The headquarters of Taeyoung E&C in Seoul / Courtesy of Taeyoung E&C

Speculation runs high that Taeyoung Engineering & Construction (Taeyoung E&C) is close to filing for corporate restructuring due to a liquidity crisis triggered by a soured real estate project financing (PF) deal.

Some market watchers expect the construction company will file for restructuring as early as this week, given that the aggregate amount of PF loans maturing later this week and until early next year has surpassed the level that Taeyoung can service.

The construction company did not confirm the market rumors in a public disclosure announced on Wednesday and said, "The company is currently reviewing various options for the normalization of operations. However, nothing has been confirmed yet. The company will provide updated disclosure on the issue at the time of confirmation or within a month."

PF is a financing technique that uses loans to finance a project after promising the future revenue of a real estate development project as repayment. As of the end of the third quarter, Taeyoung's entire real estate PF loan balance is estimated at around 4.4 trillion won ($3.4 billion). When excluding 1.2 trillion won worth of social overhead capital PF guaranteed by the government, 3.2 trillion won remains as the net real estate PF balance. Out of the 3.2 trillion won worth of real estate PF, approximately 47 percent of Taeyoung E&C building sites have yet to start construction due to a lack of secured repayment funds.

"The issue at hand is Taeyoung E&C's lack of short-term liquidity. As of the end of the third quarter of 2023, Taeyoung E&C's sequential borrowings amount to 1.93 trillion won, with a debt ratio reaching 478.7 percent," Kang Kyung-tae, a construction sector analyst at Korea Investment & Securities, pointed out. "Among the major construction companies ranked within the top 35 in the country in terms of construction capability assessment, Taeyoung E&C has the highest debt ratio. Repayment of the debt through revenues would be very challenging, as all earned operating profits are fully offset by interest costs."

This week alone, the construction company is facing the maturity of a PF loan related to an office building development project in Seongsu District in eastern Seoul, which amounts to 48 billion won. The company has other debt maturing in early January.

Choi Sang-mok, finance minister nominee, reponds to questions in his confirmation hearing at the National Assembly in Seoul, Dec. 19. Yonhap

Financial authorities on full alert

The government is vigilantly observing how the situation pans out. The so-called "F-4" members — indicating four key financial authorities: Choi Sang-mok, nominee for finance minister, Financial Services Commission (FSC) Chairman Kim Joo-hyun, Financial Supervisory Service (FSS) Governor Lee Bok-hyun and Bank of Korea (BOK) Governor Rhee Chang-yong — held a meeting on late Tuesday, discussing the possibility of Taeyoung E&C's restructuring and its potential repercussions on the real estate PF market.

Earlier this month, the FSC chairman, who is the top financial regulator, highlighted that the government is aiming for what he called a "soft landing" and "orderly cleanup" of the real estate PF market, hinting that the financial authorities are expecting and ready for bankruptcy filings or restructuring by a number of insolvent construction companies.

The FSS governor also shared a similar view earlier this month.

"In principle, construction and financial companies with insufficient profitability and chronic problems should undergo appropriate adjustments or restructuring, unless they undertake extraordinary measures, such as asset reduction," he said.

With those comments coming out, it is now clear that the government has shifted its position from focusing on prolonging maturity expirations to letting go of some businesses that cannot remain profitable.

Financial industry sources told The Korea Times that it is the government's view that allowing severely unprofitable businesses to fail in accordance with market principles can be beneficial to the national economy in the long run, despite short-term turbulence.

The FSC vowed late last week to ensure prompt responses in the event of market uncertainties.

Financial Services Commission Chairman Kim Joo-hyun, right, speaks next to Financial Supervisory Service Governor Lee Bok-hyun, during a meeting with financial group leaders in Seoul, Dec. 20. Yonhap

While Taeyoung E&C is making utmost efforts to secure liquidity by selling stakes in various development businesses and affiliates, construction and finance sector insiders seem to have already acknowledged the looming restructuring as a fact.

Meanwhile, the Corporate Restructuring Promotion Act, which ended in October, was reinstated after the National Assembly passed the bill early this month. The act serves as the fundamental legal framework for debt adjustment or restructuring of companies showing signs of insolvency.

The law allows insolvent companies that undergo a temporary liquidity crisis to extend debt maturity when more than 75 percent of creditors consent to offering such support. If Taeyoung applies for the workout under the law, subsequent procedures will immediately be taken, according to the law.