The Downgrade Decision: A Closer Look
On March 22, the Korea Ratings Agency made a pivotal decision to downgrade Shinsegae Construction’s unsecured bond credit rating from A (Negative) to A- (Stable). This move also saw a decrease in the company’s commercial paper (CP) rating from A2 to A2-. The downgrade stems from a combination of significant operational losses, lackluster sales performance, and heightened Project Financing (PF) contingent liability risks. This section dives into the rationale behind the downgrade and its implications for Shinsegae Construction.
Unpacking Operational Losses and Sales Challenges
Shinsegae Construction’s journey through the last fiscal year was marked by a substantial operational loss amounting to KRW 187.8 billion. This segment explores the factors contributing to this loss, including escalated construction costs at ongoing projects and notably poor sales outcomes in Daegu project sites. The analysis also touches on the high ratio of private construction contracts and the looming threat of further losses from unsold properties, painting a detailed picture of the hurdles Shinsegae faces in returning to profitability.
Daegu’s Sluggish Sales and PF Risks
The residential projects in Daegu have particularly underperformed, leading to difficulties in collecting construction payments and diminishing project viability. This part of the article examines the ballooning sales receivables, which reached KRW 4,529 billion last year, and the impact of a restructuring PF market alongside persistent sales and housing market challenges. It discusses the broader implications of these conditions on Shinsegae Construction’s financial health.
Escalating PF Contingent Liability Risks
One of the standout concerns for Shinsegae Construction has been the expansion of PF contingent liability risks. Failure to initiate the Gupo Port development project on time resulted in a substantial PF funding supplement commitment. This section delves into the details of the PF guarantee amount’s surge to KRW 280 billion and the stagnant sales market conditions exacerbating the situation. Additionally, it addresses the potential risks associated with the Eunpyeong New Town complex development project’s lackluster sales performance.
Korea Ratings’ Perspective and the Path Forward
Despite the challenges, Korea Ratings Agency believes that Shinsegae Construction maintains a certain level of business and financial resilience, thanks to group-level support. However, concerns linger about the high cost ratio at most project sites and the increased PF guarantee amount potentially delaying sales performance and profitability improvements. This concluding section reflects on the potential for further credit deterioration if PF contingent liabilities materialize, highlighting the urgent need for strategic adjustments by Shinsegae Construction to navigate these turbulent times effectively.
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