TAEYOUNG Engineering & Construction, the distressed builder that’s raised the threat of more project finance crises in South Korea, won support from creditors to start debt restructuring talks. 

The builder of a post office in Seoul’s financial district, amusement parks and a baseball stadium received backing in a vote from creditors holding 96.1 per cent of its aggregate debt, according to a statement from its largest creditor Korea Development Bank (KDB) on Friday (Jan 12). 

But the successful ballot is only the first step in a potentially months-long restructuring process for the firm, which had net debt of 1.8 trillion won (S$1.8 billion) as at last September.

KDB will set up a body to supervise financial management of the builder, which is part of a larger conglomerate that also includes one of the nation’s biggest broadcasters.

Creditors want to push ahead with construction projects already underway, according to KDB’s statement.  

Taeyoung has rekindled memories of a default in 2022 by the developer of a Legoland amusement park that sent short-term corporate borrowing costs to their highest in over a decade.

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The case has sent the authorities into damage control mode to contain any fallout, with sensitivities running high after other real estate debt related crises that struck after the Bank of Korea started hiking interest rates in 2021. 

With borrowing costs surging, Taeyoung struggled to refinance project finance loans, the same kind of short-term debt taken out by builders for construction projects that caused the Legoland developer crisis.

Taeyoung told creditors that the rate of interest on its project-financing bonds had risen six fold to 13.8 per cent in the space of two years and that roughly 27 per cent of the 9.5 trillion won of debts it had guaranteed were risky. 

To generate cash, Taeyoung Group is selling off assets and offered to provide even its lucrative stake in Seoul Broadcasting System as collateral, if needed, in order to win a green light from creditors. 

After a rally in anticipation of the deal, Taeyoung’s shares tumbled as investors took profit on the news.

The stock was down 19 per cent or 715 won at 3,050 won in Seoul on Friday.

Taeyoung’s 2024 won bond was trading at 62 per cent of par during the day, just shy of its all-time low and down from 97.2 per cent before it announced the restructuring.

Officials’ policy steps have helped stop credit markets going into a spin this time, with yield premiums stable since the start of the year.

But Korean house prices are down more than 5 per cent from their peak in mid 2022, according to Kookmin Bank, and an election in April is adding to pressure on the government.

Some polls suggest President Yoon Suk Yeol’s party faces almost certain defeat. 

Korea’s finance minister pledged to step up a US$66 billion programme to stabilise markets, if needed. Likewise, Lee Bokhyun, governor of the Financial Supervisory Service, a market watchdog, said there was a contingency plan to calm markets, if required. 

Yields on commercial paper, which spiked as a result of Legoland’s troubles, have been steady in recent days, well below their 2022 crisis-era peak. 

Korea’s finance ministry said in a statement on Friday that the authorities would strengthen monitoring of major construction sites and take timely measures due to concerns about real estate project financing.

Financial markets are relatively stable, they also said. 

Having agreed to kick-start the process, creditors will have until Apr 10 to undertake due diligence of Taeyoung Engineering & Construction’s business.

The deadline for agreement on a restructuring proposal is Apr 11, with a detailed plan to be signed within a month of that date.

Changes to the yield and maturity of the builder’s debt could be decided on during those talks. 

Taeyoung estimates that roughly 34 per cent of all companies in Korea succeed in resuming normal business after creditor-led restructuring, higher than 12 per cent ratio for businesses that land in court receivership, according to a presentation to creditors this month. BLOOMBERG