South Korean builders, facing at least 4 trillion won ($3.75 billion) in debt repayments by the end of June, are turning to equity instruments to bolster depleted balance sheets that have deterred bond investors.

GS Engineering & Construction Corp. plans to raise 523.6 billion won selling shares, the company said Feb. 18. SK Engineering & Construction Co. and Lotte Engineering & Construction Co. sold ordinary and preferred stock in December.

Yields paid on three-year notes from builders with local ratings above A- jumped an average of 54 basis points in the last year, according to calculations by Bloomberg. Rates on equivalent government notes rose 14 basis points in the period.

South Korea’s 10 biggest builders by market value posted 420 billion won of net losses in their latest quarterly filings, from a combined 134 billion won profit a year earlier, data compiled by Bloomberg show.

That coincided with a swelling of debt to 40 percent of capital on average from 28 percent. Investors burned by the losses are unlikely to buy their notes any time soon, said Samsung Asset Management and Mirae Asset Global Investments.

“Most investors don’t even think of buying builders’ bonds,” said Lee Do Yoon, the Seoul-based head of fixed-income at Samsung Asset Management, the country’s biggest money manager with 105 trillion won in assets. “Investor sentiment toward the construction industry will take time to recover because there remain concerns over the credibility of builders’ earnings.”

Korean builders rated investment grade by local rankings companies are facing 4.05 trillion won of combined bond repayments in the first half of this year, the most since the second half of 2001, according to data compiled by Bloomberg.

GS measures

GS Engineering, which has 605 billion won in loans and bonds due by the end of June, will sell 22 million new shares, it said in the Feb. 18 filing. The company raised $100 million by selling offshore convertible bonds on Jan. 28, according to a Jan. 24 regulatory announcement, and said Feb. 10 it is considering selling assets, including the InterContinental Hotel in Seoul, to secure funds for investment.

Daewoo Engineering & Construction Co. had its credit rating cut one level to A by Korea Ratings on Jan. 28. after posting a parent net loss of 781.7 billion won for the latest quarter.

GS Engineering, SK Engineering and Hyundai Development Co. ― Engineering & Construction had their ratings lowered one level by domestic ranking agencies last year, citing low profitability in overseas businesses and a persistant slump in the domestic property market.

New shares

SK Engineering sold 14.72 million shares to raise 480 billion won on Dec. 9, including 353 billion won in purchases of new shares by affiliates SK Holdings Co. and SK Chemical Co., and by SK Chemicals Co. Vice Chairman Choi Chang-Won, regulatory filings show. Lotte Engineering sold 3.24 million preferred shares to raise about 130 billion won on Dec. 16, according to regulatory filings.

South Korea’s total construction orders received rose the last three months from a year earlier and the 12-month moving average of building permits approved has been trending upward since June.

“While the data shows early signs of a recovery in the domestic market, the time it takes for that to impact developers, earnings may prove too long for some firms,” said Chun Byoung Jo, executive vice president at KB Investment & Securities Co.

Major surgery?

“Those companies need to seek equity plays such as selling new shares, convertibles and redeemable convertible-preference shares instead of selling bonds,” said Chun Byoung Jo, executive vice president at KB Investment & Securities Co., in a Feb. 14 interview. “They may be fine if they take their medicine now, but they’ll have to undergo major surgery if the problem is ignored long enough.”

Ssangyong Engineering & Construction Co., the builder of Singapore’s Marina Bay Sands Hotel in Singapore, filed for court receivership on Dec. 30, 2013. Keangnam Enterprises Ltd., STX Construction Co. and Hanil Engineering & Construction Co. also entered bankruptcy protection in 2013.

Not all builders are struggling, with Hyundai Engineering & Construction Co. and Samsung C&T Corp., AA- rated subsidiaries of South Korea’s two largest corporate groups, having no problems selling bonds.

Hyundai Engineering doubled the size of its latest offering to 200 billion won after receiving orders of 190 billion won, according to a Feb. 12 regulatory filing. Samsung C&T plans a 400 billion won bond sale next month, according to a person familiar with the matter.

Earnings misses

“There will be a marked differentiation among builders,” Shin Jae Hoon, head of the fixed-income management team at Mirae Asset Global Investments Co. with 44 trillion won in assets, said on Feb. 18. “Investors are still reluctant to buy builders’ notes though their earnings are expected to increase this year. Most builders missed their forecasts last year and the market hates uncertainty.”

“Investors are wary about the transparency of builders’ earnings reports after they reported huge losses on overseas projects,” said Chris Park, a Hong Kong-based senior analyst at Moodys’ Investors Service. “They had cut prices after being subjected to stiff competition for offshore contracts amid the domestic building downturn and are likely to suffer from these hard operating environments in the medium and long-term unless the competition problem is solved.” (Bloomberg)