Where South Korea’s Teetering, Debt-Laden Companies Go to Bank

Ships under construction at the DSME shipyard in South Korea. Photo credit: Lappino

By Kyunghee Park and Jung Park

(Bloomberg) — Last August, the Korea Development Bank left cash-strapped Hanjin Shipping Co. adrift at sea — literally.

South Korea’s state-owned lender, the nation’s largest policy bank, and other creditors turned down a bailout request from Hanjin, then one of the world’s biggest shipping lines. That in turn led to a bankruptcy filing in Seoul and a major disruption in global shipping as more than 90 Hanjin ships were marooned offshore and ports in the U.S., Asia and Europe turned the company’s ships away.

Now KDB, founded in 1954 to finance industrial projects and power South Korea’s postwar expansion, faces another quandary: Whether to revive money-losing Daewoo Shipbuilding & Marine Engineering Co., the world’s largest shipbuilder.

Daewoo Shipbuilding, set to report its 2016 earnings mid-March, is poised for a fourth consecutive annual loss, perhaps 46.4 billion won ($41 million), according to the average estimate from 17 analysts surveyed by Bloomberg. On top of that, it faces $1.1 billion of payments due on local-currency bonds this year and 2018.

As a controlling shareholder, KDB has a lot to lose if Daewoo Shipbuilding gets washed out to sea like Hanjin. So does South Korea’s $1.4 trillion economy, which the central bank forecasts will expand 2.5 percent this year, the most sluggish pace since 2012.

Severing the credit lines to Daewoo Shipbuilding would deliver yet another shock to a nation reeling from the impeachment of South Korean President Park Geun-hye following an influence-peddling scandal and this week’s indictment of Samsung Electronics Co. Vice Chairman Jay Y. Lee on graft charges.

Shipbuilding is one of South Korea’s flagship industries, accounting for 7 percent of the nation’s exports and 5.2 percent of employment. The sector has fallen on tough times, thanks to a plunge in crude oil prices that’s depressed orders for new vessels.

“We have to think about the cost of letting it go down from the government’s perspective,” said Cho Dou-hyung, head of credit research at Shinhan BNP Paribas Asset Management Co. in Seoul. “We are talking pretty big damages here. KDB will continue to work on different ways to sustain Daewoo Shipbuilding.” Creditors who have lent more than 3 trillion won will see immediate losses if Daewoo were to default, besides some South Korean pension funds, he said.

A KDB spokesman said the lender will “closely monitor” the progress of the company’s revival plans and review its action accordingly. Daewoo Shipbuilding is making all efforts to secure liquidity to meet payments, a company spokesman wrote in an email.

While KDB started out as a development bank, in recent decades it has often played the role of lender of last resort to some of South Korea’s most indebted firms, including Doosan Infracore Co., the nation’s biggest maker of construction equipment, and LG Card Co. that were revived and sold to recoup funds the bank spent to revive them.

KDB took over Daewoo Heavy Industries Co. in the aftermath of the 1997-98 Asian financial crisis when the parent Daewoo Group collapsed under the crushing weight of $73 billion in debt. Daewoo Shipbuilding was created after splitting Daewoo Heavy Industries into three companies in 2000.

KDB last year swapped debt for equity as part of a 4.2 trillion won financial package pledged by the lender and the Export-Import Bank of Korea to aid the shipbuilder. That boosted KDB’s stake to 79 percent, according to the bank’s filing in December.

While KDB Chairman Lee Dong-geol told lawmakers on Feb. 16 that the lender won’t provide any more funds to Daewoo Shipbuilding, he said they are working on a “comprehensive plan” to address cash liquidity at the company by mid- to late-March before the first payment is due in April.

“There’s talk in the market about pending crises,” with the first coming in April as 440 billion won of bonds mature, Lee told lawmakers, referring to Daewoo Shipbuilding. “We are doing our best to secure liquidity.”

‘Very Worried’

Hong Il-pyo, a lawmaker with the opposition Bareun Party, said the same day that the restructuring must gather pace and the government needs to ensure proper steps are taken to address the crunch.

“People are watching closely and very worried,” he said. “Daewoo Shipbuilding’s risk could become a real problem.”

About 940 billion won in bonds mature this year amid concerns Daewoo Shipbuilding doesn’t have enough cash to meet its obligations. As of Sept. 30, the company had cash and equivalents of 739 billion won, according to its third-quarter financial report issued in November, of which 329.3 billion won is restricted as collateral for other funding.

“Daewoo will use everything at its disposal to meet April debt obligations,” said Ryu Young-jae, the Seoul-based head of fixed income at Samsung Asset Management Co., which oversees 202 trillion won. “Obligations due in the second half, however, would be more difficult. Creditors certainly don’t want a default, and the best case scenario would be the company getting new orders.”

Under Pressure

Daewoo Shipbuilding Chief Executive Officer Jung Sung-leep said in an email interview last month that he is considering measures to bolster its finances, adding “we’re doing our best to normalize the company as quickly as we can.” He didn’t elaborate.

“KDB has refund guarantees on Daewoo’s orders and a default in April would cause enormous loss for KDB,” said Choi Jin-young, a Seoul-based senior portfolio manager at Mirae Asset Global Investments Co., which oversees 111 trillion won in assets globally. “The outlook is very, very uncertain from next year on. Oil market simply is not picking up fast enough to help Daewoo make timely cash flow recovery.”

KDB isn’t the only one left with the burden of rescuing the company. The government, for its part, said in October that it plans to spend about 11 trillion won, ordering more than 250 vessels and about 6.5 trillion won in aid to the shipping industry.

“While direct support may not be an option, Korea Development Bank is pretty much a big part of the government measures,” said Um Kyung-a, an analyst at Shinyoung Securities Co. in Seoul.

KDB is also at the center of efforts to revive Hyundai Merchant Marine Co., which became the nation’s biggest container line after Hanjin’s demise. The lender spent about 600 billion won last year to swap its debt to equity and buy convertible bonds. CEO Yoo Chang-keun said in an interview last month that he predicts losses through the first half of 2018 before posting an operating profit.

Creditors, led by KDB, plan a 200-billion-won loan to help Hanjin Heavy Industries & Construction Co. complete building warships for the military, the lender said Thursday.

Asset Sales

Hyundai Merchant, which has posted operating losses for six straight years, will utilize all available government measures to improve its competitiveness, a spokesman said.

Both the shipbuilder and the box carrier have sold assets in exchange for financial support.

“For Korea Development Bank and other creditors, it’s still far better to keep these companies in business,” said Lee Jae-won, an analyst at Yuanta Securities Korea Co. in Seoul. “It could take about four to five years before Daewoo Shipbuilding can be fully normalized. The cost would be far too great if they fail.”

© 2017 Bloomberg L.P