[Exclusive] Meritz Proposes Investment to Other Construction Firms Following Lotte Construction's 1.5 Trillion Won Fund

PF Securitization Investment Agreement Negotiations
Focus on Additional Deals with Construction Firms Bearing Significant Contingent Liabilities

[Asia Economy Reporter Lim Jeong-su] Meritz Financial Group, which recently agreed to establish a fund worth 1.5 trillion KRW with Lotte Construction, has reportedly proposed similar deals to other construction companies, including Taeyoung Construction. However, Taeyoung Construction did not finalize the deal as its affiliates found it difficult to take responsibility for subordinated loans and providing real estate collateral was also challenging. Taeyoung stated that although they received the proposal, they declined it as they are exploring other financing options.

According to the investment banking (IB) industry on the 13th, Meritz Securities and other Meritz Financial Group affiliates proposed the establishment of funds to purchase construction project financing (PF) securitized bonds to other construction companies such as Taeyoung Construction. The structure involves Taeyoung Group affiliates providing subordinated loans to the fund for purchasing securitized bonds, while Meritz Financial Group lends senior loans. This is similar to the fund structure agreed upon with Lotte Construction.

Previously, Meritz Securities agreed to establish a fund worth 1.5 trillion KRW to purchase securitized bonds from PF projects guaranteed by Lotte Construction. Major group affiliates such as Lotte Corporation, Lotte Hotel, and Lotte Fine Chemical are responsible for 600 billion KRW in subordinated loans, while Meritz Securities, Meritz Fire & Marine Insurance, Meritz Capital, and other Meritz Financial Group affiliates will provide the remaining 900 billion KRW in senior loans. Additionally, Lotte Construction provided collateral including its headquarters building, key business sites, and accounts receivable.

An IB industry insider said, "Meritz proposed a deal to Taeyoung Construction, but the deal did not materialize due to the absence of affiliates willing to take subordinated loans and disagreements over providing real estate collateral."

TY Holdings, the holding company of Taeyoung Group, is the major shareholder of Taeyoung Construction with a 27.8% stake. Chairman Yoon Seok-min and the Seoam Yun Se-young Foundation, along with other related parties, hold 21.4%. Major affiliates include SBS. A Taeyoung Construction official said, "We received a fund establishment proposal from Meritz Securities, but since liquidity is not urgently needed and we are seeking other financing methods, we did not accept the proposal."

As of the end of September last year, Taeyoung Construction had PF guarantee liabilities amounting to 3.2 trillion KRW. This increased by 1.4 trillion KRW in just one year and nine months from 2.1 trillion KRW at the end of 2020 due to development projects such as military base relocations, station area complex districts, and industrial complexes. With a debt ratio exceeding 400%, if the guarantees are realized, the financial situation could worsen significantly. After the Legoland incident last year, Taeyoung Construction, along with Lotte Construction, was also caught up in bankruptcy rumors amid liquidity crisis concerns.

Attention is also focused on whether Meritz Financial Group will successfully close deals with other construction companies. An industry insider said, "Construction companies with heavy contingent liabilities such as PF guarantees need to proactively secure liquidity in preparation for potential responsibility for construction site debts. Meritz is aggressively marketing to these construction companies, so additional deals may emerge."