By Lee Kyung-min
Three local ratings agencies are coming under heavy criticism for slashing credit ratings for Taeyoung Engineering and Construction, only hours after the troubled builder filed for debt workout, on Dec. 28 of last year. They are Moody’s Investors Service-affiliated Korea Investors Service, Korea Ratings and NICE Investors Service.
Market watchers say the collective last-minute rush barely explains months of stalling and failure to closely monitor rapid corporate deterioration developments and make prompt revisions accordingly.
Also at play are claims of deliberate oversight, amplified in large part by the ratings agencies’ exclusive reliance on corporate issuers for hefty evaluation fees. Few ratings bodies are incentivized to make timely downbeat projections. This almost always comes at the expense of retail investors whose primary source of information is from the supposed fairly assessed creditworthiness of corporate issuers.
Taeyoung is the latest reminder of past ratings fiascos, as evidenced by the case of Korea Investors Service downgrading Legoland’s rating to the lowest D from the top A1 in just a matter of weeks after reports of default last year. In 2012, ratings agencies downright stalled the downgrade of Tongyang Group until after the conglomerate filed for court receivership.
All too belated
The three agencies in unison slashed Taeyoung’s unsecured corporate bonds rating to a speculative or junk grade CCC, Dec. 28, down 10 grades from a solid A minus grade. It was immediately after news broke on the builder filing an application for debt workout.
The A minus rating indicates the issuer is likely to pay the principal and interest, whereas CCC rating indicates a high risk of default.
The three maintained A grade, but lowered it by merely one grade to A minus in June of last year, prompted by continued elevated financial uncertainty from heavy real estate project financing guarantee exposures.
The latest ratings response to the looming threat of Taeyoung was limited to Korea Investors Service and NICE Investors Service listing the builder on the watch list for possible downgrade early last week. Korea Rating revised Taeyoung’s credit outlook to negative from positive, without even dignifying credit downgrade considerations.
Rating agencies say they expected Taeyoung would be able to generate stable liquidity flows, aided by sales of its lucrative assets.
“We determined Taeyoung could maintain cash flow and restructure the troubled project financing construction sites,” Korea Investors Service said.
The early application for workouts was triggered by the authorities’ mandate for outright restructuring of project financing loans over simple maturity extensions, it added.
However, most industry insiders say the argument simply lacks merit.
“Everyone in the market knew about Taeyoung’s financial soundness deteriorating,” an industry official said.
“The agencies should have lowered to at least around BBB grades to limit market impact. Whether intentional or not, they simply did not do their jobs.”