KDB to Recapitalize Ahead of Shipbuilding Losses

Korea Development Bank is moving to improve its debt coverage ratio in preparation for the restructuring of the nation’s troubled shipbuilders. On average, South Korea’s banks keep capital on hand representing over 100 percent of their substandard loans, but KDB, with heavy exposure to shipping and shipbuilding, has a coverage ratio of less than 80 percent – even before adding in more bad debt allowances for shipyards, which the bank has allegedly not yet booked.

Insiders speaking to BusinessKorea estimated that the bank might have to write off an additional one to six billion dollars in bad loans to DSME alone; Daewoo is the most challenged of South Korea's Big Three shipbuilders, and KDB is its largest creditor. The bank intends to resolve some of the debt through a $500 million equity swap planned for later this year. 

Regulators have called on the bank to improve its ratio to at least 100 percent in advance of challenges ahead. The Korean government has called on its central bank, the Bank of Korea, to assist – and to recapitalize KDB and sister bank KEXIM by means of printing new bank notes. The move is said to be drawing concern from the International Monetary Fund, whose delegates have suggested that the state of the South Korean financial system is healthy enough that an emergency measure like printing money is unwarranted. Bank of Korea opposes the plan. 

Shipbuilders, perhaps especially DSME, are at the root of the financial challenge. Daewoo faces headwinds from a down market in ship and rig construction; it is finalizing a "self-rescue" plan for its creditors' approval, featuring wage cuts worth $2.6 billion, asset sales and other measures. But Tuesday, its major creditors announced that the shipbuilder would not be selling off its subsidiaries in the near term as planned, and will push back the disposal of more than a dozen companies until 2018. The plan affects Mangalia Shipyard, DSME Construction, DeWind, DSME Oman, DK Maritime, FLC, DSME Shandong, Shinhan Heavy Industries, Samwoo Heavy Industries and DSME's specialty vessel / defense contracting unit.  

A spokesman for creditors told media that the delay was planned in order to take advantage of order backlog revenue over the next three years and to await an improved business climate before spinning off valuable assets. Even at that late date, creditors expect sales to generate only half of the previously assessed values of the firms. 

Separately, Japan recently filed a formal protest with the OECD regarding government support for DSME, which it claims is an unfair trade subsidy. Japan and South Korea intend diplomatic talks on the issue, and the OECD will take it up again at its next meeting in December.