Korea to Resume Financial Guarantees to Shipbuilders to Support Order Flow

 

The Korean government working through its state-run financial institutions along with the private banking sector is partnering to increase liquidity for the shipbuilding sector. It marks the first time in 11 years that the banks, including the regional banks, have stepped into issue financial support and increase liquidity, especially for Korea’s midsized shipbuilders.

During a signing ceremony for the multiparty deal, government officials pointed to the strong financial contribution from the shipbuilding sector to the economy while also acknowledging increasing competition. In the first five months of 2024, shipbuilders have exported more than $10 billion worth of ships, which is reported to be up 57 percent from a year earlier.

The midsized shipyards however are under the most pressure and the bank had stopped issuing refund guarantees after the bankruptcies in the shipbuilding sector in the last decade created losses for the banks. Typically, a shipyard receives about 40 percent of the purchase price of the ship upfront and receives installment payments during the construction.  The shipyard in turn issues a guarantee to the buyer that it will refund the monies if it fails to deliver the ship.

Korea’s five largest banks as well as three regional banks are joining the program. The state financial institutions including the Korea Development Bank, the Export-Import Bank, and the Industrial Bank of Korea are all participating. In addition, the Korea Trade Insurance Corporation is altering terms to reduce the exposure and risk for the banks to encourage them to provide more financing the guarantees.

The first tranche of the program will provide approximately $260 million with $30 million allocated to each of nine ships already ordered at the midsized shipyard. The first to be covered is a tanker on order for a Belgian owner to be built at Daehan Shipbuilding. In total, about $680 million will be provided to the midsized shipyards which is designed to enhance their competitive position.

Hyundai’s three large shipyards and Samsung are also participating. Officials point out that the largest shipyards have nearly exhausted their guarantee limits due to their strong orderbooks. An additional $10 billion will be provided for the large shipyards so that they can continue to write new orders.

The program marks the first time that the large institutions and regional banks have jointly participated with the finances being devoted to the midsize shipyard. It also marks the return of the large financial institutions working to assist the midsize sector to improve its competitiveness. 

The government reports this program will be followed with a continuing emphasis on new technologies. Next month they expect to release a roadmap for technology and innovation within the shipbuilding sector.