S. Korean shipyards sinking as debts loom

A vessel under construction at a Daewoo shipyard on Geoje Island in South Korea in 2007, when the industry was booming. Today, many of the country's shipbuilders are facing losses as orders for new vessels and oil platforms shrink.
A vessel under construction at a Daewoo shipyard on Geoje Island in South Korea in 2007, when the industry was booming. Today, many of the country's shipbuilders are facing losses as orders for new vessels and oil platforms shrink.PHOTO: BLOOMBERG

Asian bond market may see more defaults as billions in notes issued by shipbuilders mature next year

SEOUL • As if investors in Asia's troubled corporate bond markets don't have enough to worry about, concern is mounting over whether South Korean shipyards will be able to repay record amounts of debt coming due next year.

Yields on bonds of Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries have shot up this year. The top four South Korean shipbuilders have 2.3 trillion won (S$2.8 billion) in notes maturing next year - the most in Bloomberg-compiled data going back to 1997.

Some might have trouble repaying debts without help from the government or group firms, according to HMC Investment Securities and NH Investment & Securities.

The bond slump adds to jitters in Asia's debt market, which has seen the number of Chinese defaults climb to 28 this year from seven last year, and delinquencies spreading in Singapore, as weak commodity markets took their toll. 

LIFELINES NEEDED

Daewoo (Shipbuilding) will need an additional lifeline from state banks, and companies like Samsung Heavy might need to get help from their group firms.

MS KIM JIN YOUNG, credit analyst at HMC Investment, on the burgeoning debt crisis.

Hanjin Shipping sought bankruptcy protection this year, and earnings suffered at South Korea's top shipyards, including Hyundai Heavy Industries and Hyundai Mipo Dockyard, amid a slump in oil prices and growing competition from China.

"Real worries about shipbuilders' debt will become more apparent next year as maturities approach," said credit analyst Kim Jin Young at HMC Investment.

"Daewoo will need an additional lifeline from state banks, and companies like Samsung Heavy might need to get help from their group firms."

The yield on Daewoo Shipbuilding's three-year bond due in April next year rose to a record 13.9 per cent last month, and it's still at 12.4 per cent, compared with 8.4 per cent a year earlier, Bloomberg-compiled prices show.

Samsung Heavy's five-year note due in February saw its yield jump to 3.3 per cent last month from 2.6 per cent in February.

Daewoo Shipbuilding is doing its best to secure enough liquidity for the bond payments, and is in the process of selling non-essential assets including subsidiaries and real estate, said a spokesman who asked not to be identified.

Samsung Heavy will have enough cash to meet obligations next year after a recent rights issue and also because it expects to deliver an offshore facility in the first half, according to an official who declined to be named.

Daewoo Shipbuilding has 940 billion won in debt maturing next year, starting from April. Cash and cash equivalents stand at 739 billion won, while short-term borrowings total more than 5 trillion won, exchange filings show.

The shipyard is expected to receive an additional US$2.4 billion (S$3.5 billion) in capital from Korea Development Bank, its largest shareholder, and the Export-Import Bank of Korea.

The capital infusion probably will not be sufficient for Daewoo Shipbuilding to deal with its debt because revenue is likely to fall next year, according to credit analyst Lim Jung Min at NH Investment. "It will probably need additional support," he said.

Hyundai Heavy, Daewoo Shipbuilding and Samsung Heavy have all posted multiple quarters of losses in the past 11/2 years amid delivery delays and a plunge in demand for new vessels and oil platforms.

"The credit quality of a lot of Korean firms, especially those that are sensitive to economic cycles such as shipyards, will deteriorate next year," said fixed-income head Choi Jin Young at Mirae Asset, which oversees 111 trillion won globally.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 24, 2016, with the headline 'S. Korean shipyards sinking as debts loom'. Print Edition | Subscribe