South Korean state banks are preparing a fresh $2.6 billion bailout for floundering Daewoo Shipbuilding & Marine Engineering Co Ltd, which has built up huge losses from offshore projects and risks missing debt repayments.
Daewoo, 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, prompting cost cuts and asset sales.
Of the three, Daewoo's situation is the most difficult.
Without the infusion of funds, Daewoo is not expected to be able to redeem 940 billion won ($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 2.9 trillion won bailout to go through. In case of disagreement, Daewoo could enter a form of court receivership under an alternate plan.
"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.
Already bailed out in the aftermath of the Asian financial crisis of the late 1990s and supported again in 2015, Daewoo's financials have deteriorated rapidly since then 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 payment for a drillship ordered by Angola's Sonangol EP, and fewer-than-expected orders in 2016, have reduced Daewoo's liquidity to critical levels, the FSC said. Sonangol could not be immediately reached for a comment.
In the event of a bankruptcy, about 50,000 people would be expected to lose their jobs and about 1,300 sub-contractors could 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. The South Korean economy could take a 48.4 trillion won hit if Daewoo goes bankrupt this year, it added.
South Korea's central bank said the bailout plan was "inevitable" when considering the economic consequences of letting the company go under.
"We will be looking at this from here on out, but whether the creditors will agree to change the debt and what Daewoo does to save itself will be very important," Governor Lee Ju-yeol told journalists.
The FSC's plan to keep Daewoo afloat requires corporate bondholders, which hold about 1.5 trillion won of Daewoo debt, to agree to a 50 percent debt-to-equity swap and a three-year repayment grace period on the remaining.
Daewoo's two largest state creditors, Korea Development Bank (KDB) and the Export-Import Bank of Korea, will accept a 100 percent debt-to-equity swap of 1.6 trillion won in unsecured loans. This is separate from the 2.9 trillion won the two will inject into Daewoo if all stakeholders agree to the plan.
A Daewoo creditors' meeting will be called around April 14, KDB said.
But non-state-owned creditor banks, which hold about 700 billion in unsecured loans, must agree to an 80 percent debt-to-equity swap and a 5-year grace period on the remaining.
Trading in Daewoo shares is currently halted.
After Daewoo overcomes this liquidity crunch, it will be put up for sale, KDB Chairman Lee Dong-geol told reporters.
"Going forward, we will work with Daewoo so it can focus on its strengths in fuel-efficient ships, liquefied natural gas vessels and naval vessels," Lee said.
The FSC outlined a Plan B, in case Daewoo stakeholders cannot agree, under which the firm will enter a form of court receivership, giving a Seoul court power
to organise its debt restructuring while allowing creditor banks to infuse funds into Daewoo as needed. In this scenario, Daewoo will talk with key shipowners to prevent them from cancelling orders, FSC added.
Daewoo's financial woes come at a time when the global shipping industry is stuck in its worst slump on record amid low freight rates and overcapacity.
While orders could pick up given a recent recovery in the dry bulk market, Japanese and Chinese ship yards will be more competitive for this kind of business, said Ralph Leszczynski, head of research at ship broker Banchero
Costa in Singapore.
"A recovery in the tanker and containership sectors, not to even mention offshore, are unfortunately further away. Therefore, Korean yards will probably continue to face losses still for at least a few more years, and will most likely have to rationalise capacity," Leszczynski added.
($1 = 1,118.4000 won)
(Reporting by Joyce Lee, additional reporting by Keith Wallis; Editing by Clara Ferreira-Marques and Himani Sarkar)