South Korea's Legoland default points to wider bond market stress (updated)

Korea Electric Power

28/10/2022 08:38

(Recasts headline. No change to text.)
    By Cynthia Kim
       SEOUL, Oct 28 (Reuters) - A missed bond payment by the
developer of a South Korean theme park has rattled the country's
money markets and raised worries about the prospect of a credit
crunch similar to the kind that threw China's property market
and economy into crisis.
    South Korea's central bank and financial regulators
scrambled this week to contain the risks of wider financial
fallout as local short-term yields spiked, crippling some major
institutions' ability to meet near-term funding needs.
    Money market yields have soared since Gangwon Jungdo
Development Corp., the developer of the new Legoland Korea theme
park east of Seoul, missed bond payments worth 205 billion won
($144 million) due on Sept. 29.
    While official efforts to calm markets have prevented wider
dysfunction in financial markets this week, money market
confidence is fragile with the yield on 91-day commercial paper
 KRCP=KQ  at a 13-year high of 4.58% on Friday from 3.25% a
month earlier.
    "The Legoland case was like getting COVID when you are
barely breathing at an intensive care ward," said Cho Dou-hyung,
a credit analyst at Shinhan BNP Paribas Asset Management. "It
looks like the credit market is getting enough policy support
for now, but the jitters are unlikely to go away unless the Fed
and the Bank of Korea give some sort of assurance about possible
slowdown in policy tightening."
    The missed debt payment by the Gangwon Jungdo Development
has raised questions about loans related to hundreds of
thousands of other projects in Asia's fourth-largest economy and
even drawn alarming parallels with China's property debt crisis.
    It also shocked some investors as the case showed even
state-backed developers at risk of defaults amid surging
interest rates. The company is 44% owned by Gangwon Province,
whose asset-backed commercial paper (ABCP) was A1 rated and
guaranteed by the local government.
    "Right now, there is just not enough confidence that these
kind of soured loans won't happen again with rates still going
up," said Cho.
    Legoland, a the park resort on the island of Chuncheon that
boasts 40 rides and a 154-room hotel, said on Thursday it will
close down for three months starting January 2023 "for
maintenance."
    CONTAGION?
    Some top-tier state-run enterprises have struggled to obtain
financing this week, even after the government's 50 trillion won
($35.3 billion) package announced on Sunday to buy more
commercial debt from financial institutions.
    AAA rated state-run Korea Electric Power Corp. (KEPCO)
failed to get enough bidders for its three-year corporate bonds
on Tuesday, while Korea Gas Corp., also rated AAA, failed to
sell a two-year corporate bond.
    Incheon Housing and City Development Corp., rated AA+, also
failed to sell bonds on Monday.
    Gangwon province, which is required to repay the loan as
state guarantor of developer's debt, has said it will pay the
entire 205 billion won by Dec. 15.
    But Fitch Group's CreditSights sees risks further down the
value chain.
    "The financial groups themselves have relatively little
exposure to troubled or likely to be troubled ABCP but would
feel the after-effects of tougher domestic funding conditions
via lower margins for their credit card businesses and increased
demand for corporate loans," CreditSights said in a report
released on Friday.
    A BOK analysis show South Korea's commercial and savings
banks exposed to 112.2 trillion won of outstanding project
finance loans for real estate industry as of June this year,
more than double the amount in 2016.
    The dire picture for the credit market comes against the
backdrop of volatile global financial markets and with the Bank
of Korea set to raise interest rates further amid crippling
inflation and despite slowing growth.
    "We have asked major institutional investors to refrain from
excessive selling of bonds or reduction of any planned (bond)
purchases given the financial market situation and take a mid-
to -long term approach in their investment decisions," the
Financial Services Commission said in a statement on Friday.
($1 = 1,418.3800 won)
 (Reporting by Cynthia Kim; Editing by Sam Holmes)
 ((Cynthia.Kim@thomsonreuters.com; 822 3704 5655; Reuters
Messaging: cynthia.kim.thomsonreuters.com@reuters.net))