Court Receivership Filings by Construction Firms Halt in August... Is the 'Domino Crisis' Easing?

The crisis among mid-sized construction companies, which had been experiencing a seemingly endless decline, has started to stabilize. Earlier this year, concerns about a "domino crisis" spread as thirteen companies, beginning with Shindonga Construction, consecutively applied for corporate rehabilitation (court receivership). However, for the first time last month, there were no new companies entering court receivership. Among the existing companies under court receivership, some have already received rehabilitation approval, accelerating the normalization process.

Additionally, nearly half of the construction companies ranked in the top 100 for construction capability evaluation have improved their debt ratios. While caution still prevails due to the challenging business environment, some analysts suggest that the worst-case scenario that had weighed heavily on the construction industry may have been avoided.

The headquarters of Shindonga Construction, which recently received corporate rehabilitation approval. Asia Economy DB.

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According to the courts and the construction industry on September 4, following Shindonga Construction’s recent rehabilitation plan approval, Ankang Construction and Daewoo Shipbuilding & Marine Engineering Construction have also set dates for their creditors’ meetings. Daewoo Shipbuilding & Marine Engineering Construction will hold its meeting on September 5, and Ankang Construction on October 17. Both companies, which applied for rehabilitation in February, are now nearing approval after about seven months.

A creditors’ meeting is a stage in the rehabilitation process where stakeholders such as creditors, shareholders, and bondholders gather to review and vote on the rehabilitation plan submitted by the debtor company. The court can grant rehabilitation approval only if at least three-quarters of secured creditors and two-thirds of creditors agree. In essence, this meeting determines the survival of companies under court receivership.

On August 29, Shindonga Construction passed its creditors’ meeting and received rehabilitation approval. As the first company to enter court receivership this year, it had sparked concerns about a domino crisis among mid-sized firms, but its move toward normalization has raised industry expectations. Shindonga Construction succeeded in persuading creditors through strong self-rescue measures, including the development of its headquarters building. Ankang Construction, which is preparing for its creditors’ meeting, is seeking prior consent from creditors by implementing intensive restructuring, such as reducing its workforce by 80%.

Typically, it takes about a year to receive corporate rehabilitation approval. Given this, the current pace in the construction industry is relatively fast. Noh Hyuncheon, head of the Corporate Rehabilitation Research Center at law firm Win & Win, explained, "A creditors’ meeting is held only when it is determined that the company’s going-concern value is higher than its liquidation value. The fact that the process is proceeding faster than expected is evidence that creditors, the court, and companies are all actively working to overcome the crisis."

Since the beginning of this year, thirteen mid-sized construction companies ranked 50th to 200th in construction capability evaluation have applied for rehabilitation. Although new applications were submitted every month since January, there have been no new filings for nearly two months since Shinhan General Construction’s application on July 2. Ewha Construction, which applied for rehabilitation in April, even voluntarily withdrew from court receivership and is working toward management normalization without institutional support.

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Financial indicators that had reflected the liquidity crisis among mid-sized companies are also showing signs of stabilization. According to disclosures by the Financial Supervisory Service, among the 29 construction companies ranked 21st to 100th that submitted semiannual reports, 13 improved their debt ratios. The remaining 16 also saw a slowdown in the sharp rise. The debt ratio, calculated by dividing total liabilities by total equity, is a key indicator of a company’s financial soundness.

Companies that saw significant decreases in their debt ratios include SGC E&C (309.7% to 221.3%, down 88.4 percentage points), Kyungnam Enterprise (181.7% to 144.0%, down 37.7 points), Seohan (163.9% to 135.6%, down 28.3 points), Namkwang Engineering & Construction (248.4% to 221.7%, down 26.7 points), and Samsung Engineering & Architecture (157.0% to 130.8%, down 26.2 points). Except for a few, such as Shinsegae Construction (up 50 points) and HL D&I Halla (up 46 points), no companies experienced a significant increase in their debt ratios.

Experts observe that while the crisis has not been completely resolved, the end of the “chain bankruptcy scenario” that had weighed on the market for mid-sized construction companies appears to be in sight. Although the construction business environment remains difficult, the increasing number of companies accelerating normalization is laying the groundwork for restoring trust.

Lee Eunhyung, a research fellow at the Korea Institute of Construction Policy, said, "Compared to the foreign exchange crisis in 1997, this is by no means an unprecedented crisis. The market is also showing some resilience as it undergoes restructuring centered on sound companies." He added, "Companies ranked in the top 100 have sufficient resilience in terms of business experience, networks, and technological capabilities. However, only when more positive indicators accumulate will the market’s question of ‘Is this truly the bottom?’ be answered."

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