Capital Increase for Restructuring
The South Korean government recapitalizes the Korea Development Bank (KDB) and the Export-Import Bank of Korea (Korea Eximbank) in order to accelerate its corporate restructuring processes in the shipbuilding and shipping industries and prevent a rapid increase in their bad debts ahead of the evaluation of the financial structures of the main debtor groups and the credit risk assessment regarding large corporations scheduled to be completed in the first half of this year. The government explained that the Ministry of Strategy & Finance recently formed a task force to that end and began to discuss specific measures.
Things are quite serious in the shipbuilding industry, where restructuring is reaching a climax these days. For example, the Korea Eximbank has lent no less than 12.5 trillion won (US$10.8 billion) to Daewoo Shipbuilding & Marine Engineering (DSME) and the lending amounts to 4.1 trillion won (US$3.5 billion) for the KDB. The two banks’ financial soundness can be seriously affected if the loans provided for DSME are classified as doubtful ones. Specifically, in that case, their allowances for bad debts have to reach 50% of the lending amounts, which causes the BIS ratios of the KDB and the Korea Eximbank to drop from 14% or so to approximately 12% and from about 10% to 9%, respectively. The BIS ratios can be further affected if Hyundai Merchant Marine and Hanjin Shipping with a total credit of one trillion won go into court receivership.
The government’s goal is to maintain a BIS ratio of at least 14%. “A drop in BIS ratio should be dealt with in advance by means of recapitalization based on an increase in the number of common stocks instead of costly means such as subordinated bonds and perpetual bonds,” it said.
The KDB, fully owned by the government, currently has a paid-in capital of 17.2 trillion won (US$14.9 billion) and its equity capital including retained earnings totals 26 trillion won (US$22.6 billion). The best part of the paid-in capital is the in-kind assets including the shares of the Korea Electric Power Corporation and the Korea Land & Housing Corporation. The recapitalization is expected to take the form of investment in kind as well, that is, an additional transfer of public enterprise shares owned by the government to the KDB. Investment in cash is forecast to be carried out at the same time though.
The government is said to have prepared a budget of 50 billion won (US$43,4 billion) for the recapitalization of the KDB. The budget is predicted to be executed for a capital increase before an extra budget is prepared next year. The KDB is looking forward to investment in cash, rather than investment in kind, as well for a smooth restructuring process.
According to the South Korean government, the two banks’ allowances are far from sufficient now in spite of an increase in bad debts. The non-performing loan (NPL) ratio of the KDB, in fact, skyrocketed from 1.6% to 5.68% between 2011 and last year and the amount of the NPLs held by the KDB increased by as much as 4.2 trillion won in 2015 alone. In the case of the Korea Eximbank, the ratio soared from 2.02% to 3.24% between the end of 2014 and the end of 2015. Meanwhile, their respective allowance ratios were 78.6% and 79.9% at the end of last year, much short of the average of the banking sector at 112%. The financial authorities are calling for them to raise the allowance ratio to at least 100% in the interest of financial soundness, to at least 20% of the lent amount for substandard loans, 50% for doubtful loans and 100% for estimated losses to be specific. These, though, are minimum guidelines according to the financial authorities.