[Q&A] "Taeyoung Construction-Originated Crisis, Soft Landing Possible... Self-Rescue Plan Will Be Well Negotiated"

Kim Joo-hyun, Chairman of the Financial Services Commission, said on the 28th regarding the possibility of a crisis in the construction industry following Taeyoung Construction's workout application, "It is true that the situation is somewhat difficult, but with active financial support and plans to normalize real estate project financing (PF), along with improvements in interest rates and macroeconomic conditions, I believe a soft landing is possible."

Chairman Kim attended a briefing on response measures related to Taeyoung Construction's workout application held at the Government Complex Seoul in Jongno-gu, Seoul, in the morning, stating, "If anxiety spreads, market participants may withdraw all funds, which would make it difficult even for sound companies, so it is necessary to calm the anxiety."

Chairman Kim said, "Currently, the government is managing all identifiable risks mainly through the F4 meetings (a council of economic and financial leaders)," adding, "Once the new Deputy Prime Minister and Minister of Economy and Finance takes office, support measures for construction companies will be separately prepared through consultations with related ministries."

Regarding the scale of Taeyoung Group's self-help plan, he said, "The specific scale of the self-help plan will be negotiated between the creditors and Taeyoung Group. I believe Taeyoung Group will be able to explain well enough to satisfy the creditors during the negotiation process."

The following is a Q&A session with Kwon Dae-young, Standing Commissioner of the Financial Services Commission.

- How much personal funds from the Taeyoung Group owner family do you think should be contributed?

▲ Taeyoung Group has so far made self-help efforts amounting to about 1 trillion won. They sold Taeyoung Industry, raised funds by using a golf course as collateral at Korea Investment & Securities, and TY Holdings supported 400 billion won. When the proceeds from the sale of Taeyoung Industry come in today, repayment will start with trade receivables. Taeyoung Group has also submitted additional self-help plans to the Korea Development Bank. It is too early to mention specifics, but once the PF projects are organized, the scale of personal fund contributions will be disclosed. I understand that major shareholders have also made some personal contributions. The major shareholders have personal stakes in the sold Taeyoung Industry and the golf course used as collateral, and they are contributing those shares and are expected to contribute more. Personal fund contributions should be strong and sufficient enough to gain market trust.

- What is your view on the sale of major affiliates such as SBS?

▲ The sale of affiliates is a matter for the major shareholders to decide, so it is not appropriate to comment here.

- Financial Supervisory Service Governor Lee Bok-hyun recently mentioned 'sorting out insolvent construction companies,' but today's policy meeting mainly discussed a 'soft landing.' If other construction companies become insolvent in the future, will the policy be not to support them?

▲ The consistent message from the F4 meetings is 'an orderly soft landing for PF and the construction industry.' The workout process Taeyoung Construction is undergoing is a 'regular restructuring.' A healthy economic system gives companies another chance to restructure or find ways to survive rather than forcing liquidation or destruction. In a sense, it is a matter of terminology. Terms like sorting out or restructuring are sometimes used, but they mean the same as soft landing.

- The Korea Housing & Urban Guarantee Corporation (HUG) plays a significant role in the measures. However, HUG is expected to record a net loss this year due to guarantee accidents such as jeonse fraud. Is there no problem?

▲ Kim Sang-moon, Director of the Construction Policy Bureau at the Ministry of Land, Infrastructure and Transport: Recently, a bill to expand HUG's guarantee capacity was passed in the National Assembly. Accordingly, HUG's capacity to guarantee has been expanded to up to 70 times its equity capital, and discussions are underway for investments amounting to several trillion won.

- It is said that Taeyoung Construction's liquidity crisis is due to its unique circumstances, so the possibility of spreading to the entire industry is low. Then, isn't supporting a specific company with taxes or financial aid unfair?

▲ That is not the case. The workout involves Taeyoung Group bearing the financial burden through self-help efforts. Market participants normalize the company based on market principles, and no tax money is involved. However, since market participants may feel uneasy during this process, the government is working to stabilize the market. This has always been the mission of policy financial institutions.

- It is said that the situation of Taeyoung Construction and others has been continuously monitored since the end of last year. How many construction companies is the government currently closely inspecting?

▲ It is inappropriate to mention specific companies in official settings. The issue with Taeyoung Construction surfaced in the media starting in October this year.

- You said, "A known risk is not a risk."

▲ Currently, there is no particularly worrisome company. The company you have in mind is clearly different from Taeyoung Construction. I understand they have ample cash and smooth refinancing. The Financial Supervisory Service is continuously monitoring.

- Support measures such as maturity extensions have been prepared for subcontractors as well. What is the scale?

▲ The Financial Supervisory Service is currently assessing, but the loan scale is not large. Most subcontractors are small-scale companies engaged in landscaping, interior work, etc. The Financial Supervisory Service plans to set up a support center to respond.

- Do you expect the creditors to decide to start the workout?

▲ It depends on the 'four elements' aligning: sufficient self-help efforts by Taeyoung Group, smooth negotiations and cooperation from creditors, market trust, and improvement in South Korea's construction market. Whether liquidation or normalization is more beneficial must be reasonably judged, and the decision to start the workout depends on this. The Korea Development Bank will lead efforts with creditors to achieve this.

- How will you respond if an excessive fund recovery atmosphere arises across PF projects?

▲ Since the Legoland incident, there have been some fund recovery movements last year and this year. For projects that can be normalized, funds are supplied to promote normalization, and for those that cannot, a PF creditor group agreement to auction off the projects is in place and being operated. This is a consistent policy, and we will communicate closely with the financial sector during the process.

- How long has it been since a construction company applied for a workout?

▲ During the 2008 global financial crisis, Daewoo Construction was sold to Kumho Industrial, which was later restructured through a workout. The restructuring process continued until 2014-2015, and since 2016, the construction industry has been in a boom period. Construction companies built considerable strength during the boom and are currently holding on based on that strength. Now, it is a race against time.

- How many construction companies are not in a normal state?

▲ Among the top 50 construction companies by contract ranking, such cases are rare. However, some companies within the top 300 have undergone some rehabilitation procedures. The main point is not the company itself but the viability of the PF projects they are involved in.

- How many creditors does Taeyoung Construction have?

▲ The authorities have a complete understanding of the number and maturity structure of Taeyoung Construction's creditors. Each PF project has its own creditor group, which is being checked through the Korea Development Bank. The main company has about 10 creditors, and PF projects have more.

- Since strong self-help efforts are a premise, how will you respond if they fail?

▲ It is not appropriate to mention this here. It is not easy for all four elements to align, but it is a part Taeyoung Group must work on, and ultimately it depends on whether they can obtain 75% consent from creditors, which is a condition for starting the workout.

- During the Legoland incident, financial holding companies and securities firms cooperated in establishing funds such as the 'Bond Market Stabilization Fund' for pain-sharing. Will the upcoming construction industry measures include pain-sharing plans for construction companies?

▲ Through the housing supply measures announced on September 26, the Construction Mutual Aid Association and others have prepared a guarantee program worth about 6 trillion won based on funds contributed by construction companies. This matter is being led by the Ministry of Land, Infrastructure and Transport.

- What were the main discussion points at the F4 meeting held on the 26th?

▲ The F4 meeting, a council of economic and financial leaders, operates unofficially to allow deep and intensive discussions. Since the Legoland incident last year, the Financial Supervisory Service has been monitoring the situation of construction companies, so we were aware of the situation.