Capital Erosion
Ssangyong Engineering and Construction, South Korea’s No. 13 builder, is increasingly at risk of bankruptcy as it is suffering from capital erosion. Amidst such debacle, its largest shareholder, Korea Asset Management Corporation (KAMCO) decided to cut its losses in the Ssangyong business, fueling speculation that it started going after scapegoats following recovery of public fund.
In particular, all eyes are on new roles of the construction firm’s creditors to whom the key to solving this issue was handed over by KAMCO.
According to the Financial Supervisory Service (FSS) on February 14, Ssangyong E&C posted a current net loss of 411.4 billion won last year, more than twice the amount it posted in 2011, which stood at 157 billion won. That year, the company went into the red affected by the global financial crisis of 2008 following years of profitable operations since 2004 when the company had successfully emerged from workout process. Accordingly, the company lost all of its 140 billion won capital as of late last year, thus falling into a state of complete capital erosion.
One financial industry official said, “The main culprit for sharp increase in Ssangyong’s losses was the company’s push to sell off unsold apartment units at a discount after KAMCO urged the company to secure liquidity in order to advance its sale.”
Construction and financial industry experts predict that Ssangyong will need capital injection of at least 150 billion won in order to avoid capital erosion, which requires a debt-for-equity swap by the creditors. The Hong Kong fund VVL reportedly submitted a proposal to the company for the capital increase through third-party allocation currently under way. It says that in order to participate in a 300 billion won worth of capital increase, 350 billion won worth of debt-for-equity swap is required.
The creditors have long been demanding the largest shareholder provide funding for the construction firm, but the government-run enterprise has refused to do so, citing that “there’s no regulatory ground.” It should return the stake (38.75%), which the “Non-performing Asset Management Fund” holds in the builder, to the Financial Services Commission (FSC) in kind by February 22.
The industry expects that once the firm emerges from capital erosion through a debt-for-equity swap, it will get back on track and smoothly wrap up the sale process.
One construction industry official said, “300 billion won is too cheap for Ssangyong E&C, a globally competitive firm in the field of high-end construction,” adding, “Once the swap gets finished, not just VVL but other companies will come forward showing keen interest in the deal.”
The company has turned in 183.4 billion won of profits overseas and injected 300 billion won worth of liquidity into the domestic business unit over the last three years. It is currently involved in 3 trillion won worth of projects without ever bidding below cost. It is competitive enough overseas to be currently participating in bidding process for the 19 trillion won worth of projects after passing Pre-Qualification.
Meanwhile, if no decision as to whether or not to move forward with a debt-for-equity swap was made by April 1, a deadline for submission of business report, the construction firm will go through a delisting procedure.