Shift to Offshore Rig Building Leaves Samsung Heavy with Mountains of Debt

(Bloomberg) — Samsung Heavy Industries Co. plans to offer 500 billion won ($440 million) of bonds next month as South Korean shipyards sell a record amount of debt to cope with a funding squeeze.

The company is preparing for the sale, it said in an Aug. 22 e-mail, without elaboration. Hyundai Heavy Industries Co., the world’s biggest shipyard, may also raise 1 trillion won through bonds, loans and other means, according to a Newspim report, citing unidentified industry officials. The shipbuilder declined to comment.

South Korea’s three biggest shipyards have raised 2.4 trillion won in the bond market this year as a move away from building container and commodity vessels toward more time- consuming drill ships and offshore units leaves them waiting longer to get paid. Less money is also coming in because the economic slowdown is damping orders and letting customers win lower down payments.

“There’s a temporary glitch in the cash flow,” said Um Kyung A, an analyst at Shinyoung Securities Co. in Seoul. “Orders have fallen drastically and there are no major deliveries scheduled this year.”

Samsung Heavy, based in Seoul, dropped 0.3 percent to close at 38,100 won, the lowest since Aug. 3, on the city’s stock exchange. It has gained 37 percent this year. Hyundai Heavy climbed 1.3 percent today and Daewoo Shipbuilding & Marine Engineering Co. fell 0.4 percent.

Low Yields

The shipyards are also taking advantage of near-record low bond yields to refinance maturing debt sold in 2009, according to Lim Jungmin at Woori Investment & Securities Co. in Seoul. That was the previous record year, with the three big shipbuilders raising 1.5 trillion won to cope with customers canceling or delaying orders amid the global recession.

“The shipyards are opting to issue bonds at cheaper costs than bank loans,” Lim said. “They need to refinance the maturing bonds and they are pre-emptively raising capital to secure liquidity as the industry is in a downturn.”

South Korean yields for three-year AA- corporate bonds, the benchmark according to the Korea Financial Investment Association, reached a record-low 3.35 percent on Aug. 3 after the central bank lowered the benchmark rate in July for the first time in three years. That compares with 5.67 percent for loans as of June, according to data from the Bank of Korea.

Hyundai Heavy

Hyundai Heavy has been the biggest seller of corporate bonds in South Korea this year, raising 1.75 trillion won, including 550 billion won through its refining unit. The Ulsan- based company, whose shipbuilding arm hadn’t sold any bonds since 2009, also raised 705 billion won selling part of its stake in Hyundai Motor Co. last month.

The company’s shipbuilding and offshore orders fell 53 percent in the first seven months of the year. Full-year deliveries will also be the lowest since 2010, with the company and its affiliates handing over 135 vessels, predominately container vessels and tankers. There won’t be any deliveries of more lucrative drill ships and offshore units.

Next year, the company will hand over five drill ships, which are used to explore for oil in deep waters. It will also install a $2.06 billion liquefied natural gas processing facility in Australia for Chevron Corp., completing a four-year project.

Floating production units and drill ships account for almost 50 percent of order backlogs at Hyundai Heavy, Samsung Heavy and Daewoo Shipbuilding, the world’s three largest shipbuilders. That compares with about 30 percent at the end of 2010.

Drill Ships

Drill ships take about two years to build compared with about eight months for a capesize commodity vessel. They sell for about $600 million, more than 10 times the price of the capesize.

The greater investment and time needed to build a drill ship can squeeze shipyards as customers traditionally pay in installments as work progresses, leaving the shipbuilder to finance each stage.

The global order slump has exacerbated this trend as shipyards are offering more generous payment terms to win business, said Kim Hong Gyun, an analyst at Dongbu Securities Co. in Seoul. For instance, customers may get to pay 70 percent of the contract price on completion instead of spreading payments during the work, he said.

“Shipyards don’t have the negotiating power like they used to,” Kim said. “Orders have slumped and financing has become more difficult. Things are more difficult now than in 2009.”

Global shipbuilding orders fell 56 percent from a year earlier in the first seven months to 24.6 million deadweight tons, according to Clarkson Plc, the world’s biggest shipbroker. That was the lowest tally for the period since 1999.

Samsung Heavy

Samsung Heavy got $6.5 billion of orders in the first seven months, compared with $14.9 billion for the whole of 2011. The company sold 700 billion won of three- and five-year bonds in February with 4.16 percent and 4.39 percent coupons, respectively. It will deliver more than 10 drill ships next year compared with four this year.

Daewoo Shipbuilding sold 500 billion won of bonds last month. The sale was to take advantage of low interest rates and to increase the availability of funds, it said by e-mail. The company is working on 20 of the world’s largest container ships, which were ordered by A.P. Moeller-Maersk A/S. The first five are due to be handed over next year, starting in June.

The pickup in deliveries should end the funding squeeze for the shipyards, according to Park Moo Hyun, an analyst at E*Trade Securities Co. in Seoul.

“The shipbuilders are going through a transition,” he said. “Liquidity issues will be resolved next year as more orders are completed and shipyards receive payments.”