Again Facing Liquidity Crisis
Big problems are worrying financial authorities at great pains to put Daewoo Shipbuilding and Marine Engineering (DSME) back on track. This year, its new orders reached 15 percent of its original target. It is impossible to justify injecting new funds into the ailing company since a massive 4.2 trillion won was poured into it already and the government elucidated that there will be no more financial support for restructured companies.
Even though the DSME managed to pass the month of September safely, the company is expected to face a possible liquidity crisis in April of next year. “Our goal is to get the DSME to survive until 2018 through extremely belt-tightening self-rescue efforts,” said a high-ranking official in the government. “In terms of landing new orders, the situation is becoming worse and worse.” It is expected that if the current situation continues, financial authorities will have no choice but to execute a contingency plan to make the DSME survive by additionally cutting down on docks and selling off the military hardware part of its business.
Although new orders are well below target, the DSME is not in an emergency. The company is building 142 vessels amounting to US$ 41.4 billion in billings. So, DSME has a more room to breathe than Hyundai Heavy Industries and Samsung Heavy Industries, each of which only have US$30 billion in remaining orders.
The point is new orders. This year, DSME has received a mere US$1.2 billion in new orders as of October. The figure is 10 percent of the US$11 to $12 billion in new orders predicted at a time when the government decided to support the DSME in a meeting in October of last year. It is also only 20 percent of the US$6 billion in new orders expected when a self-rescue plan and additional support plans were announced in July of this year. This fact is undermining the premise that support for the liquidity of the DSME will be able to save the company.
“The name of the game is how long the new order cliff will last. But we cannot take control of the matter,” said Lim Jong-ryong, chairman of the Financial Supervisory Commission. “We are nervous, as it is important to make a survival strategy while considering this matter.”
The new order cliff is devastating since it means that work is vanishing and will further damage the DSME in terms of liquidity. Shipbuilders receive about 20 percent of the price of a ship as a down payment at the time of landing orders. The DSME is claiming that they will be able to win orders amounting to a total of US$3 billion by the end of this year. Even if the goal is achieved, the DSME will inevitably fall short of proper liquidity by about 600 billion won. “We are securing liquidity by accelerating the current self-rescue plan in case new orders drop sharply,” a high-ranking official said. “Nonetheless, a probable delay in the delivery of a drillship to Sonangol may give the DSME a liquidity problem.”
In June, financial authorities stated that they mapped out a contingency plan against a worst-case scenario while announcing a restructuring plan for the DSME. The conditions are a prolonged sharp drop in new orders (from US$3.5 billion to US$4.5 billion in 2017 and US$5.5 billion in 2018), a 10 percent increase in expected cost of offshore plants and indemnities for payment delays, and a prolonged delay in the delivery of the drillship. Measures to address these matters are an additional reduction of docks and the complete sell-off of the special vessel business division. They are estimated at 2 trillion won (US$1.7 billion). This means saving the DSME and turning the company into a mid-sized shipbuilder.
“Whether or not to execute the contingency plan depends on the status of the company’s new orders and its liquidity flow next year,” financial authorities said, taking a prudent approach. But observing the current status of receiving new orders and liquidity, the DSME is at the worst level disclosed by financial authorities in a restructuring plan in June. If the current situation continues, the contingency plan may be implemented around April of next year.