Taeyoung Construction’s workout start confirmed, is it the end or the beginning?

Due diligence of assets and liabilities for 3 months → Evaluation of company survival ability
Will the PF lenders consultative body become an obstacle to rapid normalization?
“Taeyoung is just the tip of the iceberg”, the risk of PF insolvency is at its peak

The start of Taeyoung Construction’s corporate improvement work (workout) has been confirmed. The results were originally scheduled to be compiled on the 12th, but creditors quickly expressed their intention to agree, securing a 75% consent rate based on the bond amount early on. On the 11th, KDB Korea Development Bank, Taeyoung Construction’s main creditor bank, announced this, saying, “We have received information on the amount of the claim and whether consent has been received from approximately 600 financial creditors of Taeyoung Construction.” In the industry, the prevailing opinion is that although the Taeyoung Construction incident has passed a major juncture, the risk level in the real estate project financing (PF) market is still high.

A detailed corporate improvement plan is expected to be announced as early as April

According to the financial authorities on the 12th, Taeyoung Construction secured more than 6% (based on bond amount), which is the requirement for approval to start the workout, at around 75 PM the previous day. Voting was conducted in writing, and creditors participated in the vote using fax or email.

There is a feeling in the industry that Taeyoung Construction’s workout launch was a planned process. In addition to the Korea Development Bank and other affiliates of major financial holding companies that hold about a third of the total bond amount, they have already indicated their intention to agree to the workout, and the National Pension Service and the Housing and Urban Guarantee Corporation (HUG), which hold about 3% of the bond amount, have agreed to the government’s plan. This is because it is an organization that is influenced by policy. The government has repeatedly expressed concerns about Taeyoung Engineering & Construction’s real estate PF insolvency spreading throughout the economy.

Taeyoung Construction has experienced numerous ups and downs for about two weeks since applying for a workout on December 12th of last year. On the 28th of last month, the day after the application, it was revealed that the parent company Taeyoung Group had used the proceeds from the sale of Taeyoung Industry to repay the debt of its holding company, TY Holdings, not Taeyoung Construction, arousing public outrage from creditors, and on the 2rd of this month, KDB Chairman Kang Seok-hoon said, “Taeyoung’s side He also criticized the creditors on behalf of the creditors, saying, “They are not showing any will to implement the self-rescue plan originally promised.”

On the 4th, voices of concern also emerged from financial authorities. Lee Bok-hyeon, head of the Financial Supervisory Service, said, “The self-rescue plan proposed by Taeyoung Construction is not a plan for normalizing the company, but a plan for the owners.” In the end, Taeyoung Construction raised the white flag on the 9th by presenting an additional self-rescue plan to provide TI Holdings shares (33.7%) and SBS shares (36.9%) as collateral.

Korea Development Bank plans to appoint an external accounting firm to conduct asset and liability due diligence on Taeyoung Construction over the next three months. This is to evaluate the future business feasibility of 3 business sites scattered across the country and evaluate the company’s ability to survive by identifying more specific debt amounts. The Korea Development Bank said, “We plan to announce a corporate improvement plan that includes the amount of funds needed to normalize Taeyoung Construction as early as April 112. “It can be extended by up to one month if necessary.”

“Starting a workout is just the beginning” There are also skeptical views

Taeyoung Construction’s workout has several differences from those of Yeocha Construction Company that have been carried out so far. This is the first construction company workout led by the Korea Development Bank 2009 years after Kumho Industrial (now Kumho Construction) in 15, and the restructuring environment has changed significantly in the meantime.

First, the “Corporate Restructuring Promotion Act,” which contains various regulations related to workouts, was revised. In the revision promoted in 2016, the scope of application of the law was expanded from existing financial institutions to all financial creditors. If they hold the bonds of the target company, ordinary companies or investors other than financial companies can now participate in the vote to initiate the workout. This is the reason why Taeyoung Construction could not hide its anxiety until the end regarding whether or not to start workouts.

Taeyoung Construction is also the first to apply the financial authorities’ PF normalization plan to the workout procedure. In 2012, the Financial Supervisory Service prepared the ‘Workout Construction Company Management Normalization Plan Implementation Agreement Guidelines’ that presented the scope of support between the construction company’s creditor bank and PF lenders. Typically, construction companies carrying out large-scale development projects have a much larger PF business loan guarantee than funds borrowed directly from banks. This is to prevent construction companies from being forced into court receivership due to lack of funds while creditor banks and PF lenders delay providing financial support to each other. This is a measure for

In accordance with the guidelines, Taeyoung Construction’s PF lenders will form a separate consultative body within the creditors’ group to discuss funding support plans and opinion adjustments, and prepare PF treatment plans after conducting due diligence for each business site. As the workout process becomes more complex and the number of people involved in the process increases, it is expected that it will take a considerable amount of time to normalize business.

In the real estate and construction industry, it is predicted that Taeyoung Construction’s management’s self-rescue efforts will determine the speed of restructuring as the government shows its will to support and revive the company. An official from the financial sector said, “In the past, Korea Development Bank, the main creditor bank, would have actively led the workout, but as of now, Korea Development Bank is just one of many creditor banks,” and added, “As we need to consider audits by the Board of Audit and Inspection in the future, this latest “Workouts will be carried out very carefully,” he said.

Financial market remains on thin ice despite signs of resolution of Taeyoung crisis

Experts expressed deep concern about the possibility that this crisis would not end at the level of Taeyoung Group and its creditors but could spread to the entire financial market. Due to the nature of the construction industry, where large amounts of funds are invested, liquidity risks arising from specific companies are bound to have an impact on the entire industry. It is explained that Taeyoung Construction’s workout will bring the insolvency of several construction companies to the surface.

The fact that real estate PF risks have not been resolved at all despite the steady increase in household debt, which indicates the revitalization of transactions in the real estate market, also adds weight to these concerns. As of the end of November 2023, the credit spread between PF-asset-backed commercial paper (ABCP) with domestic credit ratings of A11 and A1 or lower was 2%p, widening about three times compared to the same month last year (2.65%p). The credit spread, which refers to the difference in interest rates between two bonds, means that as the figure increases, it becomes more difficult for a company to borrow money.

To make matters worse, domestic construction investment is also expected to fall significantly. A recession in the construction industry is expected as construction starts decrease after 2022. Kim Seong-hwan, associate research fellow at the Construction Industry Institute of Korea, said, “Since the second half of last year, the rigidity of overall lending attitudes, including policy loans, has strengthened, and the timing of interest rate cuts cannot be predicted, so a downward turn in the real estate market seems inevitable.” .