Why Taeyoung Construction Facing Crisis Prefers Workout Over Court Receivership [Seungseop Song's Financial Light]

Taeyoung Facing Bankruptcy Crisis Due to Liquidity Deterioration
'Workout' Created by IMF Crisis
Controversy Over Property Rights Infringement and Public Funds Injection
Taeyoung's Self-Help Measures... Creditors Say "Insufficient"

Taeyoung Construction, pushed into a crisis, stands at a crossroads between 'workout' and 'court receivership.' Initially, the Taeyoung Group hoped for a workout, and the market also viewed the possibility of court receivership as slim. However, despite financial authorities and creditors demanding that conditions necessary for a workout be prepared by this weekend, the Taeyoung Group has not responded. Why does the Taeyoung Group hope for a workout? What happens if they go into court receivership?

'Let's talk with creditors, not the court'... The Workout Created by the IMF

Taeyoung Construction, which applied for a workout due to liquidity issues in real estate project financing (PF), has completed a creditors' briefing session. On the 4th, the traffic light in front of Taeyoung Construction's headquarters in Yeouido, Seoul, turned red. Yoon Se-young, the founding chairman of Taeyoung Group, acknowledged management's mistakes during the briefing and requested consent for the workout, but the main creditor bank, the Korea Development Bank, demanded an additional self-rescue plan. Photo by Kang Jin-hyung aymsdream@

Corporate workouts and court receiverships are procedures conducted just before bankruptcy. Both systems involve debt restructuring and corporate restructuring, so they may seem similar, but in fact, they are very different. The biggest difference is who holds the initiative. In a workout, the initiative lies with the lenders (creditors). The company and the lenders discuss ways to repay the debt. In contrast, court receivership decisions are made by the court.

But why were two procedures, workout and court receivership, created? If both deal with companies in crisis, wouldn't one suffice? In principle, court receivership is the proper route. Court receivership is a formal procedure based on the 'Debtor Rehabilitation and Bankruptcy Act.' Although workouts are also based on the 'Corporate Restructuring Promotion Act (CRPA),' it is a temporary law set to expire in early 2027. In other words, workouts are laws implemented only temporarily.

The workout system was created in response to the International Monetary Fund (IMF) crisis. You may recall that many companies were pushed to the brink of bankruptcy at that time. However, there was one problem: all the companies in crisis had to go through court receivership. It was pointed out that companies that could survive if they overcame immediate liquidity crises might collapse due to the lengthy court receivership process, which could take over ten years. Therefore, in 2001, with the intention of saving viable companies, the workout system led by creditors rather than the court was introduced.

'Good for Saving Companies' but... Controversies Over Property Rights Infringement and Public Funds Injection

On the afternoon of the 3rd, related notices were displayed at the Seoul Industrial Bank headquarters, where the creditors' briefing session regarding Taeyoung Construction's workout (corporate financial restructuring) application was held. [Image source=Yonhap News]

Workouts have become a highly preferred system for companies. Unlike court receivership, workouts last about 3 to 4 years. If creditors agree, companies can receive additional financial support during the debt restructuring process. Above all, management rights can be maintained. When entering court receivership, the court dispatches a 'court receiver' to the company. The court receiver manages company operations, finances, and company reorganization. The owners or representatives of the company may be stripped of their authority. In contrast, workouts involve voluntary debt restructuring with creditors, so such cases are rare.

However, workouts have faced constitutional challenges since their inception, threatening their existence. Courts have maintained opposition, arguing that the CRPA infringes on private property rights. The cause lies in the structure where anything is possible with just 75% consent from creditors. Suppose a company owes 10 billion KRW in total: 5 billion KRW from Bank A, 2.5 billion KRW from Bank B, and 0.5 billion KRW each from Banks C, D, E, F, and G. The workout implementation and debt restructuring method can be decided at will by Banks A and B, which hold 75% of the debt. The remaining five banks, holding 25%, must accept even unfavorable negotiations.

There is also considerable backlash. There are allegations of preferential treatment. In workouts involving companies of high public interest, the head of the creditor group is often a policy bank. Policy banks are fundamentally funded by taxpayers' money. When a workout begins, debts may be reduced or additional funds provided. This means public funds are being used. This is why voices arise during every workout questioning whether it is right to save private companies that got into crisis due to poor management with taxpayers' money. Therefore, creditors demand 'painful efforts' from the target companies as a condition for workouts.

Taeyoung's Self-Help Measures... Government and Creditors Say 'Insufficient'

The Taeyoung Construction case is no different. Taeyoung Construction, whose liquidity worsened due to real estate project financing (PF), applied for a workout. The main creditor is the Korea Development Bank (KDB). Taeyoung Group, the parent company of Taeyoung Construction, with Chairman Yoon Se-young personally persuading creditors, requested a workout. However, the policy bank KDB cannot simply approve Taeyoung Construction's workout. Therefore, Taeyoung proposed four self-help plans: support from the sale of group company Taeyoung Industry (154.9 billion KRW), sale of Ecobit, sale of Blue One, and providing pledged shares of Pyeongtaek Silo.

The response has been cold. The KDB and the financial authorities, its supervisory body, evaluated Taeyoung's efforts as insufficient. Financial Supervisory Service (FSS) Governor Lee Bok-hyun criticized, saying, "This is not Taeyoung Construction's self-help plan but the owner's family self-help plan," and added, "They mentioned painful self-help efforts, but from the creditors' perspective, it looks like efforts to make others suffer." Yang Jae-ho, head of KDB's Corporate Restructuring Division 1, pointed out at a creditors' briefing on the 3rd that "So far, (Taeyoung Construction's self-help plan) is judged insufficient to proceed with the workout."

Kim Ju-hyun, Chairman of the Financial Services Commission (right), Lee Bok-hyun, Governor of the Financial Supervisory Service (left), and Kang Seok-hoon, President of the Korea Development Bank (center), are moving on the morning of the 28th of last month at the Government Seoul Office Annex to hold a briefing on response measures related to Taeyoung Construction's workout application.
[Photo by Yonhap News]

The creditors insist that the Taeyoung Group must first fulfill the promises it made. According to financial circles and authorities, Taeyoung Group has reportedly supported only 65.9 billion KRW from the sale proceeds of Taeyoung Industry. The remaining 89 billion KRW of sale proceeds were used to repay the joint guarantee debt of the holding company, TY Holdings, not Taeyoung Construction. The government urged immediate support of the promised 89 billion KRW and demanded confirmation of the remaining self-help plans. They also pressured Taeyoung to present additional self-help plans. These additional plans are believed to involve securing liquidity by utilizing shares of SBS or TY Holdings owned by Taeyoung.

The deadline set by financial authorities and creditors for confirming the self-help plans and preparing additional alternatives is this weekend. Taeyoung Group is reported to have not responded yet. The government and financial authorities have begun seriously considering the court receivership scenario in case the workout fails.

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