FSC says Taeyoung E&C disaster can be managed

Korea's Taeyong E&C has applied for creditor-led restructuring to mitigate its current liquidity crisis due to real estate PF loans.

Financial Services Commission Chairman Kim Joo-hyun speaks in a briefing at the government complex in central Seoul on Thursday over the government’s response to Taeyoung E&C’s application for creditor-led restructuring. [YONHAP]

Financial regulators on Thursday ensured that the ailing Taeyoung Engineering & Construction’s (E&C's) debt troubles will not spill over into financial markets.

“Financial struggles at Taeyoung E&C were caused by overall difficulties in refinancing project finance (PF) loans and asset-backed securities amid global monetary tightening,” said the Financial Services Commission (FSC) on Thursday.

Taeyoung E&C, the 16th largest builder in Korea, applied for creditor-led restructuring on Thursday. The company faces a liquidity shortage, having taken out a high volume of real estate PF loans amid a weak property market.

PF loans are loans borrowed with a development project's future profits as a form of collateral.

The troubles were “caused by unique characteristics to Taeyoung E&C, and situations at other builders are different.” The FSC added, “Given that the market participants have observed issues related to Taeyoung E&C for a considerable amount of time, the impacts of its application for the debt restructuring program on financial market can be sufficiently managed.”

A debt workout is an agreement between a borrower in default and creditors to reschedule debts. Taeyoung E&C will enter a debt workout if 75 percent of its creditors agree to the arrangement in two weeks.

The company's creditors include the state-run Korea Development Bank, KB Kookmin Bank and Shinhan Bank.

The FSC hosted a meeting with the Ministry of Economy and Finance; Ministry of Land, Infrastructure and Transport; Financial Supervisory Service and Korea Development Bank to discuss Taeyoung E&C's situation.

The builder was scheduled to repay 48 billion won ($37.2 million) in maturing PF loans to creditors on Thursday, which had been issued for the construction of an office in Seongsu-dong of Seongdong District, eastern Seoul.

Taeyoung E&C has 4.58 trillion won in debt, which accounts for less than 1 percent of total assets held by local financial institutions. Its debt ratio as of September stood at 258 percent, followed by GS E&C's 205 percent, Posco E&C's 128 percent and Hyundai E&C's 114 percent, according to the firms' respective regulatory filings.

The government pledged to beef up contingency measures to ensure that negative sentiment doesn't raise volatility.

Those measures include government loan guarantees for Taeyoung E&C’s PF loans and allowing a repayment delay or interest rate reduction to the builder’s subcontractors. The regulators will also encourage financial institutions to save enough reserves to prepare for the risks associated with PF loans.

“A soft landing of the markets for construction and PF loans is sufficiently possible if market participants collaborate, given the size and capacity of our economy,” said the FSC in a statement, promising to continuously monitor the markets.

BY JIN MIN-JI [jin.minji@joongang.co.kr]