SEOUL: South Korean state banks are preparing a fresh US$2.6 billion bailout for floundering Daewoo Shipbuilding & Marine Engineering Co Ltd over huge losses from offshore projects and risks missing debt repayments this year.
Without the infusion of funds, Daewoo is not expected to be able to redeem 940 billion won (US$840.49 million) in corporate bonds maturing this year – starting with 440 billion won due in April, the country’s financial regulator, the Financial Services Commission (FSC), said on Thursday.
Bondholders and other creditors, however, will have to agree to painful debt-for-equity swaps for the FSC’s 2.9 trillion won bailout plan to go through.
“A liquidity crunch is expected in April, and without additional measures Daewoo Shipbuilding will not be able to meet its obligations and bankruptcy cannot be avoided,” the FSC said.
Daewoo, together with Hyundai Heavy Industries and Samsung Heavy Industries, are South Korea’s top shipbuilders – a massive economic force and a source of national pride. But they slipped into the red in 2015 amid a commodities downturn and bleak trade volumes, forcing all three to slash costs and sell assets.
Out of the three, Daewoo’s situation is, however, the most difficult. Already bailed out in the aftermath of the Asian financial crisis of the late 1990s, the company’s financials have deteriorated rapidly since 2015 due to delays and trouble building complex offshore facilities. It reported a record net loss of 3.3 trillion won in 2015.
Additional delays in the delivery of a drillship due to low oil prices LCOc1 bogging down negotiations, and winning far fewer orders in 2016 than expected, have reduced Daewoo’s liquidity to critical levels, the FSC said.
In the event of a bankruptcy, about 50,000 people would be expected to lose their jobs and about 1,300 sub-contractors could also go under.
Daewoo’s creditor banks would be liable for massive refund guarantees of pre-paid construction fees and would have to set aside bad-loan provisions of up to 14 trillion won, the FSC said, adding the South Korean economy could take a 48.4 trillion won hit if Daewoo goes bankrupt this year.
