Unstable Movements in 'Construction Company Bonds' Amid Taeyoung Construction Workout

Taeyoung Construction Bonds Plunge Up to 60% of Principal
Other Construction Company Bonds Also See Trading Yield Fluctuations
2.4 Trillion Won Refinancing Emergency for Construction Bonds Maturing in First Half of Next Year

Corporate bonds issued by construction companies are showing signs of a sharp price decline. This is due to growing concerns over construction company bonds and credit ratings following Taeyoung Construction's application for a workout (corporate financial restructuring). With construction company bonds nearing 2.4 trillion won maturing in the first half of next year, there is an emergency regarding the refinancing of construction companies' maturing borrowings.

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

According to the bond market on the 29th, the corporate bonds issued by Taeyoung Construction plummeted to about 60% of their evaluated price on the day before Taeyoung Construction applied for a workout. The bond trading yield (transaction yield) was around 102%, which is 97 percentage points higher than the private bond rating agency's evaluation yield (average market yield). A sharp rise in transaction yield means a sharp drop in bond prices. On that day, Taeyoung Construction's credit rating fell to CCC, a rating assigned to companies in the workout stage.

A bond market official explained, "Once the workout process begins, there is a high possibility that the creditors will restructure the debts (loans, corporate bonds, etc.) they hold," adding, "Concerns have grown that it will be difficult to receive timely repayment of principal and interest, and some portion of the principal and interest may not be repaid, leading to a sharp drop in corporate bond prices."

Bonds of other construction companies also traded below their evaluated prices. Corporate bonds issued by SK Ecoplant and Hanshin Engineering traded at yields 308 basis points and 205 basis points higher than the previous day's average market yield, respectively. However, these two bonds have less than two months until maturity, so the price decline due to interest rate fluctuations is not significant. GS Construction's corporate bonds, with more than one year until maturity, traded at 6.038%, which is 101 basis points higher than the average market yield.

A corporate bond market insider said, "Since last year, concerns over project financing (PF) defaults have increased, causing construction company bonds to trade at relatively high interest rates," adding, "Taeyoung Construction's workout application has further worsened investor sentiment toward construction company bonds."

There are also voices of concern warning to be cautious about the possibility of default contagion to other construction companies. Credit rating agencies downgraded GS Construction and Dongbu Construction, which suffered from excessive debt burdens and experienced construction site collapse accidents this year, from A+ and A3+ to A and A3, respectively. Earlier, Shinsegae Construction's credit rating outlook was changed to 'negative' due to an increase in unstarted construction sites and poor sales rates at regional sites.

Government entering for briefing on countermeasures related to Taeyoung Construction workout application
[Image source=Yonhap News]

Meanwhile, corporate bonds worth 2.4 trillion won issued by construction companies will mature in the first half of next year, triggering an emergency for refinancing. In particular, during January and February 2024 alone, corporate bonds worth 1.42 trillion won from major construction companies such as Lotte Construction, SK Ecoplant, Hanwha Construction, and Hyundai Construction are scheduled to mature.

By credit rating, A-grade (A+, A, A-) bonds account for about 1.88 trillion won, approximately 79% of the total maturing volume. The relatively high-grade AA bonds amount to only 140 billion won, while BBB-grade bonds, which are expected to be practically difficult to refinance, total about 350 billion won. The corporate bond maturity volume in the second half of next year is 1.2 trillion won, somewhat less burdensome than the first half, but the shortening of bond maturities may increase the maturing volume.

An asset management company's bond operations manager diagnosed, "For construction companies, as issuing corporate bonds, which used to be a major funding source, becomes difficult, commercial paper (CP) and short-term bonds have shortened the funding maturity," adding, "They need to respond not only to general corporate bonds but also to maturities of convertible bonds or CPs."

The official expressed concern, saying, "The Taeyoung Construction case also involved the shortening of borrowing maturities until they all clustered at once, leading to a default state," and added, "Construction companies facing intensified shortening of borrowings may fall into a vicious cycle where extending or refinancing borrowings becomes increasingly difficult."

Meanwhile, the so-called ‘F(finance)4’?Choi Sang-mok, nominee for Minister of Economy and Finance (Deputy Prime Minister), Kim Ju-hyun, Chairman of the Financial Services Commission, Lee Chang-yong, Governor of the Bank of Korea, and Lee Bok-hyun, Governor of the Financial Supervisory Service?held an emergency macroeconomic and financial meeting on the 29th to discuss measures to prevent real estate PF defaults and to block transmission to the financial market.

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