T
he government's decision to salvage Daewoo Shipbuilding & Marine Engineering (DSME) by converting its multitrillion-won debt to equity is coming under, as critics say it’s a careless use of taxpayers' money to help the recklessly managed state-owned company.
According to finance circles and the shipbuilding industry, Eximbank is set to convert DSME's debt to equity, another decisive measure after recapitalization by its largest shareholder the Korea Development Bank (KDB), by issuing new stocks to salvage the debt-ridden shipbuilder from capital impairment. In light of Eximbank's total 7 trillion won ($6.3 billion) loans to DSME, including refund guarantees, the Ministry of Strategy and Finance is discussing with bank officials about its plan to convert DSME's 2 trillion won debt into equity. If the plan is carried out, Eximbank will be DSME's second-largest shareholder following KDB.
However, the decision aroused concerns that the government may spend trillions of won of tax money to salvage the poorly-managed company.
"It is shoveling sand against the tide," an industry insider said on condition of anonymity. "DSME's problem is not only its liquidity but also the downturn in the global shipbuilding industry. Even if the government provides room to help with its current financial difficulty, DSME's future is still unclear. There is no guarantee it will suddenly clinch mega deals after its management becomes normalized."
The government plans to form a task force with DSME officials to discuss recapitalization with KDB and the debt-equity swap with Eximbank in mid-October. The KDB is expected to soon provide 1.6 trillion won by issuing new stocks to rescue the shipyard.
If Sonangol pays for the delivery of vessels with the $1 billion in cash, with the rest coming in stocks as planned, government and DSME officials expect the company to find some financial wiggle room.
Last month, Angola's state-run oil company Sonangol delayed the purchase of two drill ships from DSME due to its own financial difficulties. Speculation is growing that the Angolan company will buy the ships by November, but if the takeover is delayed yet again, the financial burden on DSME is expected to deepen.
The South Korean government is recapitalizing the Korea Development Bank (KDB) and the Export-Import Bank of Korea (Korea Eximbank) in order to accelerate the corporate restructuring processes in the shipbuilding and shipping industries and prevent a rapid increase in bad debts ahead of an evaluation on the financial structures of the industry’s main debtor groups and the credit risk assessment of large corporations.
That analysis is scheduled to be completed soon. The government explained that the Ministry of Strategy & Finance recently formed a task force to that end, and began to discuss specific measures.
Things are quite serious in the shipbuilding industry, where restructuring is reaching a climax. The Korea Eximbank has lent about 12.5 trillion won (US$10.8 billion) to Daewoo Shipbuilding & Marine Engineering (DSME) and the lending amounts to 4.1 trillion won (US$3.5 billion) for the KDB.
The two banks’ financial soundness can be seriously affected if the loans provided for DSME are classified as dubious ones. Specifically, in that case, their allowances for bad debts would have to reach an astronomical 50 percent of lending amounts, which causes the BIS ratios of the KDB and Korea Eximbank to drop from about 14 percent to approximately 12 percent; and from about 10 percent to 9 percent, respectively.
The BIS ratios can be further affected if Hyundai Merchant Marine and Hanjin Shipping, with a total credit line of one trillion won, go into court receivership.
The government’s goal is to maintain a BIS ratio of at least 14 percent. “A drop in BIS ratio should be dealt with in advance by means of recapitalization based on an increase in the number of common stocks instead of costly means such as subordinated bonds and perpetual bonds,” it said.
The KDB, fully owned by the government, currently has a paid-in capital of 17.2 trillion won (US$14.9 billion) and its equity capital, including retained earnings, totals 26 trillion won (US$22.6 billion).
The best part of the paid-in capital is the in-kind assets including the shares of the Korea Electric Power Corporation and the Korea Land & Housing Corporation.
The recapitalization is expected to take the form of investment in kind as well, that is, an additional transfer of public enterprise shares owned by the government to the KDB. Investment in cash is forecast to be carried out at the same time.
The government is said to have prepared a budget of 50 billion won (US$43,4 billion) for the recapitalization of the KDB. The budget is predicted to be executed for a capital increase before an extra budget is prepared next year. The KDB is looking forward to investment in cash, rather than investment in kind, as well as a smooth restructuring process.
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