Introduction of Project Financing Stabilization bank to aid problems in Project Financing

Korean government announced Project financing stabilization bank (PFS bank) as one of the policy measures to encourage construction industry on May 1, 2011. The Government will promote financial institutions to actively extend the maturities of PF-related loans, and help the creditors voluntarily reduce non-performing debts of project sites that don’t have business value. And then, the PFS bank will handle project construction sites which have ability to operate its business through restructuring.

Additionally, the United Asset Management Corporation (UAMCO), along with some commercial banks, including KB, Sinhan, Woori, Hana, KDB, IBK and NH, had confirmed the size of PFS bank as 1.2 trillion won on May 11, and they are going to set details in concrete soon.

1. Background of PFS bank

As a result of construction industry recession, financial institutions are having a hard time to collect the PF loans and ABCP. Further, as some construction companies including LIG E&C, SAMBU, Dong Yang E&C have been under legal management or workout program, distrust of the market is rising. Ahead of credit risk evaluation by credit banks in June, funding markets have been deteriorated and CP issuing, considered as the main source of short-term capital supply, has been reduced. All things considered, not only construction industry but financial market and property market may undergo additional liquidity crisis. So then, PFS bank is necessary to ease problems in construction industry and financial market.

 

2. What is the PFS bank?

PFS bank takes over financial institution’s soured loans, pools together, restructures and stabilizes them. UAMCO will act as general partner (GP) and commercial banks which sell of their obligations act as limited partner (LP), as a form of Private Equity Fund (PEF). By pooling loans, PFS bank can easily simplify the valuation and normalize the sites through workout programs including debt restructuring and funding operating costs on each project site basis. Credit banks get proceeds from sales and get rid of non-performing PF loans, instead of passing out their obligations.

Target purchases are mainly participant banks’ PF loans. Feasibility of project and normalization is likely to important factor to be considered, and it will be decided after participant’s additional meeting. Purchasing price will be market price negotiated by banks.

Regarding funding resource, there are two types on funding. One is the costs of purchasing the insolvent PF loans, and the other is required to stabilize and restructure project construct sites. Commercial banks which participated in PFS bank bear the first expenses, but these are recollected to commercial banks as form of proceeds from sales. And second expenses are likely to be funded by PEF itself from financial market, using purchased assets as collateral.

It is different from already existing UAMCO and structural regulation fund in that it takes action to restructure and fund operating cost for revivable project construction sites. That is, PFS banks will focus on helping some sound project construction sites keep going their business, not just purchasing insolvent debt from financial institutions.

( Source: Financial Services Commission)

 

3. The role of PFS bank and stabilization process

Once PFS bank chooses project construction site to stabilize, it takes over each credit banks’ PF loans of chosen project site at specified price. And then, as a status of the biggest creditor, it carries out workout program to each project construction sites, including debt restructuring of contractor and developer, operation cost funding to project site, transfer of business or contractor if needed.

4. planned schedule and expected effect

(Photo: Yonhap news)

By pooling insolvent PF loans into PFS bank, it is expected to reduce delaying the restructuring process due to different opinions of each credit banks, and to actively implement normalization and stabilization of project sites. And also, if PFS bank works well as successful developer, the credibility of PF business is likely to increase and smooth financing can be expected. Besides, by passing out insolvent debts from banking industry, soundness of banks will be enhanced and the ability to react additional PF insolvency also is expected to improve.

From construction industry’s perspective, liquidity crisis, which has been considered as major problem, can be solved more easily, especially for some relatively sound medium-sized construction companies. Also the number of filing for receivership is expected to decrease even though the maturity date of the PF bond is coming up.

The first PFS bank is now in progress, and will be launched during June 2011. The second and third PFS bank will follow afterwards.

 

Oh Kyoung Tae (kyoung.taeee@gmail.com)

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