State-run banks will give 2.9 trillion won ($ 2.6 billion) in fresh loans to the debt-ridden Daewoo Shipbuilding & Marine Engineering (DSME), the Financial Services Commission (FSC) said Thursday.
The Korea Development Bank (KDB) and the Export-Import Bank of Korea (Eximbank) will extend the new loans just 17 months after creditor banks gave the shipbuilder a 4.2 trillion won rescue loan.
DSME will get the money after the government, the KDB and Eximbank reach an agreement with other creditor banks and shareholders.
Also, the latter two must agree to the government’s proposal to swap a portion of the company’s debt for equity.
This means the fate of DSME lies with creditor banks and institutional investors such as the National Pension Service. The parties will meet to negotiate next month.
Should the government and the state-run banks fail to persuade investors, they will put DSME into a workout program aimed at reviving the shipyard.
“The workout in the last scenario will focus on revitalizing the company as soon as possible rather than settling its debts through asset liquidation,” an FSC official said.
The court-led rehabilitation program will only involve the two state-run policy banks, which will provide the necessary funds to improve DSME’s finances.
This comes as DSME is about to face another liquidity crisis next month. It has to pay 440 billion won to its investors.
DSME is low on cash as it only has about 400 billion won left from the 4.2 trillion won relief loan it received in 2015.
Overall, the shipbuilder has to come up with 1.5 trillion won to settle payments due over the rest of the year.
It has had no luck in securing cash through new orders ― these amounted to $1.54 billion in 2016, well below its initial forecast of $11.5 billion.
The company posted a net loss of 2.7 trillion won last year, and has a debt ratio of 2,732 percent.
Its financial troubles could lead the company to default and go under, given that it lost 531 billion won in capital on its balance sheet.
The FSC admitted that it and DSME were too overly optimistic on a recovery in global shipbuilding.
“Not even the global researcher Clarkson expected such a prolonged slump,” the FSC official said.
The slump resulted in cash flow problems for the shipbuilder, which could not secure 1.4 trillion won following delivery delays because its buyers including Angola are in a financial crisis.
The FSC will propose that institutional investors swap 50 percent of DSME’s debt for equity, and extend the maturity of the rest by three years.
Investors hold about 1.5 trillion won in DSME bonds and commercial paper.
Commercial banks will be asked to swap 80 percent of subordinated loans worth 700 billion won into equity, and extend the maturity on the rest by five years.
Banks’ exposure to DSME came to around 18 trillion won in total as of last December. The KDB and Eximbank are owed over 15 trillion won, and commercial banks 2.7 trillion won.
Additional state support for DSME will most likely affect their balance sheets and capital adequacy ratios as they will have to set aside more reserves for the possible bad debt and record them as costs.
“The restructuring plan we proposed has been drawn from a highly conservative point of view,” the FSC official said.
The financial regulator’s stance is that it needs to improve DSME’s finances first, and then put it up for auction when its debt ratio falls to around 200 percent.
It is also be ready to recapitalize the policy banks should their capital adequacy ratios fall following more loans to DSME.