Korean corporate debt sale hits snag amid Taeyoung woes

The South Korean corporate bond market is taking a direct hit from growing credit crunch concerns in the country’s construction sector triggered by the debt restructuring of local mid-size construction firm Taeyoung Engineering & Construction Co.

According to the Korean investment banking sector on Tuesday, Lotte Chemical Corp. postponed a plan to sell its corporate bonds to raise up to 400 billion won ($298 million).

The bond sale, originally planned this month, is now put off until after April, according to IB industry sources.

The growing liquidity risk at its construction affiliate is blamed for the Korean chemical firm’s postponed debt sale.  

Lotte Chemical is the largest shareholder of Lotte Engineering & Construction Co. with a 44% stake. Institutional investors are said to be worried about Lotte Chemical’s possible financial aid to the Lotte E&C in case of a severe liquidity crunch in the local construction industry.

Lotte Chemical in 2022 injected 500 billion won into the construction sibling struggling with raising funds due to the Korean money market crunch caused by the default on municipal government-guaranteed debts for Legoland Korea in Gangwon Province.

It also guaranteed the construction unit’s bond issuance in December 2022.

Some others said that given the fact that Lotte Chemical boasts the highest credit rating of AA with a stable outlook, it might have decided to wait to sell its bonds until after its affiliates succeed in attracting investors for their debt sales driven by Lotte Group in search of future growth engines.

Lotte Shopping Co. has completed its bond issuance, while Lotte Corp. and Hotel Lotte Co. will soon tap investors’ demand for their debt sales.

WAIT-AND-SEE MODE

As the Korean credit market is in turmoil again in the aftermath of Taeyoung E&C’s debt workout, investors are expected to stay in a wait-and-see mode until concerns over Korean construction companies’ liquidity crunch ease.

The Taeyoung E&C woes also put a brake on other major Korean construction firms’ debt sales.

Daewoo Engineering & Construction Co. with a healthy credit rating of A and a stable outlook canceled its debt sale planned this month.

The company’s bond issuance had been much anticipated as it was due to return to the corporate bond market for the first time in three years since its last sale in 2021.

It is said to be waiting for cues from Korean debt market heavyweight Hyundai Engineering & Construction Co.'s bond sale later, according to sources.

The construction unit of Hyundai Motor Group plans to tap institutional investors’ demand for up to 280 billion won worth of its bonds rated AA- with a stable outlook on Jan. 22.

Big players in the Korean construction sector have means to raise funds, such as loans from their affiliates, but smaller peers are expected to continue grappling with raising funds due to their greater exposure to residential development projects in rural areas and commercial building projects backed by project financing, said an analyst at Mirae Asset Securities Co.

Late last month, Taeyoung Group filed for a debt workout for Taeyoung E&C to avoid bankruptcy.

Its debt workout application highlighted the liquidity crunch in the Korean construction sector struggling with high financing costs and stalled building projects amid the economic slowdown.

Write to Hyun-Ju Jang at blacksea@hankyung.com
Sookyung Seo edited this article.