Investors who invested in corporate bonds issued by Daewoo Shipbuilding & Marine Engineering Co. (DSME), a financially troubled South Korean shipbuilder, are highly likely to lose their capital, rather than receiving interests. In fact, DSME barely paid back its commercial paper (CP) worth 400 billion (US$349.65 million), which matured in September, with its shipbuilding payment in advance from ship owners.
Regardless of its unstable financial conditions, DSME still ranked No. 1 in the world in terms of order backlog. The data released by U.K.-based global research firm Clarkson Research Services showed that DSME’s shipyard in Geoje had a total of 6.95 million compensated gross tons (CGTs) worth of order backlog as of early October. Its order backlog was worth US$35.1 billion (40.15 trillion won), including US$16.3 billion (18.65 trillion won) of merchant vessels and US$13.9 billion (15.9 trillion won) of offshore plants. The company has also received the highest number of orders to build 51 liquefied natural gas (LNG) carriers, which are considered high value added merchant vessels with the highest margin, among the nation’s top three shipbuilders.
As many criticize that the government released the unsubstantial shipbuilding industry restructuring plans, excluding DSME issues, on October 31, all eyes are on whether or not DSME can get over the current slowdown in the shipbuilding industry and survive.
From a financial point of view, market experts say that it is impossible for DSME to normalize the business due to a serious shortage in operating funds, though the company has the advanced shipbuilding technology. An analyst from a securities firm said, “Unlike Samsung Heavy Industries which can immediately raise 1 trillion won (US$874.13 million) of cash to secure its operating funds through a paid-in capital increase, DSME’s debt-equity swap program led by its creditors is just to restore its impaired capital by improving its financial indicators, not to actually raise operating funds.”
DSME made a net loss of 1.2 trillion won (US$1.05 billion) in the second quarter and its capital was completely eroded with 776.3 billion won (US$678.58 million) of debts. This was largely due to the delayed deliveries of large-scale offshore plants including the Sonangol project worth 1 trillion won (US$874.13 million) and the “order drought” in the merchant vessel sector.
In fact, DSME set a goal to achieve US$6.3 billion (7.21 trillion won) in orders this year, but the figure stood at only US$1.3 billion (1.49 trillion won) as of November. The decrease in new orders destroys a virtuous cycle as the company receive advances and inject them into building earlier ship orders to deliver.
Another official from a credit rating agency said, “If the number of new orders dramatically drops as it is now, it might be impossible for the company to survive even with the government’s support.”
However, some say that when DSME shuts down its insolvent offshore plant business and focuses on the LNG carrier and large container areas where the company has the best technology in the world, it will be able to survive as a mid-size shipyard specializing in the sectors.
DSME built the world's first icebreaking LNG carrier in 2014 and won orders to build 35 LNG carriers in the same year alone based on the technical competence, sweeping the market. As STX Offshore & Shipbuilding Co., which is currently under a court receivership, canceled orders at low prices and carried out large-scale workforce reductions in the past and is seeking to put up for sale, DSME can also seek out a new owner after reducing the company in size. An official from DSME said, “We are having difficulties to secure operating funds, but we have an excellent technology to build high-efficiency LNG carriers that have a high profit margin. Accordingly, we can normalize the business if we overcome the current crisis.”