Taeyoung Construction Workout... Could It Spread to Securities Firms' Liquidity Crisis?

Securities Firms Face 13% Delinquency Rate in Real Estate PF
Funding Difficulties Inevitable for Guarantee Execution

Mid-sized construction company Taeyoung Construction's application for a workout (corporate rehabilitation) has raised growing concerns that a real estate project financing (PF) crisis could become a ticking time bomb for securities firms. If fear of a real estate PF crisis spreads in the market due to Taeyoung Construction's workout situation, securities firms may face difficulties in short-term fundraising. In particular, it is analyzed that small and medium-sized securities firms, which have less fundraising capacity than large securities firms, could be hit hardest.

On the 28th, Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), applied for a workout (corporate restructuring). The entrance of Taeyoung Construction headquarters in Yeongdeungpo-gu, Seoul. Photo by Jinhyung Kang aymsdream@

According to the 'Financial Stability Report' published by the Bank of Korea on the 29th, the outstanding balance of real estate PF loans surged 45.2% (41.8 trillion won) in less than three years, from 92.5 trillion won at the end of 2020 to 134.3 trillion won at the end of September this year. Among these, the scale of securities firms' real estate PF debt guarantees was 21.7 trillion won at the end of September, accounting for about 16% of total loans. Securities firms have typically supported PF funds in the form of debt guarantees rather than direct loans. If the real estate project is delayed or canceled and the developer fails to repay the PF loan, the guaranteeing securities firm must repay the money on their behalf.

Although the loan scale is smaller than that of banks and credit institutions, the delinquency rate is noteworthy. Mutual finance and savings banks calculate delinquency rates based on principal overdue by one day or more or interest overdue by one month or more, but the delinquency rate of securities firms jumped from 10.4% last year to 13.9% at the end of September. This is the highest figure in the financial sector. It means that cases of borrowing money but failing to repay principal or interest have increased accordingly. This is believed to be due to the increase in developers and construction companies that failed to recover funds as more projects were overturned or sales delayed following the cooling of the real estate market at the end of last year.

Industry insiders say the crisis triggered by Taeyoung Construction is unlikely to immediately spread to securities firms but could serve as a catalyst for reigniting the real estate PF crisis, warranting close attention. There is concern that the liquidity crisis experienced by securities firms due to deteriorated investment sentiment after last year's Legoland incident could recur.

A representative from a large securities firm said, "If anxiety about real estate PF defaults spreads in the market following Taeyoung Construction, considering the worsened investment sentiment, interest rates on commercial paper (CP) issuance will inevitably be set higher." He added, "This could lead to issuance failure or poor circulation, causing difficulties in fundraising."

In particular, small and medium-sized securities firms, which have less capacity to respond than large securities firms, are expected to bear a greater PF risk burden. Many small and medium-sized securities firms have provided loan guarantees for projects with high business risks aiming for interest income.

Another concerning point is that during the housing market downturn, the proportion of guarantees is higher in local areas than in the metropolitan area, where housing prices and sales performance are relatively better, and higher in subordinate ranks than in senior ranks. In fact, the fixed-below ratio (the proportion of guarantees with principal debtor delinquency or default) centered on small and medium-sized securities firms surged to 2.5% as of the end of September, a sharp increase from 0.5% a year earlier. The proportion of mid- and subordinate-rank PF guarantees, which pose a high risk of realization requiring securities firms to repay directly, also reached 74.1% for small and medium-sized firms. This is high compared to 29.3% for comprehensive financial investment companies with more than 3 trillion won in equity capital.

A representative from a small and medium-sized securities firm said, "Although the Taeyoung Construction incident is unlikely to immediately escalate into a financial issue, we are closely monitoring the situation as the real estate PF market could tighten."

With PF delinquency rates and loan interest rates steadily rising, securities firms with large debt guarantee balances cannot be complacent. This is because there are no signs of recovery in the real estate market, which directly affects the recovery of real estate PF loans, and the trend of interest rate hikes continues. The interest rate on securities firms' PF loans rose from 4.8% per annum at the end of 2020 to 6.9% at the end of last year and 7.1% at the end of June this year.

Meanwhile, financial authorities maintain that the possibility of Taeyoung Construction's workout spreading throughout the financial sector is slim. Currently, the total exposure of financial institutions related to Taeyoung Construction is 4.58 trillion won, accounting for only 0.09% of total assets.

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