'Group Support Commitment' Shinsegae Construction Issues 100 Billion Won Option Bonds for KDB Support

원본보기 아이콘

Shinsegae Construction has issued 100 billion KRW worth of option bonds with the support of the Korea Development Bank and others. Although there are significant concerns about project financing (PF) defaults at regional business sites, this move is seen as demonstrating the group's financial support commitment through the merger with Shinsegae Yeongrangho Resort and funding support for its affiliates' construction projects.

According to the investment banking (IB) industry on the 2nd, Shinsegae Construction recently issued privately placed option bonds worth 100 billion KRW. This consists of 70 billion KRW in 2-year maturity bonds and 30 billion KRW in 2 years and 3 months maturity bonds. The interest rates were set at 7.50% and 7.60%, respectively. All bonds include a call option allowing Shinsegae Construction to redeem the bonds before maturity.

The difference in maturity and interest rates is due to different underwriters and bond purchasers. The 70 billion KRW 2-year bonds were largely acquired by the Korea Development Bank, the underwriter, through its issuance market office. The remaining 30 billion KRW bonds were underwritten by Eugene Investment & Securities and purchased by Shinsegae I&C, an affiliate of the Shinsegae Group.

The bonds are structured so that Shinsegae Construction can redeem them early starting three months after issuance and up to three months before maturity. Since the call option period for the bonds borrowed from the Korea Development Bank is relatively short, it is expected that Shinsegae Construction will repay the Korea Development Bank bonds first. An IB industry insider explained, "It appears that the Korea Development Bank acquired senior bonds on the condition that Shinsegae I&C invests some funds in subordinated bonds."

The background behind Shinsegae Construction's ability to raise funds despite high PF default concerns is analyzed as the Shinsegae Group showing its willingness to support construction. In November last year, Shinsegae Construction absorbed and merged with Shinsegae Yeongrangho Resort, a subsidiary of Emart. The plan is to streamline the construction and resort business sectors and create synergy. As a result, Emart's stake in Shinsegae Construction sharply increased from 40.70% to 70.46%.

Additionally, as funding became difficult due to Tae Young Construction's workout, a Shinsegae Group affiliate decided to acquire privately placed bonds issued by Shinsegae Construction. Shinsegae I&C plans to provide an additional 30 billion KRW in two installments of 15 billion KRW each, besides the current 30 billion KRW.

Previously, Shinsegae Construction announced it would issue a total of 200 billion KRW in privately placed bonds, with Shinsegae I&C agreeing to acquire 60 billion KRW worth. Therefore, it is expected that approximately another 100 billion KRW in privately placed bonds with a similar structure will be issued in addition to the current 100 billion KRW option bonds.

A bond market official said, "Although Shinsegae Construction has succeeded in raising some liquidity with the support of the Korea Development Bank and its affiliates, concerns about defaults have not completely eased due to many regional projects (Shinsegae Villiv) with poor business viability or low sales rates. However, the steady demonstration of group-level support intentions has somewhat alleviated market concerns."

Meanwhile, Lotte Construction, also considered a risk group along with Shinsegae Construction, recently succeeded in issuing 200 billion KRW in corporate bonds backed by a payment guarantee from Lotte Chemical. The demand forecast (bidding) for the 1-year maturity bonds targeted at institutional investors received orders totaling 344 billion KRW. This is also evaluated as a result of showing group-level support commitment.

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.