Better Than Bankruptcy
Creditors, such as the Korea Development Bank (KDB) and the Export-Import Bank of Korea (Exim Bank of Korea), have decided to provide a total of 6.7 trillion won (US$5.97 billion), including 2.9 trillion won (US$2.58 billion) of fresh funds, to Daewoo Shipbuilding & Marine Engineering Co. (DSME). The KDB, the main creditor bank of DSME, announced a DSME’s restructuring plan at the headquarters in Yeouido, Seoul, on March 23.
State banks will extend DSME a new 2.9 trillion won (US$2.58 billion) bailout, but only if bondholders and other creditors agree on the debt-equity swap and extension of debt maturity. The financial authorities will hold a meeting of debenture holders after April 14. Then, they will inject the new funds when bond holders favor the plan. But when the creditors oppose to the idea, the financial authorities will implement a free package plan (P-Plan) which consists of court receivership and workout programs that can dramatically improve the financial soundness.
KDB Chairman Lee Dong-geol said, “The KDB and the Korea Eximbank will inject 2.9 trillion won (US$2.58 billion) – 1.45 trillion won (US$1.29 billion) each – of new funds into DSME. It is impossible to normalize the company without the debt settlement so I ask the parties concerned, including other bank creditors and bond holders, to make a wise judgment.”
The KDB expects that DSME will decrease the debt ratio from the current 2,732 percent to 257 percent in 2021 and make around 1 percent of operating profits with the debt settlement and new funds. The bank is also planning to sell DSME after 2018. In addition, the authorities will resume DSME stock trading within the second half of this year in order to help banks and debenture holders liquidate their stocks earned through a debt-to-equity swap when needed.
Meanwhile, Financial Services Commission Chairman Lim Jong-ryong held a press conference at the Government Complex Seoul on the same day. In regard to the estimation that losses will reach 59 trillion won (US$52.61 billion) caused by the bankruptcy of DSME, he said, “It is not the marketing of terror.” He added that it is an unexaggerated figure as the failure of DSME will lead to a massive loss of jobs and chain-reaction bankruptcies of small and mid-size shipbuilding equipment and material providers.
The Industry-Academic Cooperation Foundation of Koje University released a report in November last year that DSME’s bankruptcy will incur 58 trillion won (US$51.75 billion) of losses. However, there was also controversy over “self-report” as the report was led by DSME. Regarding this, Lim said, “Due to the controversy, we asked KPMG Samjong Accounting Corp. to check on the figures. Samjong’s estimate was 59 trillion won (US$52.61 billion), higher than that of Koje University.” According to Samjong, there will be a loss of 32.2 trillion won (US$28.7 billion) when all of 114 vessels currently under construction turn into scrap metal. Accordingly, the loss will reach 59 trillion won (US$52.61 billion) when most of loans from banks and stocks become a loss.
In particular, Samjong concluded that global ship owners will cancel their orders for more than 40 vessels for sure when DSME enters into receivership. In this case, financial companies will face a huge loss of refund guarantee (RG) calls worth up to 14 trillion won (US$12.47 billion) and additional allowances for bad debts. Creditors think that DSME is highly likely to go into liquidation when it files for receivership without preparation. Lim said, “The maximum figure is 59 trillion won (US$52.61 billion). It means that 32 trillion won (US$28.51 billion) of money, which was injected for labor costs and design costs, will die out when DSME stops building all the ships. However, the figure will decrease in case of actual bankruptcy as it is the figure came up at the worst scenario including all possible risks.”