Taeyoung E&C's restructuring proposal shot down by Korea's financial regulator

The chief of Korea's financial regulator criticized the self-rescue plan proposed by cash-strapped Taeyoung Engineering & Construction (E&C), pushing the mid-sized construction company to come up with a better proposal by this weekend.

A corporate flag of Taeyoung E&C, shown at its headquarters in western Seoul on Wednesday [NEWS1]

The chief of Korea's financial regulator criticized the self-rescue plan proposed by cash-strapped Taeyoung Engineering & Construction (E&C), pushing the mid-sized construction company to come up with a better proposal by this weekend before its creditors decide on whether to greenlight its debt restructuring program.

"I suspect that Taeyoung E&C's self-rescue plan is meant to save its owner's family, rather than the company itself," Financial Supervisory Service (FSS) Gov. Lee Bok-hyun said during a press conference Thursday.

"The creditors may think the bone-crushing effort that it takes [to save the company] will crush the creditors' bones instead of Taeyoung's," Lee said.

Taeyoung E&C, the country's 16th-largest builder by construction capacity, recently filed for debt restructuring, as it struggled to repay loans funneled through project financing (PF).

As initiating the debt workout process would require at least 75 percent approval from creditors, Taeyoung on Wednesday held a meeting with its creditors to convince them to approve the debt restructuring program but was largely given the cold shoulder.

FSS chief Lee stressed that Taeyoung should revise its proposal by the weekend, as the final decision on the workout initiation will be determined in the upcoming creditors' meeting scheduled for Jan. 11. Creditors include Korea Development Bank (KDB), KB Kookmin Bank and Shinhan Bank, among others.

KDB Chairman Kang Seog-hoon said, “Taeyoung E&C’s self-rescue plan won’t be able to buy the company approvals from its creditors” as it would execute fewer funds than were initially pledged.

Amid growing concerns over a potential liquidity crunch across Korea’s construction sector, analysts warned that the recent debt struggle of Taeyoung E&C is not likely an isolated case.

Dongbu Corporation, Shinsegae E&C and Lotte E&C are being scrutinized as possible future flash points.

“With the real estate market downturn and surging construction costs, it has become crucial for small- to mid-sized construction companies to secure short-term liquidity,” a Hi Investment & Securities report said Thursday.

“The recent Taeyoung E&C trouble may make it harder for the small- and mid-sized builders to secure short-term funding,” the report warned.

It named Dongbu, ranked 22nd, and Shinsegae E&C, 33rd, as vulnerable builders.

Dongbu had short-term borrowings of 418.9 billion won ($320.1 million) as of September last year, but only 58.3 billion won in cash assets. Credit rating agency Korea Ratings lowered Dongbu’s short-term ratings last month from the previous A3+ to A3.

Shinsegae E&C currently holds short-term borrowings of 170 billion won and cash assets of 146.8 billion won. While its financial standing is not considered to be in a precarious position, a number of unsold housings at its Daegu operations were cited as possible risk factors.

“Shinsegae E&C’s financial situation is deteriorating, weighed down by unsold housing units [in Daegu],” Bae Se-ho, an analyst at Hi Investment & Securities, said.

Hana Securities, on the other hand, suggested Lotte E&C may face liquidity stress, drawing parallels between the eighth-largest construction company and Taeyoung E&C.

“[Lotte E&C’s] outstanding volume of PF loans for projects that are yet to begin, which are to expire by the first quarter, stands at 3.2 trillion won; and the funding for delayed projects outside Seoul was estimated to be worth about 2.5 trillion won as of the first quarter of last year,” said Kim Seung-joon, an analyst at Hana Securities, suggesting that Lotte may not be able to handle the debt.

Lotte’s cash assets are estimated at around 2.3 trillion won.

However, more optimistic forecasts expect that the ongoing Taeyoung incident will not result in a sector-wide liquidity collapse.

“If the debt workout program is orderly carried out in line with the government’s response plan, the temporary suffering may accelerate the recovery of the entire market situation,” Korea Investment & Securities analyst Kang Kyung-tae said.

BY SHIN HA-NEE, HA NAM-HYUN [shin.hanee@joongang.co.kr]