[Q&A] Lee Bok-hyun on Taeyoung's claim 'External loan = financial bond': "Excuse and pretext"

Morning of the 4th Financial Supervisory Service Press Briefing
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Lee Bok-hyun, Governor of the Financial Supervisory Service, is holding a press conference at the Financial Supervisory Service in Yeouido, Seoul, on the 4th. Photo by Kang Jin-hyung aymsdream@

On the 4th, Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), criticized Taeyoung Construction for failing to repay hundreds of billions of won in accounts receivable-backed loans (external accounts receivable loans, or EAD) that matured, stating, "The trust, which is the premise for initiating a workout (corporate restructuring), has not been restored," and added, "No matter what excuses Taeyoung makes, they simply did not keep their promise."

At a press briefing held at 10 a.m. at the FSS headquarters in Yeouido, Seoul, Governor Lee said, "The authorities are closely monitoring with concern and vigilance as the minimum self-help measures promised at the time of the workout application have not been observed from the outset."

Taeyoung Construction did not repay 45.1 billion won of the 148.5 billion won in trade receivables that matured on December 29 last year. The company claimed that the EAD was a 'workout target debt' and argued that it did not have to be repaid. However, financial authorities and the main creditor bank, Korea Development Bank (KDB), maintain that even the minimum promises to demonstrate sincerity in self-help efforts have not been kept.

There is also controversy over the self-help efforts of Taeyoung Construction and its owner family. Yesterday, KDB held a creditor briefing attended by about 600 creditors. The sale of shares in the core affiliate SBS or the personal fund contributions from the founding chairman Yoon Se-young and the owner family were not included. Kang Seok-hoon, Chairman of KDB, who acts as a mediator between creditors and debtors, expressed regret, saying, "Taeyoung did not implement the promised self-help plan."

Governor Lee stated, "We will cooperate organically with related institutions to minimize damage to subcontractors and buyers and to prevent impact on the construction industry," and added, "We are currently operating a task force (TF) on the Hong Kong H-index equity-linked securities (ELS), and based on on-site and written investigations of sales companies, we plan to launch a fact-finding investigation if problems are revealed." Several overseas investment banks (IBs) involved in illegal short selling amounting to hundreds of billions of won have also been identified, and results will be announced soon after the investigation is completed.

Below is a Q&A with Lee Bok-hyun, Governor of the Financial Supervisory Service.

- You emphasized the loss burden on major shareholders regarding restructuring principles. In the case of Taeyoung Group, there was no personal fund contribution. What is the financial authorities' view on their plea for recovery?

▲ Regarding Taeyoung Construction's workout, in addition to the principle of orderly restructuring based on principles, the characteristics of project financing (PF) assets such as real estate must be considered. There are many stakeholders with differing interests. To obtain the agreement and consent of the major creditors, a more sincere and genuine commitment from the major shareholders and the group is necessary.

What is regrettable is that, as Chairman Yoon Se-young also mentioned, the fundamental promise at the forefront, which was the basic condition to support minimizing losses for buyers, was not kept. In reality, it is being used to protect the shares of TY Holdings, the core of the founding family's foundation. To put it bluntly, the creditor group suspects that this is not Taeyoung Construction's self-help plan but rather the owner family's self-help plan. Despite having hundreds of billions to trillions of won in cash and liquid assets through subsidiary sales, the owner family did not include a single won in the workout plan.

During the real estate boom, Taeyoung earned over 1 trillion won in profits by handling both development and construction, and a significant portion of this benefited the founding family. As the real estate market declines, subcontractors and buyers, not the major shareholders, are left to bear the burden, evoking the Korean proverb 'Gyeon-ri-mang-ui (견리망의),' meaning 'to forget loyalty when seeing profit.'

Taeyoung initially mentioned a self-help effort involving 'cutting their own flesh' when applying for the workout, but the creditor group suspects it is more like 'cutting others' flesh.' From the authorities' perspective, there is some understanding of the major creditors' position. For stakeholders to share pain and lead the company forward, especially when new capital injection or equity conversion is required, the major creditors must have sufficient trust in the management's self-help efforts.

Fundamentally, a workout is based on voluntary agreements between creditors and debtors involving pain and loss sharing. It is not a procedure where the government authorities provide the final answer. We watch with interest and concern but cannot provide answers in advance.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is holding a press conference on the 4th at the Financial Supervisory Service in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

However, judging from KDB's statement yesterday, it is clear that their position is that the efforts are very insufficient. We have heard both sides as the gap between creditors and debtors has widened recently. From the major creditors' perspective, they hope Taeyoung will sincerely present a funding plan for at least six months, preferably about a year, showing how much of the shortfall can be covered by the major shareholders' efforts, how close they have come to the maximum effort, what the remaining shortfall is, and how much the creditors will need to supply later. Only then can the creditor group hold internal meetings and reach agreements.

