'Workout' Taeyoung Construction Decline... Construction Stocks Investor Sentiment Inevitably Worsens

19.54%↓·24.95%↑…Stock Price Rollercoaster
Holding Company TY Holdings Rises, SBS Falls
"Psychological Anxiety May Remain for Other Construction Stocks"

The stock price of Taeyoung Construction, which applied for a corporate restructuring workout due to a real estate project financing (PF) crisis, fell for three consecutive days. Despite the workout decision for Taeyoung Construction, other construction stocks showed relatively resilient performance. However, as concerns about PF persist, it is expected to weigh on the stock prices of other construction companies.

On the 28th, Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), applied for a workout (corporate restructuring). The Taeyoung Construction flag is fluttering in the wind at the Taeyoung Building in Yeongdeungpo-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

On the 28th, Taeyoung Construction closed at 2,315 won, down 90 won (3.74%) from the previous trading day. The stock price fluctuation of Taeyoung Construction was very large that day. In the early session, it dropped by 19.54%, then briefly surged up to 24.95% after 10 a.m. However, after giving back all the gains, it closed down nearly 4%.

Related stocks of Taeyoung Construction, TY Holdings and SBS, showed mixed results. The holding company TY Holdings closed at 4,225 won, up 45 won (1.08%). Meanwhile, SBS, which is owned by Taeyoung Construction, closed at 29,250 won, down 1,400 won (4.57%).

Taeyoung Construction's stock plunged 2.61% on the 26th and 19.57% on the 27th, marking three consecutive trading days of decline. The sharp drop was triggered by news that Taeyoung Construction would apply for a workout. Especially, the stock decline accelerated after Taeyoung Construction disclosed that "various measures for business normalization are currently under review, but nothing has been concretely decided yet."

Eventually, as the workout application was confirmed, credit rating agencies rushed to downgrade Taeyoung Construction's credit ratings. On that day, Korea Ratings and Korea Investors Service lowered Taeyoung Construction's senior unsecured bond credit rating from 'A-, under review for downgrade' to 'CCC, under review for downgrade' through an ad hoc evaluation. The commercial paper (CP) credit rating was also downgraded from 'A2-, under review for downgrade' to 'C, under review for downgrade.'

Jihoon Jeon, a researcher at Korea Ratings, said, "This is due to Taeyoung Construction applying for a workout with creditor banks," adding, "The main creditor bank, Korea Development Bank, is expected to form a financial creditor council to decide whether to initiate the workout." He further noted, "During the debt restructuring process, principal and interest impairments are expected due to principal and interest reductions, repayment deferrals, and equity conversions."

Korea Ratings had already lowered Taeyoung Construction's unsecured bond credit rating from 'A-, stable' to 'A-, under review for downgrade' on the 20th.

At that time, researcher Jeon explained, "Taeyoung Construction's PF guarantees for construction contracts are still increasing this year," adding, "More than half of the PF guarantees are for projects that have not started construction or are in pre-sale after construction. If project progress is delayed or sluggish pre-sale markets continue long-term, the repayment burden of related PF borrowings could be transferred to Taeyoung Construction." He also stated, "While the scale of contingent liabilities from PF is not easily reduced, the refinancing burden of PF borrowings and securitized bonds is expanding again due to high interest rates and deteriorating investment sentiment."

Although Taeyoung Construction faced the negative event of a workout, other construction stocks showed relatively resilient performance. This is interpreted as bargain buying following the previous day's sharp decline. The KOSPI construction industry index rose 0.06 points (0.08%) to 71.39 compared to the previous trading day. On the 27th, it had fallen 1.87%. Looking at individual stocks, DL Construction rose 2.65%, while HDC Hyundai Development Company and Gyeryong Construction increased by more than 1%. On the other hand, Shinsegae Construction, Dongbu Construction, and Kumho Construction fell by more than 1%.

However, securities firms forecast that the recent workout application by Taeyoung Construction will be a psychological burden on the stock prices of other construction companies. Kyungja Lee, a researcher at Samsung Securities, said, "Compared to the early 2010s, the overall PF guarantee scale in the construction sector is not large, and financial soundness has improved," but added, "Due to Taeyoung Construction's workout, there is a possibility of worsening stock sentiment mainly for companies with large PF guarantee scales relative to their current financial strength."