Even though Daewoo Shipbuilding & Marine Engineering (DSME) completed its debt rescheduling, the financial sector came to bear a bigger burden.
According to the banking sector on March 19, five commercial banks -- KEB Hana Bank, KB Kookmin, Woori Bank, NH Bank, and Shinhan Bank –- will conduct a fair evaluation in June following a debt-for-equity swap of DSME. The evaluation will be carried out with an external accounting firm and the accounting firm will be selected through consultations with five banks with the Korea Development Bank (KDB) and the Korea Export-Import Bank (Eximbank) taking the lead. The KDB and the Eximbank swapped all DSME debts they held for equity.
A debt-for-equity swap is to turn unsecured bonds held by the banks into DSME stocks. At the moment, DSME stocks are banned from being traded so their current price are impossible to know, forcing DSME stocks to be assessed by an accounting firm. In this case, it is likely that the stock price set by the accounting firm will be dwarfed by the stock price used in the debt-for-equity swaps by the KDB and the Eximbank.
"At the end of last year, the KDB wrote off DSME debts as a loss by assessing DSME stocks swapped for debts at one won," a high-ranking financial official said. “As DSME’s debt ratio plummeted via a massive debt readjustment and the shipbuilder will receive new financial support, its value set via the fair evaluation may outnumber that of last year. But on the banks’ part, they will have to stomach some losses.”
According to the Korea Investors Service, KEB Hana Bank has 512.7 billion won (US$461 million) loans to DSME, the highest amount among DSME debts. Of the amount, debts to be swapped for equity are 410.2 billion won (US$369 million). KB Kookmin Bank swapped 134.9 billion won (US$121 million), 80% of its total DSME debts of 166.8 billion won (US$150 million) for equity and Woori Bank 8 billion won (US$7.2 million) of 100 billion (US$9 million) in DSME debts for equity. In addition, NH Nonghyup Bank and Shinhan Bank swapped 20.7 billion won (US$18 million) and 12.8 billion won (US$11.5 million), the smallest among the banks for equity, respectively.
Some experts say that the assessed fair value of DSME stocks may fall to 90% of the value applied to the debt-for-equity swaps. The price of one DSME stock may slide below 5,000 won (US$4.5) from 40,000 won (US$36). In this case, KEB Hana Bank will have to take losses of about 370 billion (US$333 million) in the first half. KB Kookmin Bank will lose 121.4 billion won (US$109 million), Woori Bank 720 billion won (US$648 million), and NH Bank and Shinhan Bank 18.6 billion won (US$16 million) and 11.5 billion won (US$10 million), respectively. However, it is said that KB Kookmin Bank actually have less than 100 billion won (US$90 million) in loans to DSME and the fair value evaluation will give rise to 80 billion won (US$72 million) in losses since its loans DSME are based on limited contract loan accounts.
A limited contract loan account is a kind of overdraft account, which means that a customer can set his or her maximum possible loan amount and receive loans within that limit.
However, the banks do not have to accumulate additional reserves for the remaining 20% of debts after debt-for-equity swaps. This is because financial authorities decided to keep the asset quality classification of the remaining debts at the current "precautionary" level.
When a debt readjustment is made in the first place, the reclassification of asset quality should adjust drops in the grades of the remaining debts. As a result, DSME’s loan debts, which were already at the precautionary level, were expected to receive standard or substandard and below grades, so there were concerns over an additional provisioning burden for financial institutions. However, financial authorities believed that DSME's debt-to-equity ratio improved significantly and new funds were injected so there was no need to downgrade the credit ratings of the remaining debts.