Taeyoung E&C kickstarts debt workout with loan sale to IGIS

Creditors to Taeyoung Engineering & Construction Co. (Taeyoung E&C) gave the go-ahead to a debt workout program for the cash-strapped South Korean builder on Tuesday, under which Taeyoung E&C will sell some of its bad loans to a domestic investment firm.

According to investment banking sources, IGIS Asset Management Co. will purchase 60 billion won ($43 million) of first-lien bridge loans, collateralized by an office building project led by Taeyoung E&C in Seongsu-dong, eastern Seoul.

More than 85% of Taeyoung E&C creditors have approved the bad-loan sale to revive the stalled construction, its main lender Korea Development Bank (KDB) said, taking their first step to restructure the company’s debt.

IGIS Asset is one of five external managers of a 1.1-trillion-won project finance investment fund formed by the Korea Asset Management Corp. (KAMCO) last year. They were assigned 100 billion won each by the state-run bad-loan company.

It is acquiring the non-performing loans from savings banks, including Korea Investment Savings Bank and OK Savings Bank, allowing them to fully recover the loans they had extended for the project.

Taeyoung E&C’s parent company TY Holdings Co. had injected 35 billion won into the project in the form of second-lien loans.

For the bad-loan purchase, IGIS Asset will draw down 20 billion won of the 100 billion won from KAMCO and raise an additional 40 billion won from outside investors. Those investors will have a priority position in repayments ahead of IGIS Asset’s investment of 20 billion won.

The loans are backed by the project to build a 10-story office building with six underground floors and a total floor area of 21,420 square meters.

Its construction was halted after its developer, Star Properties Korea, and Taeyoung E&C failed to refinance bridge loans with permanent financing and after the Korean builder got the nod for a debt workout from its creditors.

Bridge loans are generally provided by non-banking financial services firms to provide short-term financing. Last year, they carried interest rates of about 10% per annum in Korea, about double that of banking loans.

Hong Kong-based Star Properties Korea has a 51% stake in the financing vehicle set up for the construction, with Taeyoung E&C holding a 35% stake.

This marked the second time for KAMCO to inject liquidity into the real estate sector in recent years, following its purchase of the Sambu Building near Seoul Station from Shinhan Asset Management last year.

SHARE CAPITAL REDUCTION

Following the sale of NPLs, Taeyoung E&C, in negative equity, will reduce its share capital on a 100-to-one basis for main creditors. The lenders will also inject an additional 550 billion won into the builder through a debt-to-equity swap.

Through the workout scheme, the creditors expect to recover more than 70% of their loans from Taeyoung E&C by 2027.

As part of belt-tightening measures, Taeyoung E&C recently decided to sack more than 20 executives, including its founder and chairman, and cut employee salaries.

The creditors' rescue plan will bring some relief to Asia's No. 4 economy grappling with heavy exposure to project financing, which Samjong KPMG estimated at 200 trillion won. 

Write to Byung-Hwa Ryu and Hyun-Woo Lee at hwahwa@hankyung.com
Yeonhee Kim edited this article