South Korea's financial watchdog is probing a major local construction firm over whether it has intentionally hidden applicable risk factors in selling bonds to investors while being fully aware of such risks, informed sources said Thursday.

According to the sources, the Financial Supervisory Service is looking into GS Engineering & Construction Co.'s sale of corporate bonds totaling 380 billion won ($356 million) in February of last year, which came just two months ahead of its announcement of its first-quarter earnings.

GS Engineering is said to have sold corporate debts at lower costs by intentionally hiding its expected losses from overseas projects.

On April 10, the country's fourth-largest builder shocked investors by disclosing that it suffered 386 billion won in losses during the January-March period and an operating loss of 535 billion won as it reflected ballooning losses from lower margins in overseas construction projects on its balance sheet.

"If GS Engineering had recognized massive losses in advance, it should have notified investors of such risk factors that they may face in investing in bonds," an official at the FSS said.

A company is required to submit a set of documents to financial authorities when it plans a new offering of securities for public trade. The documents must contain, among other things, the company's financial situation and risk factors in order to protect investors from fraud.

GS Engineering was rated AA- at the time of the bond sale in February, but its credit rating was cut to A+ following the first-quarter earnings. GS Engineering raised more than 1 trillion won between this January and February of last year by selling commercial papers and bonds.

GS Engineering was among South Korean builders that settled for lower-priced deals overseas in recent years due to heated competition among local rivals, a self-injuring practice that squeezed their margins.

Stock investors were also upset over a sharp fall in GS Engineering following the earnings announcement. Shares of GS Engineering fell by the daily-permissible limit of 15 percent for a second consecutive trading session just after its first-quarter earnings were released. Its share price has fallen further by up to 40 percent since then. (Yonhap)