Value context and insight. lkm@koreatimes.co.kr
Taeyoung E&C's workout application triggers alarm among lenders
Financial Services Commission Chairman Kim Joo-hyun, center, speaks during a meeting at the Seoul Government Complex in Gwanghwamun, Thursday. Yonhap
By Lee Kyung-min
KDB, IBK and KB among high-exposure lenders; creditors' Jan. 11 meeting to set course for workout
Taeyoung Engineering & Construction filed for corporate debt restructuring, prompted by a failed payment of 48 billion won ($37 million) on a project financing debt due Thursday.
The liquidity crunch of the country’s 16th-largest builder by construction capacity fueled industry-wide fears of a chain reaction over 22.8 trillion won in contingent liabilities, amplified in large part by a sustained slowdown in the construction industry over the past few pandemic years. Among the builders at risk are Kolon Global and Shinsegae Construction.
The real estate project financing exposure totaling 134.3 trillion won could deteriorate the financial soundness of local lenders, testing the country’s financial shock absorption capabilities. A combined 700 billion won exposure will weigh heavily on the state-run lenders Korea Development Bank (KDB) and Industrial Bank of Korea (IBK), and commercial lenders KB Kookmin, Shinhan, Woori and Hana as well as a dozen brokerages, insurers and savings banks.
Industry insiders say the latest development is a source for legitimate concern, as reaffirmed by an outright discontinuation of local corporate bond issuances in the latter half of last year. Triggering the rare full-blown bond market tightening was the unexpected default of Legoland, a local developer, on a 205 billion won debt.
However, the financial authorities and economic policymakers maintained that the probability of Taeyoung spilling over into a financial crisis is limited, aided largely by the recent global monetary easing cycle.
The KDB-led creditors will meet Jan. 11 to decide whether they should push ahead with a debt workout, a week after Taeyoung outlines self-rescue measures to meet its credit obligations, Jan. 3.
Taeyoung E&C headquarters in Yeouido, Seoul / Yonhap
Under control
“The future course of the debt workout program will be determined largely by how much of a sacrifice Taeyoung makes to limit the creditor losses,” Financial Services Commission (FSC) Chairman Kim Joo-hyun said during a meeting at the Seoul Government Complex in Gwanghwamun.
The FSC-chaired meeting was attended by the finance and land ministries as well as officials of the FSC, the Financial Supervisory Service (FSS) and KDB.
“The government will also continue efforts for an effective soft landing in the real estate project financing market," the FSC chief said.
The much-rushed meeting followed Taeyoung’s debt workout application with KDB hours earlier, in line with market speculation.
The government said Taeyoung relies far more heavily on its controlled subsidiaries for construction projects, and has a high debt-to-equity ratio of 258 percent, far higher than its peers.
“Taeyoung can come under control, unless stymied by unwarranted excessive market anxieties,” Kim said.
Taeyoung’s efforts to contain the crisis thus far include 1 trillion won used to sell off its affiliates and golf courses.
The firm pledged to sell its lucrative affiliate EcoBeat worth 3 trillion won in value. Whether it will sell SBS, a local broadcaster, remains to be seen.
Financial institutions will no longer be able to cash Taeyoung’s corporate bonds, but its industry peers will seek a full bond settlement totaling 148.5 billion won.
Gov’t measures
The government will operate a contingency plan.
Partner builders of Taeyoung will continue 22 ongoing construction projects.
Would-be homebuyers will be protected, as mediated by guarantees and refund programs under Korea Housing and Urban Guarantee, a state-run organization.
About 581 subcontractors will be able to seek government funding for construction costs as part of fast-track assistance. Their loan maturities will be extended and borrowing rates will be lowered.
The rollovers will be expedited for Taeyoung partners, mostly concerning commercial bonds, project financing-asset guarantees and asset-backed corporate papers.
The financial market is expected to see negligible impact.
The exposure to financial institutions is about 4.58 trillion won, only 0.09 percent of the industry’s asset total.
“The absorption capacity of the county’s financial sector is large enough to navigate the situation,” Kim said.
KDB has an exposure of 220 billion won, including 129.2 billion won in project financing loans and 71 billion won in short-term borrowings.
The figure for KB Kookmin stands at 160 billion won, followed by IBK (99.7 billion won) and Woori (72 billion won).
“We will fortify monitoring on the financial market developments, especially concerning signs of default,” a bank industry official said.
Taeyoung shares ended at 2,315 won, down 90 won, or 3.74 percent from the previous session. It was a further steep fall from 3,070 won on Dec. 22. Most construction shares showed stable intraday movements, bucking market expectations that bet big on extreme tumbles.