Distressed Builder Puts Korea on Edge Again as Risk Mounts

Finbarr Flynn, Heejin Kim and Whanwoong Choi
Fri, January 5, 2024 

(Bloomberg) -- South Korea is again in damage control mode, seeking to contain fallout from a construction firm’s debt woes that risk replicating replicating a recent credit crunch.

In the cross-hairs this time is Taeyoung Engineering & Construction, which shocked markets late last month with a request to reschedule payment terms for project financing loans. These securities were also the source of two earlier episodes of stress, including one triggered by the default of the developer of the Legoland theme park in 2022 that snowballed into the worst meltdown in the country’s credit market since the global financial crisis.

The proposal of Taeyoung, whose projects include a baseball stadium, amusement parks and buildings in Seoul, caused a selloff in bank and developer stocks. Its won-denominated bond due in July plunged to about 62% of its par value from 97% on Dec. 26, according to Bloomberg-compiled data.

Investors’ unease came even as Korean officials pledged to step up a $66 billion program to stabilize markets if needed, with the country’s finance minister vowing authorities “will make every effort” to limit the spillover. On Friday, Taeyoung’s creditors expressed disappointment after a meeting to discuss its restructuring request and characterized its leverage as excessive.

Taeyoung’s payment struggle is the latest example of the side effects of global central banks’ aggressive monetary tightening that has worsened a housing slump in countries including Korea. It’s also a reminder of the risk from some local lenders’ undue reliance on property-related loans as a source of profit.

Founded in 1973, Taeyoung secured 400 billion won ($304 million) of fresh funds when its holding company sold bonds in a deal with KKR & Co. last year and then in December, it said it would sell a stake in Pocheon Power Co. for 42 billion won to secure liquidity. A spokesperson for KKR declined to comment.

The construction firm is more exposed than others in the sector to project financing liabilities. With the company in the throes of a liquidity crisis, the 90-year-old founder Yoon Se-Young has returned to try to save the company, meeting with creditors earlier this week.

Taeyoung should submit a self-rescue plan this week and creditors will decide by Jan. 11 whether to begin restructuring procedures, Lee Bokhyun, governor of the Financial Supervisory Service, a market watchdog, said at a briefing Thursday. The FSS has a contingency plan to stabilize financial markets, if needed, he said.

“The incident will dent market sentiment in the short-term capital market and the real-estate financing market,” Lee Kyoung-rok, an analyst at Shinyoung Securities Co., wrote in a note. While the worst-case scenario would be the “spreading of a crisis in Taeyoung into other builders and causing a liquidity risk at banks,” Lee expects regulators to stop that from occurring.

Taeyoung’s top creditor Korea Development Bank has urged the builder to present a way forward so as to win enough support for rescheduling its debt. As the construction firm applies for a debt workout, all of its liabilities will be frozen, KDB said in a statement. Once the restructuring begins, creditors should negotiate with each other on how individual loans should be handled, it added.

The construction firm’s debt woes are reminiscent of the financial stress caused by a theme-park developer’s default in late 2022 on the same type of short-term loan, which later snowballed into the worst meltdown in the country’s credit market since the global financial crisis. The chaos at that time forced the government to unleash an array of rescue measures to calm markets.

Policymakers had to step in again last year when the branch of one of Korea’s biggest credit unions was shut after reporting a 60 billion won loss on such loans, prompting authorities to set aside more than $100 billion worth of rescue funds.

--With assistance from Daedo Kim, Shinhye Kang and Abhishek Vishnoi.

Bloomberg Businessweek