By Yi Whan-woo
GS Engineering & Construction (E&C) is facing a credibility crisis after becoming entangled in a series of wrongdoings, including allegedly violating stock market rules and under reporting its poor performance.
The country’s sixth-largest builder is now facing the possibility of a heavy penalty because the Financial Services Commission (FSC) plans to impose a fine of up to 2 billion won ($1.87 million) for its alleged violation of posting regulations of the stock exchange and causing losses to investors.
“We believe that GS E&C intentionally did not inform investors in advance about the risks of purchasing the bonds, even if it could expect earnings shocks,” an FSC official said. The country’s top financial regulator will make the financial decision against the builder on March 12.
The FSC suspected that the company did not inform investors about its gloomy profit outlook in order to raise sufficient capital when it issued the bonds.
The construction arm of GS Group issued corporate bonds worth 380 billion won on Feb. 5 in 2013 and then announced that it posted operating losses of 80 billion won in the fourth quarter of 2012.
The builder posted an operating loss of 535.4 billion won during the first quarter of 2013. Its credit rating fell by one notch to A+ in April, causing the interest rate of its three-year bonds to rise and its prices to fall.
GS E&C confirmed the FSS’s probe into the case but said it did not fail to notify buyers of the investment risks of its bonds.
“It’s true that we conducted an inspection for possible financial risk factors of the company after the sales performance of our overseas offices worsened in the fourth quarter of 2012,” a GS E&C spokesman said. “But we only found out about those factors in March 2013, a month after we issued the bonds.”
An official from a major construction firm said that the explanation it has given so far is not convincing.
“A major market player like us and GS E&C is usually capable of figuring out what the risk factors are in advance if those factors are big enough to bring an earnings shock for a quarter,” he said.
“It is possible that GS E&C was already aware of such risks before issuing the bonds, considering its size and its well-established management structure.
“If the explanation of the GS E&C spokesman is true, I’d say the company has been poorly managing its branches inside and outside the country. Also, it’s possible that the branch offices have been reporting to their headquarters dishonestly and unfaithfully,” he said.
The stock price of GS E&C dropped by 40 percent to 29,300 won between April 10 and 23 after the firm announced the earnings results.
The builder is also facing a lawsuit from some investors for allegedly cooking its books to cover up losses in overseas projects.
Feb. 24 was the first day of hearings over allegations that the company covered up losses associated with its underperforming overseas projects since 2009. The stock investors claimed that the builder only reflected such losses on its balance sheet for the JanuaryMarch period.
GS E&C suffered a 937.2 billion won operating loss in 2013. Its debt ratio reached 276.9 percent during the same time period.
Last month, it said it will sell its luxury hotel operator, Parnas Hotel, to secure capital and ease its liquidity shortage. With a 67.56 percent stake, it is the biggest shareholder of the operator of Grand InterContinental Seoul Parnas and InterContinental Seoul Coex in Samseong-dong.