After defaulting on its business loan interest payment, Dream Hub is struggling to resucitate the moribund Yongsan development project by mobilizing all possible means.

Dream Hub, the project financing vehicle, plunged into loan default on Wednesday as it failed to pay back 5.2 billion won ($4.7 million) in interest on its asset-backed commercial paper.

KORAIL, the state-run rail operator and greatest shareholder in Dream Hub, is gesturing to nevertheless carry forward the project by taking on additional loans and scaling back construction.

Its amended proposal involves downsizing the 111-story landmark building to 80 stories and raising the proportion of profitable small and medium-sized residential buildings.

“We will restructure the entire business from scratch,” said a KORAIL official.

Observers, however, remain skeptical over the optimistic solution as the Yongsan development has long ago lost the investors’ credit. Also, the rail operator currently may not be able to afford to issue new corporate bonds or to borrow large sums from local financial backers, they said.

The next-best option for the faltering project developer is to rehabilitate itself through court receivership, in which case all claims and obligations would be frozen instantly. Though the process imposes some financial damages upon investors in the form of capital reduction, it is still considered a plausible compromise to subdue further losses.

However, the shareholders including KORAIL and private investors are not likely to give up their stakes in the 31 trillion won project.

The creditors, too, may oppose the workout scenario as they have some 2.4 trillion won or more to collect.

If that happens, the developer may have no choice but to file for bankruptcy and go into liquidation, which may result in KORAIL’s capital impairment and class action suits for damages involving dozens of investor companies and thousands of victimized residents.

Heated protests especially came from residents of Seobuichon-dong, a district which was originally excluded from the development blueprint but later incorporated upon pressure from former Seoul Mayor Oh Se-hoon.

Some 2,300 households have been restricted from exercising their property rights for years, and most have taken large sums in loans as they wait for the redevelopment to take place.

As for KORAIL, it is to retrieve the depreciated construction site and return the partial payment which it received earlier from Dream Hub. In the early stages of the project, the rail operator contributed the corresponding site to the project, as a form of investment in kind.

Other private investor firms such as Lotte Tours and Samsung C&T, too, are considering filing a capital refund litigation, holding KORAIL responsible for the situation.

The last remaining option is government interference, in the hopes to minimize the residents’ damages and to protect the public rail operator from collapse.

The Ministry of Knowledge Economy and the Ministry of Land, Transport and Maritime Affairs have already made clear that the government will not take over the privately initiated Yongsan plan.

Seoul Mayor Park Won-soon, too, said Thursday that the metropolitan office may only offer limited support to the deadlock, though he pledged to do his best to help out the distressed Seobuichon-dong residents.

In contrast, Cheong Wa Dae said Thursday through its spokesperson Yoon Chang-jung that the Land Ministry will take “due measures” in the Yongsan situation.

By Bae Hyun-jung (tellme@heraldcorp.com)