Tongyang Group is facing deeper financial trouble as it will have difficulty in rolling over maturing debts worth 200 billion won due in the coming months

2013-09-03 17:49

Tongyang burrows deeper into trouble

By Kim Tae-jong
Tongyang Group is facing deeper financial trouble as it will have difficulty in rolling over maturing debts worth 200 billion won due in the coming months. The situation became worse after two credit ratings agencies recently lowered their ratings on affiliates of the mid-tier conglomerate, following the issuance of corporate bonds worth 75 billion won by Tongyang Inc., the holding company of the group, on Aug. 29. With restructuring efforts delayed, the group’s affiliates have issued corporate bonds worth 576 billion won this year ― 426 billion won for Tongyang Inc. and 150 billion won for Tongyang Cement & Energy ― to secure liquidity for business operations and repayment of maturing corporate bills and bonds.However, under a revised law that will take effect in October, it can no longer continue the practice. The new law bans a securities company from making “buy” recommendations on bonds issued by its affiliates with a “junk bond” rating or lower to investors.
NICE Investors Service, one of the nation’s major ratings agencies, has downgraded Tongyang Cement from BBB- to junk bond grade BB+. It downgraded the outlook on Tongyang Inc.’s BB rating to “negative” from “neutral,” and also cut its rating on Tongyang Securities to A- from A. Junk bonds are considered risky and speculative investments.
Given that over 50 percent of bonds and bills issued by the group’s affiliates were sold through Tongyang Securities, it is highly probable that the group will struggle to find brokerages to sell its bonds under the new law.
Nice Investors Service said the group will face difficulty in getting access to the financial market as it can no longer take advantage of its brokerage affiliate.
The group has managed to attract investors by selling bonds at an annual coupon rate of around 8 percent, much higher than the market average. But its corporate bonds have become less attractive with the subscription rate dropping to 1.04 percent last Thursday from 4.16 percent in February.
“Amid growing concerns over their low credit rating, no securities firm would be willing to sell the corporate bills and bonds of the group’s affiliates,” said an analyst, who refused to be named.
According to industry sources, the group has to raise more than 200 billion won, as the amount of corporate bonds maturing by the end of the year is estimated at 135 billion won and those on the advanced repayment plan in October are 90 billion won.
In the first half of next year, Tongyang Inc. and Tongyang Cement & Energy have to repay 360 billion won in corporate bonds.
The rating reductions came as the group’s restructuring efforts have been stalled amid worsening financial health. The group’s debt to asset ratio stood at 1,300 percent in March.
“The delay in the group’s restructuring has increased risks associated with the repayment of corporate bonds and bills,” an official from Korea Ratings said.
The group originally planned to complete restructuring by the first half of this year and raise 2 trillion won by selling off its non-core business units and assets, but it only managed to sell small business units, securing just 390 billion won, less than 20 percent of what it originally aimed to raise.