Financing Hallyuwood: Dream Hub Plans Ambitious US$8bn Loan Programme

[hallyuwood]

South Korea?s Dream Hub project is mulling a massive W10trn (US$8.4bn) series of loans to fund the construction of a landmark commercial and business centre in Seoul.

If successful, the deal would be South Korea?s largest project financing ever, but success is far from assured. Indeed, many think that current market conditions make such a fund-raising close to impossible. ?If [Dream Hub] can really close this, it?ll be historic,? said one observer.

The project, which is backed by a consortium of 30 entities, including Samsung Group, the National Pension Service and Woori Bank, looks to create a business and tourist centre along the Han River in Yongsan district. The proposed development includes a 620-metre-high landmark building, two six-star hotels, high-rise residential and commercial complexes and shopping centres ? grand ambitions for an area that currently contains little more than a railroad depot and US military facilities. The development, slated to break ground in 2011 and be completed in 2016, will cost at least W31trn (US$28bn).

Dream Hub, which is said to have already begun equity fundraising, intends to borrow W10trn through syndicated loans. Samsung Fire & Marine Insurance, Samsung Life Insurance, Samsung Securities and Woori Bank will be arranging the deal, said a Seoul-based loan banker.

Dream Hub is likely to break up the financing into three separate syndicated loans spread over the course of a few years and RFPs are expected to be sent out in the first half of 2010.

But despite sharply recovering prices in the Korean market, lenders remain very wary of funding real estate projects.

Lending to the sector is set to remain slow for at least a year or two, said a banker at a Seoul-based securities company, who noted that a large number of real estate transactions were signed about five years ago, with many of them maturing soon.

?I wouldn?t say that many of the loans are likely to default, but many of them are facing difficulties and Korean institutions have a lot of exposure to this sector,? said a loan banker at a state institution. Another factor is that there is currently an oversupply of property in Seoul.

The fate of three recent property-related loan deals underlines the difficulties facing the Dream Hub financing.

A W89.9bn club loan for the Soul Flora project to fund the development of an island tourist attraction in the Han River languished in the market for nearly half a year. It finally closed in September, but had to scramble to find a replacement lender after one participant demanded better terms and then dropped out. Meanwhile, a long-dated project financing for Hallyuwood, another tourist project, was postponed, with the borrower forced to turn to a smaller bridge loan.

A large real estate PF transaction from Alpha Dome City has also struggled. Alpha Dome has been seeking a W1.3trn?W2trn loan for about a year. A W2trn loan was launched in July 2008, but then postponed due to poor market conditions. It was on the verge of being re-launched this month, after being downsized to W1.3trn, but was postponed for a second time, ostensibly due to stakeholder disagreements. Instead, Alpha Dome, like Hallyuwood, may aim for a bridge financing.

?It?s a very difficult time right now to try to raise this kind of funding. It?s not about the pricing, it?s about an unwillingness among lenders. A facility of a few trillion won would be impossible right now,? said a Korean loan banker.

Dream Hub might not have the luxury of waiting too long before tapping the market as it owes a steady stream of land payments. Dream Hub purchased land from Korea Railroad in 2007 for W8trn, to be paid in semi-annual unequal installments over nine years, until 2015. The amount that is due in 2009 totals W790bn, according to a Moody?s analyst. Dream Hub missed the deadline on a W400bn land payment installment in March of this year, according to several analysts and sources.

Dream Hub is looking at three options for dealing with the land payments. It may be forced to follow Hallyuwood and hope to tap a bridge loan despite the tough conditions. Bankers estimate that the consortium needs about W300bn immediately. Dream Hub may also begin pre-sales of units. Another option would be to negotiate with Korea Railroad to defer land payments.

Korea Railroad may be amenable to deferment since it is a stakeholder in the Dream Hub project. The problem is that Korea Railroad, which has W6trn of debt, faces its own financial pressures. The company is currently loss-making and proceeds from the land sales were meant to service its debt.

However, the pressure on Korea Railroad may not be as heavy as it appears. According to an analyst at Moody?s, Korea Railroad?s close ties with the government make it a stable entity. The ratings agency gives Korea Railroad an A2 rating ? aligned with Korea?s sovereign rating. ?The Korean government is likely to provide help in a distressed situation,? said the analyst. ?Korea Railroad won?t go under due to a few missed payments from Dream Hub ? but it will likely enforce the payment schedule.?

Credit: ifrasia