Taeyoung Engineering & Construction filed for a debt restructuring program on Dec. 28 after failing to repay its real estate project financing (PF) loan.
Experts and industry insiders are concerned that the company’s decision to apply for debt restructuring may have repercussions on the construction industry, as it reflects a broader issue of real estate PF insolvency affecting the sector. Taeyoung E&C is the 16th largest builder in South Korea in terms of construction capacity.
Real estate PF is a practice that uses loans to finance real estate development projects. A developer usually agrees to pay their creditor a portion of their project’s future profits.
Taeyoung E&C is currently facing a liquidity crisis, exacerbated by a property market downturn. The company currently holds a PF loan balance of approximately $2.5 billion (3.2 trillion won). Taeyoung E&C initially intended to use this funding to build apartments and office buildings, with the plan to sell these properties for profit. However, nearly half of Taeyoung E&C’s sites have yet to begin construction due to high interest rates and soaring construction costs.
This week alone, the company needs to extend the maturity of a 48 billion won PF loan related to an office building development project in Seongsu District in eastern Seoul, which is due on Dec. 28. Taeyoung E&C has other debt that is due to mature in early January.
As of the third quarter this year, Taeyoung E&C reported net borrowings of 1.93 trillion won and a debt-to-equity ratio of 479 percent, the highest among large and medium-sized construction companies ranked within the top 35 in terms of domestic construction capacity.
Debt restructuring requires approval from more than 75 percent of creditors and is aimed at resolving liquidity issues. The process typically involves extending loan maturities and providing additional fund disbursements.
Taeyoung E&C’s main creditors include the state-run Korea Development Bank and KB Kookmin Bank. The Korea Development Bank is expected to hold a creditor’s meeting on Dec. 29.
Local construction companies have been under strain as delinquency rates on PF loans rose amid a slump in the property market. Financial regulators and experts are worried that if companies with high exposure to real estate PF loans default, it could threaten the stability of the financial system.
The government is taking measures to prevent the PF issue from escalating into a full-blown financial crisis. Choi Sang-mok, the finance minister, and members of Korea’s financial authorities including Financial Services Commission chairman Kim Joo-hyun, Financial Supervisory Service governor Lee Bok-hyun and Bank of Korea governor Rhee Chang-yong, held a meeting recently to discuss Taeyoung E&C’s liquidity crisis.
