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Creditor Bank to Inject More Funds into DSME

KDB
KDB headquarters (file image)

By MarEx 2016-08-18 21:29:13

On Thursday, financial industry sources reported that Korea Development Bank plans to inject more capital into Daewoo Shipbuilding and Marine Engineering, the most financially challenged of South Korea's Big Three shipbuilders, in order to avoid the delisting of the shipbuilder’s stock. 

KDB is DSME's largest creditor and faces the largest exposure to any potential default. South Korea's government has recently moved to recapitalize the bank itself in anticipation of losses in the shipbuilding sector.

DSME needs to make a $350 million payment on maturing bonds in September or risk entering court receivership; a group of its shipowner clients have helped contribute towards this amount by accelerating the payment of construction milestone installments. But even if it makes the bond payment, DSME still needs to increase its assets by $1.1 billion by the end of the year in order to meet the Korea Exchange's debt-to-capital ratio requirements. If it does not, its stock – for which trading has already been suspended – may be delisted, reports the Korea Herald.

The asset gap is only several hundred million more than the amount that Angolan state oil company Sonangol owes the yard for the delivery of two drillships, the Sonangol Libongos and Sonangol Quenguela. DSME said in June that it expected difficulty in securing final "heavy-tail" payments for the ships due to Sonangol's weak finances. The fall in oil prices has cut deeply into the E&P firm's revenue.

DSME says that it is still negotiating with Sonangol and hopes to reach an agreement in September. If the shipbuilder is successful in securing payment, KDB would need to provide much less capital to fill DSME’s asset gap.

Given the allegations and the mounting losses at DSME, South Korean legislators and society groups have questioned the government's decision to provide an earlier round of funding late last year, and are likely to scrutinize KDB's plan to provide the yard with another round. 

In addition to financial hurdles, DSME faces a corruption and fraud investigation over past accounting practices, plus lawsuits from investors over alleged earnings misstatements and subsequent losses.