(Bloomberg) — A Korean construction company whose debt restructuring plan prompted a ratings agency to warn of a spillover risk slumped on Thursday, raising concerns in a country wary of project financing crises.
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Taeyoung Engineering & Construction, whose projects include a baseball stadium and a post office in Seoul's financial district, lost as much as 18% on the stock market. The 2024 won note also fell after the company's largest creditor rejected its request to restructure its debt, saying it lacked a sufficient plan.
Officials in Korea are bracing for problems in the credit market, already rocked by the default of a project developer in 2022. While there are no signs of contagion so far and Taeyoung is only ranked 16th in the construction sector, the case is drawing attention as a harbinger of what could lie ahead as builders struggle with higher borrowing costs.
“The credit outlook for the construction industry is negative,” Ji-hoon Jeon, chief analyst at Korea Investors Service, said at a briefing on Thursday. “If there is no full economic recovery, liquidity risk could expand.”
Shares in Taeyoung closed down 5.4% in Seoul on Thursday, while the bond fell to 62% of its face value from 63% the day before, according to data compiled by Bloomberg. This is the fifth drop in grade in six sessions.
Korea relies on short-term debt to finance construction, and the Legoland theme park developer's default on this type of asset-backed security triggered a surge in short-term debt yields in 2022. The government was forced to intervene.
New risks in real estate financing flared up in July as customers of MG Community Credit Cooperatives, a major source of real estate market funds, withdrew deposits amid fears that debt associated with project financing had deteriorated.
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Taeyoung E&C should submit a self-rescue plan this week and creditors will decide by Jan. 11 whether to initiate restructuring procedures, Lee Bokhyun, governor of the Financial Supervisory Service, a market regulator, said at a briefing on Thursday. The FSS has an emergency plan to stabilize financial markets if necessary, he said.
Defaults on project finance loans have increased in 2023, and the Bank of Korea has warned that risks associated with financing real estate projects are likely to increase even if the overall financial system remains stable.
Taeyoung is more reliant on project financing guarantees than its rivals, and the developer last week asked the Korea Development Bank, its largest creditor, to change payment terms on its debt.
The company says it has discussed selling assets and providing security, restructuring and cost cutting with creditors. But the KDB expressed reservations this week and called on them to come up with a plan.
Taeyoung's third-quarter financial report lists total loans of 2.2 trillion won ($1.7 billion), with KDB the largest lender. Kookmin Bank, Shinhan Financial Group Co. Ltd., Woori Financial Group Inc. and Hana Financial Group Inc. are also on the list.
– With support from Shinhye Kang and Whanwoong Choi.
(Updates with Watchdog comments in third, asset prices in sixth paragraph)
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