Daewoo Construction, Reasons for Consecutive Issuance of Option Bonds

Deteriorating Financing Environment for Construction Companies
Dongbu, Taeyoung, KCC, and Others Issue Option Bonds in Succession
Utilizing Public Corporate Bond Issuance as a Detour to Secure Liquidity

Daewoo E&C, one of the top construction companies in South Korea in terms of construction capability, is securing liquidity by consecutively issuing option bonds. This is interpreted as construction companies securing liquidity through option bonds and commercial papers (CP) amid the overall deterioration of their funding environment.

According to the investment banking (IB) industry, Daewoo E&C issued option bonds worth 25 billion KRW on the 8th. Although the bond maturity is 1 year and 6 months, Daewoo E&C can exercise a call option (early redemption right) to repay the principal and interest before maturity starting from one year after issuance.

Daewoo E&C also issued option bonds worth 20 billion KRW under the same conditions on the 29th of last month. In two weeks, they issued a total of 45 billion KRW worth of option bonds in two rounds. The bond interest rate was set at 7.10% for both issuances, which is relatively high compared to the funding rates of other companies with similar credit ratings.

Daewoo E&C is also increasing CP issuance to secure liquidity. There was no CP issuance until early October last year, but issuance began to increase after the Legoland incident, and the outstanding balance has now risen to about 115 billion KRW. CP is considered a very short-term funding instrument with a maturity of less than one year.

An IB industry official said, "Construction companies find it difficult to issue public corporate bonds, and as market interest rates rise sharply, they are securing liquidity by using detours such as option bonds," adding, "Bond issuance is carried out by securities firms underwriting the bonds when there is investment demand in the market and then transferring them to final investors."

Besides Daewoo E&C, option bond issuance by construction companies has increased this year. Last month, SGC E&C issued option bonds worth 15 billion KRW with interest rates around 7.20% and 10%. Earlier, small and medium-sized construction companies such as Dongbu Construction, Taeyoung Construction, KCC Construction, and Gyeryong Construction Industry also consecutively issued option bonds.

A bond market official said, "As the corporate bond issuance environment deteriorates overall, option bond issuance is increasing," and predicted, "Option bond issuance by companies that find it difficult to issue corporate bonds to secure leftover funds will continue for some time."