Controversy continues over ‘hard choice’ for Daewoo Shipbuilding

SEOUL-- Arguably, it may be a hard choice for policymakers here to salvage cash-hungry Daewoo Shipbuilding & Marine Engineering Co. from falling into a deeper hole given growing skepticism about the shipyard's viability in a drawn-out, industrywide slump and the sector's lingering uncertainties.

Indeed, dogged by the specter of the demise of Hanjin Shipping Co., once the country's No. 1 shipping firm, policymakers and the shipyard's creditors were left with no other options lying ahead as the shipbuilder's potential debt workout scheme or court receivership is feared to deliver a huge blow to Asia's fourth-largest economy -- massive losses for major banks here and thousands people being fired.

The creditors, led by the state-run Korea Development Bank, drew up another rescue package for the embattled shipbuilder, worth some 6.7 trillion won (US$5.98 billion), but the controversy still continues over whether a second batch of bailout for the shipyard, the world's largest in terms of order backlog, is viable, analysts say.

"Things might not have worsened if corporate restructuring had proceeded in advance," said Kim Chon-koo, an analyst at Hyundai Research Institute. "Market mechanism did not work well, and the consequence is devastating."

In late 2015, the creditors came up with a rescue plan worth 4.2 trillion won, a huge chunk of which has already been spent on salvaging the shipyard through debt-for-equity swaps and other arrangements.

Their financial assistance in 2015 was based on a rosy outlook that the shipbuilder would clinch up to $12 billion worth of orders last year, and the delivery of newly built ships would go smoothly.

But Daewoo Shipbuilding bagged a meager $1.55 billion worth of new orders, and the delivery of two drilling rigs worth 1 trillion won, originally scheduled for early last year, has been delayed to this year due to a customer's worsening financial status.

"We have failed to exactly forecast a drawn out slump, and should have taken measures in more conservative manners given an array of risks," said the creditors. "We need to resolve a supply glut in the sector... and need to reshape the current picture into one where two major players are competing," they said.

The KDB-led creditors said without additional cash injection, Daewoo Shipbuilding's liquidity crunch would only deepen. They claimed that the shipyard could face a cash shortage of as much as 5.1 trillion won over the next two years if the current situation goes on.

Daewoo Shipbuilding has ratcheted up moves to sell its non-core assets to tide over its worsening financial situation. So far, it has raised some 1.6 trillion won by selling assets and laying off employees.

The government's decision to pump additional cash into the shipyard currently under creditors' control came as the company's performance is worsening at an alarming pace amid a sharp fall in new orders.

Daewoo Shipbuilding said it suffered an operating loss of 1.61 trillion won last year following an operating loss of 2.94 trillion won in 2015.

Its net loss narrowed to 2.71 trillion won last year from a loss of 3.3 trillion won a year earlier with sales also dipping 15.1 percent on-year to reach 12.74 trillion won, it said.

During the fourth quarter of last year, its operating loss reached 1.02 trillion won.

The most pending and sticky problem facing Daewoo Shipbuilding is how to pay off 440 billion won worth of debt due next month. It has to refinance or pay off a total of 940 billion won worth of debt this year and 550 billion next year.

Creditors have believed that the shipbuilder would be able to pay off debt that matures next month as the shipbuilder has some 300 billion won in cash and the creditors have some 400 billion won that can be used for assistance after spending 3.8 trillion won for debt-for-equity swaps and others for the shipyard.

But the creditors said it can not rule out the possibility of Daewoo Shipbuilding failing to meet maturing debt, and they can not help but decide to extend fresh funding.

Daewoo Shipbuilding's creditor banks, mostly state-run ones, will be also be forced to face massive refunds of repayment guarantees for the shipyard from its clients, according to financial authorities. They even estimated the South Korean economy may shoulder 59 trillion won in losses in the event of the shipyard's bankruptcy.

"The government's decision is seen as inevitable, but at the same time, it should charter out a detailed restructuring plan and a vision to minimize any potential losses," said Cho Jang-ok, an economics professor at Sogang University in Seoul.

Policymakers' wishful thinking is that the global shipbuilding sector will rebound down the road given a rise in oil prices and soaring demand for LNG-powered vessels, which Daewoo Shipbuilding specializes in. So far this year, Daewoo Shipbuilding has secured deals to build just 4 vessels worth $520 million.

"Things boil down to whether the global economy will recover, which will largely affect new shipbuilding orders," said Hong Seong-in, an analyst at the Korea Institute for Industrial Economics and Trade (KIET).

But the real and the most important issue for the shipyard is that the government may draft another round of rescue measures.

Yim Jong-yong, chairman of the Financial Services Commission, the country's chief financial regulator, said earlier this week that it is not 100 percent certain whether Daewoo Shipbuilding would not again face a liquidity problem in the future.

The shipyard has some 22 trillion won in debt, and has some 10,000 workers. In addition its subcontractors have around 30,000 employees.

Along with Daewoo Shipbuilding, its local rivals -- Hyundai Heavy Industries Co. and Samsung Heavy Industries Co. -- have been implementing large-scale restructuring efforts to overcome hard times.

The shipbuilding industry, once regarded as the backbone of the country's economic growth and job creation, has been reeling from mounting losses caused by an industrywide slump and increased costs.

The country's top three shipyards suffered a combined operating loss of 8.5 trillion won in 2015 due largely to increased costs stemming from a delay in the construction of offshore facilities and the industrywide slump, with Daewoo Shipbuilding alone posting a 5.5 trillion-won loss.

The shipbuilders have drawn up sweeping self-rescue programs worth some 11 trillion won in a desperate bid to overcome a protracted slump and mounting losses.

Source: Yonhap News Agency

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