Based on KDB's announcement yesterday and the information we received, even the basic situation has not been shared. Beyond insufficient self-help efforts, the fundamental premises for dialogue have not been organized. Although the authorities have not reviewed contracts or accounting status and cannot confirm, there is suspicion that the cash liquidity secured from the sale of Taeyoung Industry, which has already been obtained, was not used as promised and may have been spent on other more urgent needs of the owner family.

Moreover, the sale proceeds have different natures; there are funds held personally by the chairman and funds held by the company. The creditor group suspects that the company funds are being used, while the personal funds are parked separately. Regarding other important self-help efforts, such as the sale of Blue One as collateral, it is heard that the funds are first used for urgent repayments by the major shareholders, with the position that they will be injected into Taeyoung Construction later. In reality, no cash assets are coming in.

Although Ecobit is quite sound, there are other major shareholders holding significant stakes, and given various M&A conditions, the creditor group doubts whether liquidity can be generated through short-term sales. Regardless of soundness, the creditor group questions whether the major shareholders have a realistic funding plan for the first half of the year.

Regarding the sale of SBS shares, we reviewed Taeyoung's position materials, which mentioned restrictions on selling or pledging the major asset, SBS shares. Some aspects are understandable, others not. The creditor group has conveyed that even without the complex SBS, since Taeyoung Holdings is a listed company and the major shareholders hold shares, they are demanding ways to utilize this.

While the authorities cannot make final decisions on methods and means, sincere dialogue is necessary. However, from our standpoint, the deadline is January 11, and it is not possible to present a plan on that day and demand unconditional agreement. The main creditor bank, KDB, must be presented with a plan it can accept. Since KDB must also persuade other creditors, we have heard concerns that if this extends beyond the weekend, KDB will have insufficient time to persuade others.

- If no meaningful self-help plan emerges regarding Taeyoung Construction, do you think the workout could fail? The project financing (PF) market may be shocked; do you think it can handle this?

▲ Regarding the EAD, it is indeed a financial claim in terms of credit extension. However, the nature of the EAD is that it is based on the idea of proceeding with the business to share upside in a better form. At least trust is needed to proceed with the business. If Taeyoung defaults on the EAD, financial institutions will have to bear the burden, and the framework allowing financial institutions to securitize claims related to goods and services provided by Taeyoung's clients will disappear. It is not the financial claim status that matters but whether it is necessary for sustainable business. If this is destroyed, Taeyoung Construction will be unable to finance through electronic notes or claims while conducting business. Without resolving the EAD, basic trust accumulation is difficult.

The reason I mention this first is that there are detailed issues for initiating the workout. If these are resolved one by one, a workout conclusion can be reached. As Chairman Yoon said yesterday, if the major shareholders, who bear great responsibility to buyers, subcontractors, and creditors, can clear misunderstandings and provide liquidity grounds acceptable to creditors, the workout is fully possible.

However, under the current Corporate Restructuring Promotion Act, the authorities cannot force creditors to bear excessive responsibility or to agree to the workout. We act as a catalyst between points of agreement and disagreement to facilitate the workout as much as possible. The Ministry of Land, Infrastructure and Transport and local governments should assist in this. Ultimately, it is a matter for creditors and debtors to resolve. Regardless of the outcome, we are preparing various measures to stabilize the market and protect stakeholders' interests. We will announce market stabilization measures we are preparing within a few days.

From Taeyoung's perspective, if TY Holdings' finances are shaken, the entire group may be destabilized, which we understand. From the creditors' standpoint, if the contingent liabilities they recognize amount to 2.5 trillion won, the owner family bears only a very small portion, and the rest must be borne by others. There is no assurance of feasibility, and there is distrust that collateral systems and means necessary for additional funding have been concealed. If there is a role for the authorities to play, we will do so. This is not a fully unified opinion within the government, but if necessary, I will fulfill my role.

- SBS was one of the main concerns of the creditor group. What parts are unacceptable due to broadcasting law restrictions?

▲ They said there are such restrictions under the Broadcasting Act, and I think that may be true. However, from the creditor group's perspective, if this is just an excuse, TY Holdings itself is a listed company with easy valuation and owned by the owner, so there should be ways to utilize it. This is the situation the creditor group perceives.

- TY Holdings announced it would lend 113.3 billion won to Taeyoung Construction, but only 40 billion won has actually been provided. The company said it would lend in installments. Could this be considered false disclosure?

▲ A workout can be applied for unilaterally by the company, but due to the nature of workouts, there is coordination with the main creditor bank before application. There was consensus to start the workout on the premise of new funding support of about 110 billion won from TY Holdings and construction and settling trade receivables due on the 29th. Regardless of whether there was a disclosure violation, the fundamental trust has been lost. This has resulted in blocking the essential means for successful workout progress, the EAD. No matter what excuses Taeyoung makes, they simply did not keep their promise. Disclosure violations may be discussed later regarding various violations, but currently, it seems unconstructive in the trust-based agreement process. The creditor group or shareholders may raise issues afterward.

