Struggling Taeyoung E&C files for debt restructuring

Finance

Published: 28 Dec. 2023, 09:59 Updated: 28 Dec. 2023, 19:15

Struggling Taeyoung E&C files for debt restructuring

Taeyoung Engineering & Construction's headquarters in Yeongdeungpo District, western Seoul [YONHAP]

Taeyoung Engineering & Construction (E&C), Korea's 16th-largest builder, filed for a debt workout on Thursday after failing to repay its real estate project financing (PF) loans.

Despite financial regulators' assurances that the ailing company's debt troubles will not spill over to financial markets, experts still expect the company's default to reverberate across the construction industry.

The state-run Korea Development Bank will determine the workout initiation at its Jan. 11 meeting. If 75 percent or more of Taeyoung E&C's creditors approve the workout, the group will work to address the company's liquidity issues through mechanisms such as maturity extensions and fund injections. The creditors include KDB, KB Kookmin Bank and Shinhan Bank, among others. The company will need to present a robust restructuring plan in order to secure the creditors' votes.

Taeyoung E&C is the construction arm of Taeyoung Group, which owns SBS, one of Korea's largest broadcasting companies. Of the group's affiliates, Taeyoung E&C contributes nearly half of total revenue.

The company's property PF loan balance totals around 3.2 trillion won ($2.4 billion), according to Korea Investors Service. The builder has encountered obstacles to repaying those loans, as some of its construction projects were halted due to high interest rates and increased construction costs.

Taeyoung E&C's decision to file for a workout stems from its inability to repay a PF loan of 480 billion won that was issued for an office building project in eastern Seoul's Seongsu-dong, which reached maturity on Thursday. Forty-seven percent of Taeyoung E&C's projects remain in a non-commenced state. The company's debt ratio stands at 478 percent, the highest among those of the country's major construction companies.

That decline is linked to a variety of factors, including the undertaking of excessive projects relying on company guarantees.

The company embarked on large-scale mixed-use development ventures, such as military base relocations, while also owning the apartment brand 'Desian,' rather than similar residential projects, which were primarily funded through project financing (PF).

“While Taeyoung E&C hasn't heavily focused on residential projects, its reliance on domestic development projects for revenue has exposed it to risks,” an executive from a construction company told the JoongAng Ilbo. “Factors like contingent liabilities, such as PF guarantees for securing construction rights, have exacerbated financial difficulties.”

“The excessive pursuit of projects by Taeyoung E&C during the real estate market boom has now backfired,” another executive said.

The conglomerate sold its lucrative subsidy, Taeyoung Industry, for 240 billion won, and divested its entire stake in a thermoelectric power plant, in an effort to address its liquidity issues. But those measures have not been sufficient to resolve its financial challenges.

Korea's Corporate Restructuring Promotion Act was reinstated on Tuesday, and Taeyoung E&C became the first company to apply for a workout under the provision.

As major construction companies like Taeyoung struggle to resolve liquidity issues and resort to workout applications, concerns have emerged about the realization of approximately 22.8 trillion won that are currently held as precarious real estate PF contingent liabilities.

“Taeyoung E&C's workout application is a representative case illustrating the current downturn in the real estate market, driven by factors like high interest rates,” said Professor Lee Chang-moo from the department of Urban Planning at Hanyang University. “If the real estate market doesn't recover, we may see more companies facing situations similar to Taeyoung E&C's.”

NICE Investors Service, one of Korea's three major credit rating agencies, knocked Taeyoung E&C's rating outlook from “Stable” to “Negative Review” on Wednesday.

Meanwhile, SBS's CEO clarified that despite Taeyoung E&C's workout application, there is no possibility that it sells stake.

Taeyoung E&C's shares closed at 2,315 won on Thursday, a 3.74 percent decrease from the previous trading day. SBS ended the day at 29,250 won, a 4.57 percent drop from the previous day.

BY SEO JI-EUN, KIM WON [seo.jieun1@joongang.co.kr]