Steady hand

South Korea sees its fair share of market wobbles, but they never seem to last long. That’s partly because Korean authorities intervene far more than might be expected for such a market-driven economy.

The current concerns centre around Taeyoung Engineering & Construction, which last month failed to repay a loan backing a Seoul office project.

The financial sector’s exposure to Taeyoung E&C is only about W4.58trn (US$3.4bn), or 0.09% of assets, and Korean authorities do not expect contagion across the construction sector, even though the collapse follows last year’s asset-backed commercial paper default by Legoland Korea developer Gangwon Jungdo Development Corp. Still, the authorities tend not to take any chances when it comes to maintaining market stability.

In late 2022, the government encouraged banks to slow down their issuance of domestic bonds to avoid crowding the market and drawing liquidity away from corporate issuers, at the same time lowering banks’ required liquidity coverage ratios temporarily. It also launched bond market and money market stabilisation funds, which were due to expire late last year but were extended in light of Taeyoung E&C’s troubles.

In October last year, regulators announced that banks would be given the freedom to increase their bond issuance, to avoid stoking competition for deposits and to encourage investors to put money to work in capital markets instead.

The Korean restructuring process works quickly too, unlike in some other Asian markets where both companies and creditors drag their feet. Under a newly reinstated corporate restructuring act, Taeyoung E&C has already launched its debt workout process, working quickly to raise cash and identify assets it can sell.

Again, the state plays a part in ensuring things move swiftly. Taeyoung E&C’s main creditor is state-owned Korean Development Bank, which has been involved in major restructurings going back to the Asian financial crisis. While private equity firms or commercial banks might need to recycle their investments quickly, even if it means taking a big loss, KDB can afford to take a more patient approach, especially when doing so preserves jobs or corporate value. That backing makes other creditors more comfortable.

These various tools mean that bumps in the road tend to be smoothed over more quickly in Korea than in most other Asian countries.

International investors certainly seem to have retained their appetite for Korean assets. Korea’s Woori Bank and Mirae Asset Securities managed to draw huge demand in the US dollar bond market this month, even though they are exposed to the real estate sector. The two deals priced inside the issuers’ curves and continued to tighten in secondary trading.

Compare Korea’s handling of problems in the real estate sector to those in China, where authorities exert far more influence on markets both through regulations and unofficial “window guidance” to participants.

While China has state-owned asset management companies that are supposed to suck up toxic assets from the financial system, they have had little success in tackling the mounting distress in the property sector – perhaps because some of them had already loaded up on developers’ offshore bonds before they defaulted. Banks and creditors have seemed unwilling to offload their bad debts to AMCs at distressed levels, either unwilling to crystallise losses in principal or hoping for a policy-driven turnaround.

China tried to ease the pressure on property developers in November 2022 when it lifted a ban on private share placements, but there is hardly a rush to sell shares while prices are depressed. On top of that, state-owned developers aren’t allowed to sell shares at a price below their net asset value, and most of their stocks are languishing well below that level.

Measures published last week to encourage banks to lend to approved developers will go some way to easing the liquidity crunch, but plenty of companies are already in default and mired in debt restructuring talks. Confidence in the sector is low among equity and debt investors, but most importantly property sales and prices have slumped too. Years of negative headlines about developers’ finances have discouraged many potential homebuyers from putting their money into projects that might never be completed.

Korean property prices are expected to fall this year, but the decline is likely to be gradual as its housing bubble deflates.

That’s not to say that Korean authorities always get their approach right. They can sometimes be heavy-handed in their market intervention. In November a blanket ban on short-selling caused consternation, and in late 2022 the authorities pressured Heungkuk Life Insurance to redeem its US$500m subordinated capital note after its initial decision to skip the call rattled bond markets. Authorities even decide when offshore corporate bond deals can be done, setting a schedule to avoid cannibalising demand for other Korean deals, even if that means issuers need to print in the midst of turbulence.

While the Korean approach might sometimes cause short-term surprises or inconvenience, investors won’t complain too much if it avoids a long drawn-out credit crunch.