Concerns rise in Korea’s bond market on GS E&C, Saemaul Geumgo woes

GS Engineering & Construction Corp.’s Geomdan New Town apartment construction site. The area where the accident occurred in April is covered. [Photo by Yonhap]

South Korea’s bond market is experiencing heightened tension as a series of unfortunate events, including the recent decision for a complete reconstruction due to concerns over the faulty construction of an apartment complex by GS Engineering & Construction Corp. (GS E&C) and a potential bank run at troubled Saemaul Geumgo branches.

According to sources on Friday, GS E&C made the decision to reconstruct the apartment complex in Geomdan New Town of Incheon after the collapse of an underground parking structure, raising concerns about the repayment of project financing (PF) loans extended to the constructor.

The estimated cost of the reconstruction is expected to be around 500 billion won ($382 million), which not only poses an immediate impact on the company’s performance in the second and third quarters, but also raises concerns about the potential problems in refinancing the PF loans by GS E&C due to the aftermath of the creditworthiness damage.

according to NICE Investors Service Co., GS E&C’s total guarantee for its housing business amounts to 2.9 trillion won, with about 1.28 trillion won, or 44 percent, reaching maturity this year.

“If investor sentiment towards the company worsens due to factors such as declining property prices and anticipated negative administrative actions, it may lead to difficulties in refinancing its PF loans,” NICE said.

Korea Investors Service Co. said that if there is a decline in accessibility to the capital market following the accident investigation amid the prolonged downturn in the real estate market and the prevailing high-interest rate environment, there may be an increase in volatility related to the issuance conditions of securities and corporate bonds.

Kim Ki-myung, an analyst at Korea Investment & Securities Co., highlighted the possibility of a renewed awareness of risks associated with real estate PF that have faded away in recent months. “This incident could raise concerns about real estate PF and the rising delinquency rate among lower-income households as the risks become more apparent.”

Moreover, the selling of bonds suspected to be associated with Saemaul Geumgo over the past two days further dampened the sentiment of market participants.

According to Korea Financial Investment Association (KOFIA), the yield on three-year government bonds rose from 3.110 percent in early February to 3.676 percent, surpassing the benchmark interest rate of 3.50 percent. Similarly, the yield on five-year government bonds increased from 3.096 percent to 3.675 percent, and the yield on 10-year government bonds from 3.148 percent to 3.713 percent during this period.