Taeyoung Construction Files for Workout... Concerns Over Chain Crisis in Construction and Finance Industries

Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF) insolvency, applied for a workout (corporate restructuring) on the 28th. As Taeyoung Construction, ranked 16th in construction capability, applied for a workout, ripple effects such as a chain crisis among construction companies due to PF insolvency are expected.

Entrance of Taeyoung Construction Headquarters, Yeongdeungpo-gu, Seoul. / Photo by Jin-Hyung Kang aymsdream@

According to the finance and real estate industries, Taeyoung Construction held a board meeting on the morning of the same day, resolved to apply for a workout, and submitted the application to its main creditor bank, the Korea Development Bank (KDB). In response, the KDB immediately convened a creditors' meeting and began related procedures. Going forward, the creditors will hold the first consultation meeting within 14 days from the date of the notice of convocation and decide whether to commence the workout.

The reason Taeyoung Construction ultimately applied for a workout is due to the repayment issue of matured real estate PF loans. The maturity of a 48 billion KRW PF loan related to the office development project in Seongsu-dong, Seongdong-gu, Seoul, fell due on the same day. According to financial sector estimates, Taeyoung Construction's net real estate PF balance is 3.2 trillion KRW, and PF guarantee debt maturing by this month amounts to 395.6 billion KRW.

As of the end of the third quarter this year on a consolidated basis, Taeyoung Construction's net borrowings reached 1.8176 trillion KRW, and its debt ratio stood at 478.7%. This is the highest debt ratio among construction companies ranked around 35th in construction capability.

A workout is a pre-bankruptcy stage requiring strong self-help efforts. If the creditors determine that a voluntary agreement, where the company conducts restructuring on its own, is difficult, the workout process begins. In this case, restructuring is led by the creditors and proceeds faster than a voluntary agreement. However, management rights are transferred to the creditors, which may result in the dismissal of the existing management team.

According to the recently enacted Corporate Restructuring Promotion Act (hereinafter referred to as the CRPA) at the beginning of this month, a workout is initiated if more than 75% of the creditors agree. In this case, Taeyoung Construction will receive loan maturity extensions and financial support under creditor supervision. Taeyoung Construction's main creditor banks are KDB and KB Kookmin Bank. The CRPA was sunset on the 15th of last month but was re-enacted, making Taeyoung Construction likely the first company to undergo a workout under this law.

Taeyoung Construction's workout application has spread concerns throughout the construction industry about managing PF insolvency. With high interest rates, rising construction costs, and economic recession overlapping in a poor business environment, if the slump in the sales market continues until next year, there is an analysis that PF contingent liabilities amounting to 22.8 trillion KRW (according to Korea Ratings as of the end of August) could materialize. There are also expectations that companies like Kolon Global and Shinsegae Construction could face liquidity crises due to PF contingent liabilities.

The PF crisis in the construction industry could also lead to financial sector insolvency. According to the Financial Services Commission, as of the end of September this year, the domestic PF loan balance was 134.3 trillion KRW, a sharp increase of about 42 trillion KRW (45%) compared to 92.5 trillion KRW at the end of 2020, about three years ago. The PF loan delinquency rate jumped from 1.19% at the end of last year to 2.42% at the end of September this year.

Accordingly, the government is preparing measures to prevent PF issues from spreading into crises in the finance and construction industries. Earlier, the so-called 'F(Finance)4' officials?Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance nominee; Kim Ju-hyun, Chairman of the Financial Services Commission; Lee Bok-hyun, Governor of the Financial Supervisory Service; and Lee Chang-yong, Governor of the Bank of Korea?met on the 26th to discuss related matters.

This content was produced with the assistance of AI translation services.