- TY Holdings claims that regarding Taeyoung Construction's unpaid EAD funds, they cannot provide them due to debt moratorium under the workout application.

▲ While it is true that it is a financial claim in terms of credit extension, the claim that they cannot provide funds is incorrect. On the 28th, when the workout application was made, some funds due on the 29th were of the EAD nature, and it was naturally designed to provide those. Based on precedents, the creditor group exercises voting rights or adjusts legal relations based on the upper limit of the open EAD line. The legal interpretation itself is not wrong, but regardless, if the EAD does not operate, smooth business progress is difficult. Taeyoung should know this. This is just a thin excuse for not keeping promises.

- Taeyoung Construction said at the briefing that if the EAD debt moratorium exclusion is granted on the 11th agenda, they will repay the EAD thereafter. Do you see this as a solution?

▲ I understand Taeyoung's position, but the promise was not kept from the start. They are giving homework to the other party without taking responsibility. The four conditions mentioned by KDB's chairman are the minimum conditions for starting the workout and must be observed. KDB must also persuade creditors. Regarding Taeyoung's statement on SBS, even if not by that method, there are other financial or collateral values that can be used. This is not the authorities' position but KDB's or creditors'. Without some trust from the other party, there is no solution. There may be misunderstandings about time, but the authorities are not the main player. If anyone expects this issue to drag on past January 11, that is not the case. It will end on the 11th.

- Chairman Yoon Se-young said he used liquidity prepared to repay more urgent debts. Where was this used?

▲ We have not contacted Taeyoung directly, so you should ask them. Our understanding is based on market-verified information and information provided by creditors. However, Taeyoung must know the importance of the EAD, so why they try to shift responsibility to creditors and claim they disclosed it, and whether there is something more urgent, raises strong doubts. While there was an emotional appeal, they need to respond with numbers, not emotions.

- Have you been contacted or met by the Taeyoung owner family?

▲ We have not met, but if contacted, it is not impossible to meet. While the authorities' role is limited, as the FSS Governor personally, if I can mediate differences between creditors and debtors, I have no reason to refuse contact. Taeyoung, please reach out.

- How do you assess the current real estate PF crisis compared to the Legoland case?

▲ We take any issue seriously regarding market impact. Recently, for about a year and a half to two years, heads and staff of related institutions have been coordinating closely. We believe we can exert our capabilities to the fullest and will do our best.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is holding a press conference at the Financial Supervisory Service in Yeouido, Seoul, on the 4th. Photo by Kang Jin-hyung aymsdream@

- As of the end of last year, the FSS estimated the PF-ABCP scale at 32.5 trillion won. About 20 trillion won matures in the first quarter of this year. Most securities firms and construction companies have provided credit enhancement (purchase commitments). If problems arise, securities firms and construction companies must repay. How is the financial authorities monitoring this?

▲ Regarding the PF-ABCP short-term funding market, we have monitored it for a long time using various methods. When there is volatility or concentration, we have sometimes taken measures discreetly to control it and are monitoring closely. We are aware of concerns related to specific construction companies or issues, but there is no need to worry excessively about short-term funding bonds. In this sense, the market participants are reacting to Taeyoung Construction's workout, and we believe the authorities can control the situation. We are prepared for any case of individual construction company workouts.

- You mentioned detecting global IB short selling. Was there prior notice, and what is the investigation status?

▲ We detected clues involving hundreds of billions of won, and some cases are under significant investigation. We say the deadline is over, but there are various cases such as not submitting within two weeks. Some are in the final stages, and we will announce soon.

- Abroad, there are concerns or immature views regarding Korea's sanctions on global IB short selling. What efforts are being made to regain trust?

▲ We can conduct investigations quickly, but we proceed with the intent to listen thoroughly. We believe trust from individuals and foreign investors is important, so we are preparing explanatory efforts targeting regions and financial institutions closely related to issues such as Hong Kong. We are preparing this as part of international business within the year, including IR-type explanations and explanations to Hong Kong supervisory authorities.

- The on-site investigation related to Hong Kong ELS took longer than expected.

▲ There are many issues mixed together. The prosecution will start very promptly, and it may be better for the deputy director in charge to organize materials and report later.

- Are you considering institutional improvements related to incomplete sales of Hong Kong ELS?

▲ The formal requirements are met now, but consumers sign after clicking for 30 to 40 minutes without understanding. We need to consider ways to help consumers understand what they need to know more easily and effectively, including fact-finding on individual cases. We consider this one of the important issues to address this year.

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