Daewoo Shipbuilding & Marine Engineering Co. is expected to embark on the process of writing down its capital in October as part of desperate moves by the Korean financial authorities and its major creditor banks to improve financial health of the debt-ridden shipbuilder.
According to multiple sources from the local banking and shipbuilding industries on Thursday, the shipbuilder is preparing to reduce its share capital, mostly those paid in by its largest shareholder Korea Development Bank (KDB) in October and hold a shareholders’ meeting in December to seek approval for the plan. State-owned KDB has a controlling stake of 49.7 percent in DSME. Additionally, the company will also likely carry out a debt-for-equity swap program and issue new shares.
Other details including the size of the possible capital reduction remain undetermined as they are still being discussed by financial authorities and its creditor banks.
The government and its creditor banks are said to have come up with such a radical capital reduction plan after the company has been given a year until September 28, 2017 by the Korean stock market operator to improve its financial health before its stock trading can resume. The company has been on the risk of being delisted from the Korea’s main bourse Kospi market after its stock trading has been suspended since July 14.
DSME reported worse-than-expected earnings for the April-June period, posting 1.22 trillion won in net loss that is 1 trillion won larger than the initial market estimate. The company’s disappointing result came after it posted more than 5 trillion won in operating loss last year.
As of the end of June, its capital stood at 1.37 trillion won, while its total shareholders’ equity plunged to minus 1.23 trillion won, completely eroding its capital, according to the company’s balance sheet disclosed in a regulatory filing.
By reducing the number of shares mostly held by its main shareholder KDB, share capital reduction is expected to be used to replenish DSME capital, not to be paid to shareholders.