In South Korea, world's biggest shipbuilder gets bond rescue by pension fund

Daewoo Shipbuilding & Marine Engineering shipyard in Geoje, South Korea, on March 23, 2017.
Daewoo Shipbuilding & Marine Engineering shipyard in Geoje, South Korea, on March 23, 2017.PHOTO: REUTERS

SEOUL (BLOOMBERG) - South Korea's National Pension Service agreed to a restructuring of bonds issued by Daewoo Shipbuilding & Marine Engineering, helping the world's largest shipbuilder tide over a financial crisis.

The decision comes after the shipbuilder, The Korea Development Bank and Export-Import Bank of Korea took steps to ensure repayment of the debts, the pension service said in a statement, without elaborating on the steps. Banks agreed to convert 80 per cent of loans to Daewoo Ship into shares and to extend maturity of the remainder, the Financial Services Commission said in a statement April 16. The decision means the shipbuilder, unprofitable in each of the past four years, will likely get more time to make payments on bonds that are due this month. NPS is the biggest holder of the debt.

A decision on the financial restructuring of Daewoo was the biggest test for South Korea's lenders after Korea Development Bank, the shipbuilder's majority shareholder, allowed Hanjin Shipping to collapse last year after refusing to support its debt restructuring plan. KDB was in favor of restructuring the loans, saying Daewoo doesn't have the cash to pay.

Hanjin's demise stranded about a hundred container ships around the world and roiled the global supply chain, putting some 11,000 jobs at risk. A Daewoo shutdown could be much worse, jeopardizing up to 50,000 jobs and $34 billion of vessel orders from companies including AP Moller-Maersk and Statoil.

KDB and the Export-Import Bank of Korea said last month they would provide 2.9 trillion won (S$3.56 billion) in additional loans and swap about 1.6 trillion won of debt for equity if other creditors and bondholders agree to convert up to 80 percent of their debt and extend maturities for remaining loans by as much as five years.

Daewoo plans to meet bondholders on April 17 and 18, according to regulatory filings. Failure to win final approval means the shipbuilder will be subject to mandatory court receivership and debt restructuring from around April 21, said Joung Young-suk, KDB's head of corporate restructuring.

"As the normalization of Daewoo Shipbuilding should not be delayed any longer and cannot be delayed, KDB will put all of its efforts to get an approval from the creditors' meeting as well as persuading investors," the lender said in a statement last week.

Daewoo said it had 14.4 trillion won of debt and 224.3 billion won in cash and equivalents as of December. It needs to repay the NPS about 200 billion won, or 45 per cent of bonds maturing in April, according to two people familiar with the matter. In total, the company owes NPS 390 billion won through 2019, the people said, asking not to be identified as the information isn't public. Daewoo's debt-to-equity ratio was 2,732 per cent at the end of last year, KDB said in March.

Daewoo posted its fourth consecutive loss in 2016 as weak oil prices reduced demand for oil tankers and rigs and a surfeit of other vessels curbed demand for new ships. The shipyard could face a cash shortage over the next two years of up to 5.1 trillion won in the current environment, KDB and Export-Import Bank said in a statement last month.

The trouble at South Korea's biggest shipbuilder adds to woes in a country convulsed with political and corporate turmoil that has lasted for more than a year.

Last month, South Korea's former President Park Geun-hye was arrested after a court ordered her detention barely three weeks after she was ousted for alleged corruption.