its strong credit rating, received orders totaling 910 billion won in a bond demand forecast earlier this year, significantly exceeding the 170 billion won target, and is pursuing an increase in issuance up to 340 billion won. These bonds are issued in the form of green bonds.
Recently, it also issued 500 billion won in private convertible bonds (CB), structured with a zero percent coupon and maturity interest rate. The funds raised will be used for operating capital in new energy projects, including offshore wind, solar power, small modular reactors (SMR), and large nuclear power plants.
Lotte Engineering & Construction is leveraging asset-backed securities (ABS) based on asset credit rather than company credit to enhance cash flow. Following a similar issuance in May, it issued 300 billion won in ABS this month, backed by receivables from housing projects nearing completion and construction projects from group affiliates. This ABS received a AAA rating, allowing the company to secure funds at a lower cost than its own credit rating.
The funding methods differ between companies that can directly issue corporate bonds and those that need to structure construction receivables to secure liquidity. The maintenance of credit ratings does not imply that the funding environment is the same for all construction companies.
An industry insider remarked, "Just because construction companies' credit ratings have not significantly dropped does not mean the funding environment has improved. In the second half of the year, the differences in financial costs among construction companies may widen based on their responses to PF maturities, collection of construction receivables, and improvements in cash flow."
* This article has been translated by AI.
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