[Initial Insight] The Cause of Tae Young Creditors' 'Discord'

Creditors Dissatisfied with San-eun's Passive Role
Suspicion Grows Over Favoritism Toward Taeyoung Side

Unspoken discord is erupting within the creditor group regarding Taeyoung Construction's workout. The source of the friction lies between the Korea Development Bank (KDB), which must lead the workout despite holding only about 3% of the debt, and the other creditors who collectively hold over 90% of the debt. While the non-KDB creditors appear to be cooperating cautiously with the authorities and KDB on the surface, beneath the surface there is strong criticism of KDB’s passive role and its leniency toward Taeyoung.

This atmosphere stems from the perception that KDB is not fulfilling its proper role. It is very different from past construction company workouts where KDB played an active role. A financial institution official who recently visited Taeyoung Construction sites to assess the situation reported that many sites, lacking sufficient construction funds, are effectively at a standstill. Subcontractors have taken the stance that they will cease work if cash payments are not made. If construction halts during the three-month due diligence period, it is obvious that numerous subsequent problems will arise. An executive from a financial company pointed out, "If funds that act as lubricants to keep the construction sites running are not provided to Taeyoung Construction even during the evaluation period, the contingent liabilities related to Taeyoung’s project financing (PF) could worsen significantly. Although there may be social resistance and burden regarding KDB injecting ‘new money’ into Taeyoung, if emergency funds are provided as senior debt, the risk of non-recovery is minimal, yet KDB seems unwilling to even perform this role."

Criticism also continues regarding the securitization of Taeyoung Group’s golf courses. Taeyoung Group chose securitization as a quick way to generate cash, and KDB agreed. However, allowing Taeyoung to retain ownership of the golf courses and even granting a call option (right of first refusal) to repurchase later is seen as problematic from the perspective of maximizing debt recovery. If cash is urgently needed, there are many other faster securitization methods available, so there was no need to create such a complicated structure. Unless the golf course sale (True Sale) is promptly pursued simultaneously with securitization, it will be difficult to dispel suspicions that KDB is favoring Taeyoung. Previously, there was controversy over the use of funds from the sale of Taeyoung Industry, and criticism was rampant when the owners chose to lend money to TY Holdings instead of directly contributing personal funds.

Some speculate that reducing KDB’s debt share within the workout creditors to the 3% range was intended to justify KDB’s passive role and leniency toward Taeyoung. This theory arises because when the Taeyoung Construction debt was finalized, contingent liabilities from Taeyoung’s responsibility for project completion, amounting to trillions of won, were all included in the workout debt, reducing KDB’s share within the creditor group to about half. Contingent liabilities such as payment guarantees, joint guarantees, and debt assumption are usually included in workout debt. However, including responsibility-for-completion liabilities in the debt is unprecedented historically. While there may be various justifications, dissatisfaction with KDB has fueled these suspicions.

It is realistically impossible for KDB to coordinate the interests of all creditors, quell dissatisfaction, and lead the workout. This is because the workout is complex, involving many creditor institutions and project sites, each with diverse and complicated interests. Nevertheless, what over 90% of the creditors want is for KDB to perform at least the minimum role it can and to make representative decisions that maximize debt recovery. If underlying dissatisfaction accumulates, it is difficult to guarantee that the Taeyoung Construction workout will not spiral into an out-of-control situation.