CEO Morning Brief

South Korea Pledges Market Aid as Builder Requests Creditors to Reschedule Debt

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Publish date: Fri, 29 Dec 2023, 08:48 AM
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TheEdge CEO Morning Brief

(Dec 28): South Korea sought to reassure investors after Taeyoung Engineering & Construction Co asked for its debts to be reorganised, reigniting concerns about the type of asset-backed security that triggered a credit crunch in the country last year.

The financial regulator said on Thursday it would expand refinancing support for corporate bonds and commercial paper issued by construction companies, as well as a programme allowing small and medium-sized companies to raise funds via debt capital markets. That’s a bid to avoid a repeat of 2022, when the government was forced to intervene to forestall a full-blown crisis after the default of a developer triggered a spike in firms’ borrowing costs.

“We will immediately put into operation market stabilisation measures already in place, and significantly expand and strengthen their scale and content depending on market conditions,” Financial Services Commission (FSC) chairman Kim Joo-hyun said at a briefing.

The regulator’s pledge comes after Taeyoung E&C, which provides civil engineering and construction services, said it had asked creditors to revise the payment terms of its debt. Its filing showed 40 billion won (RM142.94 million) of project finance loans guaranteed by Taeyoung were to mature on Thursday.

While the company did not say in the filing what changes it was seeking and Taeyoung’s representative did not elaborate when contacted by Bloomberg, the FSC said its exposure to project financing guarantees was larger than that of the country’s other major construction companies.

Taeyoung E&C’s shares slumped to their lowest since 2016 this week after a media report that the country’s 16th-largest construction company might seek a restructuring. The stock fluctuated between losses and gains in volatile trading on Thursday and closed down 3.7%. The construction sub-gauge of Korea’s stock index underperformed other sectors, with other builders also posting losses in a sign investors fear the trouble may spread.

But the price of Taeyoung’s 100 billion won bond maturing in July 2024 sank 28% on Thursday, according to Korea exchange prices compiled by Bloomberg.

Taeyoung E&C’s third-quarter financial report lists total borrowings of 2.2 trillion won, with Korea Development Bank the biggest lender. Financial institutions’ exposure totalled 4.58 trillion won, only about 0.09% of the sector’s overall assets.

Even so, the builder’s request is the latest in a series of worrying incidents in Korea, where authorities have been on the lookout for signs of credit market trouble after the developer of the Legoland park missed a payment on project finance asset-backed commercial paper last year, triggering the worst run up in short-term yields since the global financial crisis.

Then in July 2023, the branch of a credit union closed, having suffered losses on real estate-related loans.

KDB said creditors will hold a meeting and decide by Jan 11 whether to accept the builder’s request. Taeyoung E&C will hold an information session on Jan 3 to outline its plans, KDB also said.

Korean law requires 75% of creditors to approve the plan, and once a company files for an overhaul of its liabilities, all financial debts due get halted.

While the Legoland crisis came to be viewed as an example of the struggle to safeguard financial stability in a world of rapidly rising interest rates, the global macroeconomic environment has since shifted. Traders have ramped up expectations that central banks in many countries will slash interest rates next year, which could ease the debt servicing costs for companies.

“Many people ask questions such as whether this would be another the Legoland crisis,” Kwon Dae-young, standing commissioner of the FSC said. But the direction of the global market has changed. “At that time, interest rates were rising and we were in a tightening mode,” but now an end to the increases seems to be in sight.

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Source: TheEdge - 29 Dec 2023

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