Regulators Prepare Bankruptcy "Plan B" for DSME

Sources within Korea Development Bank, the majority owner of Daewoo Shipbuilding and Marine Engineering, say that they are already working on a prepackaged court receivership plan in case DSME's creditors will not participate in another bailout package. "We are taking a two-track approach," a KDB official told Yonhap.

Formal talks between the government and the yard’s creditors began on Monday, and the stakeholders have limited time to agree on how (or whether) to help the yard pay back its maturing debt. Under the terms of the government’s latest rescue proposal, KDB and Korea Export-Import Bank would provide DSME with $2.6 billion in new loans, and the yard's other creditors would swap half their debt for equity and delay the maturity of the rest. Institutional investors for Korea's public-sector pension funds are reportedly balking at the plan: they complain that they only invested in DSME's bonds because the yard misrepresented its earnings, and they would like to recoup a larger share of their funds. 

Korea's financial regulators warn that DSME could slip into receivership as early as April if it is not provided with another round of assistance, with potentially dire consequences for the nation's economy. However, the agencies involved have produced differing estimates for the extent of the damage. The Financial Services Commission suggests that the losses could exceed $50 billion, assuming that DSME's huge yard in Okpo ceases operation; about two thirds of this amount would come from the unrealized value of vessels currently under construction. The Ministry of Trade, Industry and Energy puts the total number much lower, at $15 billion, based on the assumption that the Okpo stays open through a prepackaged bankruptcy.

The calculations behind these damage forecasts rest in part upon the extent of any order cancelations. DSME's chief executive recently warned that receivership would allow owners to cancel orders under the "builder's default" clause in their contracts – and that many owners would have an economic motive to cancel in the current business environment.