DSME May Receive Additional Aid Package

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By MarEx 2016-10-04 17:20:36

South Korea's government appears poised to provide up to $3.5 billion dollars worth of support for troubled shipbuilder Daewoo Shipbuilding and Marine Engineering, on top of an earlier capital injection of $3.6 billion allocated last year. 

The new measures include $1.4 billion in support through a share capital reduction plan with lead creditor and stockholder Korea Development Bank, or KDB, Korean media reports.

KDB holds 49.7 percent of DSME, and under the plan, the bank would agree to cancel a portion of its stake. Once KDB reduced its stake, the government would provide DSME with $1.4 billion. 

In addition, DSME's second largest creditor Eximbank would convert up to the entirety of its $2 billion in loans into equity – eliminating nearly one third of the shipyard's debt. 

Both Eximbank and KDB are owned by the Korean government. The plans would be contingent on approval by shareholders in December. 

DSME must stabilize its finances in order to avoid delisting from the Korean Exchange. The yard has a one-year grace period ending in September 2017 during which trading in its shares will be suspended. 

DSME is still in the midst of a long-running accounting scandal, which centers on allegations of misstated earnings reports and high-level corruption. Two former CEOs and one former CFO have been arrested.

The scandal, the high cost of the bailout and the uncertain prospects for DSME's success combine to make the yard's restructuring politically controversial in South Korea.

Beyond the bailout efforts, the market outlook is challenging, and ordering activity worldwide is at historic lows. DSME only booked ten orders from the beginning of the year through September, and competitor Samsung Heavy booked nothing at all for the 12 months ending October. 

South Korean President Park Geun-hye explicitly called for "bone-crushing" reform of the shipbuilding sector earlier this year, and suggested that large-scale layoffs were an essential part of restoring Korea's "Big Three" yards to fiscal health. 

"The [shipbuilding] companies, along with creditor banks, should make bone-crushing efforts to revive their businesses," she said in a speech to parliament in June. "If we don't carry out a bold restructuring by downsizing the overgrown workforce and cutting costs, the future of not only the shipbuilders but also the whole economy will be in jeopardy."