Despite a recent outside audit report questioning the viability of Daewoo Shipbuilding & Marine Engineering (DSME), the Korean government and state lenders are determined to turn the shipbuilder around instead of sending it to the bankruptcy court for reorganization.
According to sources from financial authorities and the largest stakeholder Korea Development Bank (KDB) on Thursday, the two state lenders will convert their outstanding loans – KDB’s 1.8 trillion won ($1.6 billion) and the Export-Import Bank of Korea’s 1.1 trillion won – into equity in the shipbuilder within the year to reduce the debt load. The loans were part of the 4.2 trillion won rescue funds arranged by policymakers in October last year, making the debt-to-equity conversion an extension of public bailout.
The shipbuilder meanwhile will cut workforce by 3,000 within the year and sell off all of its floating docks next year so that it would be able to operate without requiring fresh funding from creditors.
If the normalization plan does not go well and the shipbuilder has trouble meeting the payment obligation on 940 billion won worth bonds that are due in April and November, creditors could consider conditional roll-over on the bonds.
Such conditional relief would depend on the shipbuilder’s own efforts to turn business around and save costs.
“If the asset sales plan and payment from Angola’s oil company Sonangol is further delayed to make the shipbuilder run into liquidity crisis, we will have the state and commercial lenders all chip in to keep the company afloat,” a senior government official said.
The government is going all-out to normalize the state-owned shipbuilder that it has repeatedly subsidized since the company came under the KDB following the collapse of Daewoo Group in the wake of 1997-1998 financial crisis because of the hefty cost of its insolvency.
McKinsey & Company that had been consigned by the government to examine the state of DSME and two other shipbuilding majors to come up with overall industrial restructuring claimed DSME would be operating at negative 10 percent income in the next five years to conclude it would not be worth trying to save the company.
The industry estimates public fund loss of as much as 13 trillion won if the shipbuilder goes insolvent. The vessels that usually take three years to build would have to be dumped on the dockyard as no one would buy them from a bankrupt builder. Since the shipbuilder has been bailed out through tax funds, a decision to send it to the bankruptcy court also would require parliamentary approval.