Chung Sung-Jun, Getty Images
A ship in dry-dock at Daewoo Shipbuilding & Marine Engineering in Geoje Island, South Korea.

South Korea Throws Shipbuilder Daewoo New $6 Billion Lifeline

March 23, 2017
South Korea is offering its largest shipbuilder a bailout. Could the country’s Big Three soon become a Consolidated Two?

SEOUL, South Korea — South Korea offered troubled Daewoo Shipbuilding & Marine Co. a new $6 billion bailout on Thursday, as the giant firm's financial crisis worsens.

Daewoo is the world's largest shipyard in terms of its order book and was previously given a 4.2 trillion won ($3.75 billion) aid package in 2015. It is majority-owned by state-owned banks. Previously it was a subsidiary of the now-defunct Daewoo Group, once the country's second-largest conglomerate but which collapsed in the 1990s.

The shipbuilding unit survived, only for the sector to suffer turmoil of its own in the face of a global glut of vessels and ferocious price competition from China. It suffered a 2.7 trillion won ($2.41 billion) net loss last year, with its debts 27 times greater than its capital.

The 6.7 trillion won ($5.99 billion) bailout envisages 2.9 trillion won ($2.59 billion) in fresh loans from the Korea Development Bank (KDB), its largest shareholder and main creditor, and the Export-Import Bank of Korea, also a shareholder. The money is conditional on other lenders and bondholders agreeing another 3.8 trillion won in debt-for-equity swaps and rollovers.

The new rescue plan sparked criticism that Seoul was backtracking on earlier promises to stop injecting fresh funds into Daewoo.

"We're very sorry that we've failed to assess more conservatively the industry's long-term slump and Daewoo's latent downside risks," KDB CEO Lee Dong-Geol said.

Daewoo was in "critical" financial condition and would face insolvency in April, when it has to repay large corporate bonds, unless "strong and comprehensive measures" were taken, he told journalists.

Economist Chun Seong-In at Hongik University lambasted the finance ministry for being "inconsistent, belated and unfair" in its dealings with the company, which has more than 10,000 employees. The ministry "missed a chance for a radical corporate restructuring" in 2015, forcing the government to inject additional funds, he said.

The global shipbuilding slump is expected to ease from 2018, when according to Yonhap news agency the government hopes to sell a downsized and reborn Daewoo to reduce the country's "Big Three" shipbuilders — which also include Hyundai Heavy Industries and Samsung Heavy Industries — to two, for better economies of scale.

The "Big Three" shipbuilders were once considered jewels in Korea Inc.'s corporate crown, controlling nearly 70% of the global market after seeing off their European and Japanese rivals in the 1980s and 1990s. Year after year, they churned out massive cargo ships, oil tankers and offshore drilling rigs for shipping firms and energy giants around the world.

But a prolonged slump in oil prices and the global economic slowdown sapped demand for tankers and container ships, while overcapacity, regional rivalry and competition from cheaper Chinese shipbuilders squeezed profit margins.

The three racked up a collective loss of 8.5 trillion won ($7.59 billion) in 2015.

Daewoo Shipbuilding's former head Ko Jae-Ho was in January sentenced to 10 years in prison for manipulating the company's books in 2013 and 2014, and using them to raise bank loans.

Investors sustained serious financial losses as the company's credit ratings and stocks plunged after the window-dressing came to light.

By Park Chan-Kyong

Copyright Agence France-Presse, 2017

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