Turmoil at South Korean builder revives risk fear after Legoland credit crunch

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Creditors of a South Korean builder whose debt troubles sparked fear over financial risk in the real estate sector will begin a restructuring process, as Asia’s fourth-largest economy wrestles with high interest rates and a property market downturn.

Taeyoung Engineering & Construction, a cash-strapped midsized builder, applied for a debt restructuring last month with the state-owned Korea Development Bank, its largest creditor. The deadline for the restructuring proposal is April 11.

The builder’s distress recalls a liquidity crunch in 2022 triggered by the default of a Legoland theme park developer that pushed some corporate borrowing costs to the highest level in more than a decade.

Korean authorities pledged last week to step up support for the credit market by expanding if necessary a $66bn market stabilisation scheme that was introduced after the Legoland developer’s default. Shares of Taeyoung slid 15 per cent on Friday morning.

Min Ji-hee, a credit analyst at Mirae Asset Global Investments, said a timely response from the government had helped ease market concerns, although there could be a short-term increase in credit spreads.

“The possibility of further market tantrums is low as the government is responding actively with debt rollovers and financial support to prevent any systemic risks,” she said.  

Analysts caution that Taeyoung’s liquidity crunch may still spread to other smaller builders, putting pressure on non-bank financial companies heavily exposed to property-related loans as higher interest rates and the real estate slump take a toll on the construction sector.

“Securities firms and savings banks could be more vulnerable due to their greater exposure to real estate project financing, including bridge loans, as most have only been extended rather than recovered,” said Rena Kwok, credit analyst at Bloomberg Intelligence.

Taeyoung’s debts total Won4.58tn ($3.6bn) including project financing loans, but this accounts for less than one per cent of total assets held by local financial institutions, according to financial regulators.

“Notwithstanding elevated interest rates, financial markets have remained resilient, reflecting liquidity support and property market deregulation,” said Goldman Sachs analysts.

Delinquent project financing loans as of June 2023 stood at less than Won3tn — just 2.2 per cent of total project financing loans or 0.1 per cent of the country’s gross domestic product, according to Goldman Sachs.

South Korea’s property market been in a slump since mid-2022, hit by interest rates at their highest since late 2008. On Wednesday, the country’s President Yoon Suk Yeol promised to lower property taxes and ease regulation to boost the sector.

Heakyu Chang, a senior director at Fitch Ratings, said contagion risks for the country’s financial sector were low, pointing to its well-capitalised banks and growing expectations of interest rate cuts this year.

The Bank of Korea kept its benchmark interest rate unchanged at 3.5 per cent on Thursday, with members of the central bank’s monetary policy board unanimously assessing that rates have hit their peak.

“The market was in panic in 2022 as there were a lot of uncertainties over how high interest rates would go up,” said Chang. “The situation is different now, with interest rates likely to be cut twice this year.”