South Korea’s Legoland default points to broader bond market stress

SEOUL, Oct. 28 (Reuters) – A missed bond payment by the developer of a South Korean theme park has shaken the country’s money markets and raised concerns about the prospect of a credit crunch, similar to the kind that China’s real estate market and economy is experiencing. plunged into a crisis .

South Korea’s central bank and financial regulators made every effort this week to contain the risks of a broader financial fallout as short-term local yields rose, affecting the ability of some large institutions to meet short-term funding needs. deadline, was paralyzed.

Money market returns have skyrocketed 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) on Sept. 29.

While official efforts to calm the markets this week have prevented further dysfunction in financial markets, money market confidence is fragile with 91-day commercial paper yields hitting a 13-year high of 4.58% on Friday, against 3.25% a month earlier.

“The Legoland case was like getting COVID while barely breathing in an intensive care unit,” said Cho Dou-hyung, a credit analyst at Shinhan BNP Paribas Asset Management. “It appears that the credit market is getting enough policy support for the time being, but the jitters are unlikely to go away unless the Fed and the Bank of Korea provide some assurance about a potential slowdown in policy tightening.”

Gangwon Jungdo Development’s missed debt payment has raised questions about loans linked to hundreds of thousands of other projects in Asia’s fourth-largest economy and has even drawn alarming parallels to China’s real estate debt crisis.

It also shocked some investors, as the case revealed that even state-backed developers were at risk of default amid rising interest rates. The company is 44% owned by Gangwon Province, whose asset-backed commercial paper (ABCP) had an A1 rating and was guaranteed by the local government.

“Right now there’s just not enough confidence that this kind of soured lending won’t happen again while rates are still rising,” Cho said.

Legoland, a park resort on Chuncheon Island with 40 rides and a 154 room hotel, said Thursday it will close for three months from January 2023 “for maintenance.”


Some top-tier state-owned enterprises have struggled to secure financing this week, even after the government’s 50 trillion won ($35.3 billion) government package announced Sunday to buy more commercial debt from financial institutions.

The state-run Korea Electric Power Corp. (KEPCO) with an AAA rating failed to get enough bidders for its three-year corporate bond on Tuesday, while Korea Gas Corp., which also had an AAA rating, 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 has to repay the loan as a state guarantee for the developer’s debt, has said it will pay the full $205 billion won by December 15.

But Fitch Group’s CreditSights sees risks further down the value chain.

“Financial groups themselves have relatively little exposure to distressed or likely to face ABCP, but would feel the effects of tighter domestic financing conditions through lower margins for their credit card operations and increased demand for corporate loans,” CreditSights said in a report. released Friday.

A BOK analysis shows that South Korea’s commercial and savings banks were exposed to 112.2 trillion won in outstanding project finance loans for the real estate sector in June this year, more than double the amount in 2016.

The bad picture for the credit market comes against the background of volatile global financial markets and with the Bank of Korea poised to raise interest rates further against crippling inflation and despite slowing growth.

“We have asked large institutional investors to refrain from excessive bond sales or reductions in planned (bond) purchases given the financial market situation and to adopt a medium to long-term approach to their investment decisions,” the Financial Services Commission said in a statement. statement. a statement Friday.

($1 = 1,418,3800 won)

Reporting by Cynthia Kim; Editing by Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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