It has been found that the creditors need to provide a refund guarantee (RG) of up to 5.8 trillion won in addition to new funds worth three trillion won to stabilize the business of STX Offshore & Shipbuilding. It is expected that at least some of the estimated losses amounting to 1.8 trillion won can be saved if the measures are taken to normalize the management of STX Dalian, which is the company’s ship manufacturing base in China.
The Korea Development Bank and the other creditor banks received the due diligence report on July 1. RG can be defined as a system in which a shipper pays some of the contract amount to a shipbuilding company in advance and then the creditors return the sum if the latter fails to carry out the contract.
Deloiite Anjin LLC, which conducted the due diligence, estimated that the creditors have to underwrite the RG worth approximately 5.8 trillion won if STX Offshore & Shipbuilding returns back to normal. Though RG is considered as a type of business practice in the industry, it can pose some burden on the creditors of the company that is going through a liquidity crisis because they have to stand surety and provide three trillion won of new funds at the same time.
“The surety obligations related to the RG are rather unlikely if the business of STX Offshore & Shipbuilding is completely normalized but still can act as a significant variable as the situations of the creditors as well as the shipbuilding company are not that good,” said the financial authorities, continuing, “The creditors are likely to sift out less profitable ones among the 5.8 trillion-won RG contracts.”
The creditor banks are between a rock and a hard place as they cannot cut the size of the RG unilaterally. The shipbuilder can stabilize itself and the creditors can be free from additional burden only when the company is allowed to build more ships to get more profits. If the creditor banks give up on the company based on the due diligence results, the amount of the refund is limited to 1,176.9 billion won, which is less than one-fifth of the 6,244.5 billion won that has been invested by the creditors. Meanwhile, in the case of business stabilization, the amount is almost doubled to 2,237.3 billion won. “STX deserves the RG support on condition that it succeeds in stabilizing its business,” said one of the creditors, adding, “It is not such an urgent matter because the support is offered over a long period of time.”
Another variable for the business normalization is STX Dalian. STX Offshore & Shipbuilding not only has some shares in STX Dalian but also commissioned it to build marine vessels. It has issued RG via the creditors, too.
STX Offshore & Shipbuilding’s loss of 1.8 trillion won that is estimated to be caused by STX Dalian is the amount that was generated due to the discontinuance of shipbuilding. The sum is divided into 661.5 billion won in surety liability, 531.5 billion won losses related to the shares in STX Dalian, 336.4 billion won RG regarding the commissioned shipbuilding, 316.5 billion won due to the depriving of the advance payment, etc.
The financial authorities are considering that the Chinese government and creditors are unlikely to let go of STX Dalian because more than 30,000 workers are working for it and it is in business relations with a lot of subcontractors. In other words, they are expecting that they will be able to save 1.8 trillion won of burden through at least partial normalization. As a matter of fact, the Chinese creditors have said that they are willing to provide funds for building six out of the nine ships. However, the creditors in Korea are having hard time negotiating with them as their Chinese counterparts are closely connected to the Chinese government. The Korean government, which has a much more optimistic view than the creditors do, is also admitting that the prospect is still gloomy. “Things defy any prediction as of now,” one of the creditor banks pointed out, adding, “We have no much expectation as to how much of the amount will be saved from the 1.8 trillion won.” The creditors are expressing particular concerns about the possibility that the Chinese government will shift the financial burden for the normalization of STX Dalian onto them.
In the meantime, the Korea Development Bank, the main creditor bank, has opted to decide on the amount of the support fund on a yearly basis. This signifies that it will reduce the support fund after partial normalization instead of fixing on the amount right away. Experts are saying that the measure has the purpose of relieving the burden on the part of the creditors.