A South Korean builder whose plan to restructure debt prompted a rating agency to warn of spillover risk slid on Thursday, fueling concerns in a nation on alert for crises in project finance.

Taeyoung Engineering & Construction, whose projects include a baseball stadium and a post office in Seoul’s financial district, dropped as much as 18% in the stock market. Its 2024 won note also declined, after the firm’s top creditor pushed back on its request to restructure its debts, saying it lacked a sufficient plan. 

Officials in Korea are bracing for trouble in the credit market, already rocked by the default of a developer in 2022. While there are so far no signs of contagion and Taeyoung ranks only 16th in the construction sector, the case is garnering attention as a harbinger of what may lie in store as builders grapple with higher borrowing costs. 

“The construction industry credit outlook is negative,” Ji-hoon Jeon, chief analyst at Korea Investors Service, said at a briefing on Thursday. “If there is no full-fledged economic rebound, liquidity risk may spread.” 

Taeyoung’s shares ended down 5.4% in Seoul on Thursday, while the bond fell to 62% of its par value from 63% the day before, according to Bloomberg-compiled data. That’s the note’s fifth decline in six sessions. 

South Korea relies on short-term debt to finance construction, and the default of the developer of the Legoland theme park on this type of asset-backed security triggered a surge in short-term debt yields in 2022. The government was forced to step in.  

In July, fresh risks flared in real estate finance when customers of MG Community Credit Cooperatives, a key source of property market funds, pulled deposits on concerns that soured debts linked to project financing had worsened. 

Taeyoung E&C should submit a self-rescue plan this week and creditors will decide by Jan. 11 whether to begin restructuring procedures, Lee Bokhyun, governor of the Financial Supervisory Service (FSS), a market watchdog, said at a briefing on Thursday. The FSS has a contingency plan to stabilise financial markets, if needed, he said. 

Delinquencies on the project financing loans rose in 2023, and the Bank of Korea has warned risks related to real estate project financing are likely to increase, even though the overall financial system will stay stable.

Taeyoung is more exposed than its peers to project financing guarantees, and the builder last week asked Korea Development Bank (KDB), its largest creditor, to revise the payment terms of its debt. 

The company says it has discussed the sale of assets and provision of collateral, restructuring and cost reduction with creditors. But KDB this week has expressed reservations and urged it to present a plan.

Taeyoung’s third-quarter financial report lists total borrowings of 2.2 trillion won , with KDB the biggest lender. Kookmin Bank, Shinhan Financial Group Co Ltd, Woori Financial Group Inc and Hana Financial Group Inc also feature on the list. 

  - Bloomberg