Support for DSME

The Korea Development Bank (KDB),), will accept debt-to-equity swaps worth at least 1.6 trillion won (US$1.4 billion) for Daewoo Shipbuilding & Marine Engineering (DSME
The Korea Development Bank (KDB),), will accept debt-to-equity swaps worth at least 1.6 trillion won (US$1.4 billion) for Daewoo Shipbuilding & Marine Engineering (DSME

 

The Korea Development Bank (KDB), a main creditor of Daewoo Shipbuilding & Marine Engineering Co. (DSME), will accept debt-to-equity swaps worth at least 1.6 trillion won (US$1.4 billion). Moreover, the bank will reduce the capital of its 60 million shares in DSME without refund. The Export-Import Bank of Korea (Korea Eximbank) is also considering issuance of perpetual bonds to expand capital.

During a press conference at the KDB headquarters in Yeouido, Seoul, on November 1, Lee Dong-geol, chairman of KDB, said, “We will offer a sufficient amount in debt-to-equity swaps so that DSME can operate with enough financial liquidity for a certain period of time. The figure will be larger than the market expected.”

DSME’s capital base is completely eroded with 776.3 billion won (US$679.77 million) of debts as of the end of the first half of this year. When the current situation continues until March next year, the company will be delisted from the local stock market. Accordingly, the KDB, the largest shareholder, plans to increase capital of DSME in a bid to prevent delisting and dramatically improve its financial conditions, including debt ratio.

Under the restructuring plans released last year, the KDB and the Korea Eximbank said they would provide a combined 4.2 trillion won (US$3.68 billion) worth of financial aid to DSME, which breaks down to 2.6 trillion won (US$2.28 billion) from the KDB and 1.6 trillion won (US$1.4 billion) from the other lender.

Since the KDB increased capital by 400 billion won (US$350.26 million) at the end of last year, it can currently afford to offer 1.6 trillion won (US$1.4 billion). In addition to funds provided in the restructuring process, the KDB will provide more money in debt-to-equity swaps than originally planned by using even existing bonds.

The KDB need to reduce the capital of existing stocks issued first to make the debt-equity swap program work. The bank owns 135 million shares of DSME (49.7 percent stake), including its existing 60 million shares and 75 million shares acquired through the paid-in capital increase at the end of last year. 

The KDB plans to reduce the capital of its existing 60 million shares first and then the remaining shares later. Considering the fact that the stock price of DSME stood at 4,480 won (US$4) on the same day, the total amount of capital reduction without refund reaches some 270 billion won (US$236.43 million).

A high-ranking official from the KDB said, “DSME should reduce its debt ratio from the current 4,000 percent to less than 1,000 percent in order to normally receive orders. When looking at the bigger picture, we believe that it is right to preemptively help the company to normalize the business.”

Even when DSME can stay on the local stock market through capital expansion, the company still has liquidity risks as its corporate bonds worth 950 billion won (US$831.87 million) will mature in 2017.

When to deliver ships ordered by Sonagol, a government-run petroleum company of Angola, is another problem. At the moment, however, the KDB plans to help DSME to avoid a conditional voluntary agreement even when facing a lack of liquidity.


 

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution