Shipyards will sell $7.3 billion in assets and the government has created a $9.5 billion fund to support lenders to shipyards and shipping companies.
The world’s three biggest shipyards plan to raise a combined 8.41 trillion won (U.S. $7.3 billion) selling assets as part of a restructuring following losses last year.
Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co., and Samsung Heavy Industries Co. have submitted their fund-raising plans to their creditors, including state-run Korea Development Bank and KEB Hana Bank, South Korea’s government said in a statement Wednesday. The banks and regulators will meet twice a month to review the progress of the plans, according to the statement.
A slump in crude oil prices, which halved in the past two years, has roiled the nation’s shipbuilding industry as delivery delays and cancellations of projects translated into losses, while shrinking orders for new vessels have heightened concerns their cash may dwindle further. The South Korean government told the shipyards to submit their plans to help them better manage their financials and minimize the impact on the economy.
The Korean government said it will bolster capital of state lenders by creating a 11 trillion (U.S. $9.5 billion) won fund to help cushion losses as banks aid the restructuring of both shipbuilders and shipping companies.
The steps may be coming amid nascent signs of a recovery in shipbuilding. Vessel deliveries in terms of deadweight tons increased 39 percent in May from a year earlier, said Park Moo Hyun, a Seoul-based analyst at Hana Daetoo Securities Co.
(Editor’s Note: The Wall Street Journal said Tuesday that the Islamic Republic of Iran Shipping Lines and Iranian Offshore Oil Co. have reached preliminary deals with shipyards for orders valued at roughly $2.4 billion).
The plan is for the government and the Bank of Korea to create an 11 trillion won fund (U.S. $9.5 billion) to make sure state lenders can withstand losses as they facilitate the restructuring, according to a statement. The aim is to start operating the fund from July 1 and for it to run through the end of 2017.
President Park Geun Hye’s administration is pursuing a painful restructuring of companies that are struggling under mounting debt and diverting attention from efforts to find new growth engines for the nation. The program could cost tens of thousands of workers their jobs in an economy that’s been hit by falling exports and weak demand at home.
“The fund will buy hybrid bonds issued by state-run banks,” Finance Minister Yoo Il Ho said at a policy meeting in Seoul. “We will swiftly carry out restructuring of shipping and shipbuilding companies under the principle that the companies strictly implement their own reform plans and take losses incurred,” according to a written copy of his remarks.
Separately, the finance ministry will inject 1 trillion won of capital into the Export-Import Bank of Korea (Kexim) by September this year to make sure Kexim’s capital ratio doesn’t fall by too much.
While 11 trillion won in funds will be available, the government currently estimates that the lenders will need to be injected with about 5 trillion won to 8 trillion won, assuming that Korea Development Bank and Kexim meet BIS ratios of 13 percent, and 10.5 percent, respectively. KDB’s ratio now is 14.6 percent while Kexim’s is 9.9 percent.
Korea’s restructuring of vulnerable and over-supplied industries could cut economic growth by 0.2 percentage points to 1.3 percentage points, Citigroup Inc. economists including Chang Jae Chul wrote in a Tuesday report.
Although the central bank directly injecting capital had been mentioned as possible options by the government, BOK Governor Lee Ju Yeol told reporters in May that he preferred a way that can minimize losses for the central bank money.
The government will review progress of restructuring plans at shipbuilders Hyundai Merchant, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries. The companies have proposed to sell properties and dismiss workers as part of their reform plans.
(Editor’s note: Korea’s Yonhap news agency reported prosecutors raided Daewoo Shipbuilding & Marine Engineering Co., on Wednesday over alleged accounting fraud and poor management. It said the supreme prosecutors’ office said it dispatched some 150 investigators to raid the company’s headquarters in central Seoul and its Okpo Shipyard on Geoje Island off the southern coast. State-run Korea Development Bank, the largest shareholder of the shipyard, as well as Deloitte Anjin LLC, were also included in some 10 organizations raided Wednesday, Yonhap said.
In addition, Yonhap reported that Hanjin Shipping Co., the country’s top container carrier, is still in talks with 22 shipowners to lower charter rates, a core condition to get a rollover for its loans from its creditors. Hyundai Merchant Marine Co. is also in negotiations to cut charter fees and has to join an alliance involving major shipping firms to stay afloat.
The Financial Times reported Hanjin and Hyundai Merchant Marine’s shares fell sharply Wednesday on worries about likely debt-for-equity swaps. The Financial Times cited government sources as saying Hyundai Merchant was likely to complete talks with global shipowners this week to cut charter rates).
Massive restructuring plan for Korea shipbuilders, shipping companies
