DSME’s P-Plan

The Korean government plans to expand capital of up to 2 trillion won (US$1.79 billion) for the Export-Import Bank of Korea when Daewoo Shipbuilding and Marine Engineering (DSME) fails in its self-regulating debt readjustment.
The Korean government plans to expand capital of up to 2 trillion won (US$1.79 billion) for the Export-Import Bank of Korea when Daewoo Shipbuilding and Marine Engineering (DSME) fails in its self-regulating debt readjustment.

 

It is said that the Korean government plans to expand capital of up to 2 trillion won (US$1.79 billion) for the Export-Import Bank of Korea (Korea Eximbank) when Daewoo Shipbuilding and Marine Engineering (DSME) starts a free packaged plan (P-Plan) in case of failure of its self-regulating debt readjustment. It means that an additional 900 billion won (US$805.01 million) of taxpayers' money will be injected from 1.1 trillion won (US$983.9 million) which was estimated earlier on the assumption of the agreement with creditors. According to the financial authorities and creditors on March 30, the government has recently re-calculated the amount of capital the Korea Eximbank needs from 1.5 trillion won (US$1.34 billion) to 2 trillion won (US$1.79 billion) when DSME introduces the P-Plan.

Previously, the government expected that the Korea Eximbank will be able to maintain its financial soundness when injecting 1.1 trillion won (US$983.9 million) on the premise of debt readjustment with interested parties which own DSME’s corporate bonds. When DSME implements the P-Plan due to the failure in debt readjustment, the government needs to put 400 billion to 900 billion won (US$357.78 million to 805.01 million) of more money than expected. A senior government official said, “The Korea Eximbank will see its capital soundness get worse when DSME starts the P-Plan compared to the current conditional new fund support program. The bank will need to raise capital by up to trillion won (US$1.79 billion).

The company, which conducted a due diligence on the government and DSME earlier, had a total inspection on all the ship orders won by DSME and estimated the total amount of refund guarantee (RG) calls in order to calculate the amount of capital expansion for the Korea Eximbank in case of DSME introducing the P-Plan. This was because it cannot understand the amount of additional capital expansion without checking on RG calls since 7.2 trillion won (US$6.44 billion) out of 10.2 trillion won (US$9.12 billion) of the total exposures of the Korea Eximbank against DSME are RG. Based on it, the government predicts that banks needs to shoulder the RG burden of up to 3 trillion won (US$2.68 billion) when DSME starts the P-Plan, and about half of them – 1.5 trillion won (US$1.34 billion) – will belong to the Korea Eximbank.

The Korea Eximbank, which has the most exposures among banks, will face a bigger burden when DSME implements the P-Plan. The government presented the DSME restructuring plan on the 23rd and said that the exposures of Korea Eximbank for DSME reach 10.2 trillion won (US$9.12 billion), accounting for 56.6 percent of the total exposures.

When the Korea Eximbank supports DSME by providing a new fund of 1.45 trillion won (US$1.3 billion), converting its existing loans into consol bonds and offering new RG supports under the government’s policy, the BIS capital adequacy ratio of the bank will decrease 1.1 percent point. In this case, the BIS ratio of the Korea Eximbank will fall short of 10.5 percent which is an international standard. An official from the Korea Eximbank said, “With the P-Plan, our exposures for DSME will be greater as new reserve funds and RG call risks will increase. The BIS ratio is also expected to drop.” When DSM succeeds in readjusting debts with international parties, the Korea Development Bank and the Korea Eximbank will provide new funds of 2.9 trillion won (US$2.59 billion) to DSME. However, the banks need to inject 3.4 trillion won (US$3.04 billion) into DSME with the P-Plan.

Meanwhile, the Korea Eximbank will not have enough money to independently expand capital for DSME. According to the bank’s statement of accounts approved by the board of directors on the 28th, the Korea Eximbank’s retained earnings last year stood at 535.2 billion won (US$478.71 million).

 

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