Financial Services Commission Chairman Lim Jong-ryong said on March 21 that the South Korean government is working on debt-equity swap, bond maturity extension and the like for Daewoo Shipbuilding & Marine Engineering with debenture holders and commercial banks as well as state-run banks such as the Korea Development Bank and the Export-Import Bank of Korea. The decision to provide additional assistance for the shipbuilder in spite of public criticism is because the bankruptcy of the company is likely to have a significant negative effect on the shipbuilding industry of South Korea as a whole.

At present, the Korea Development Bank and the Export-Import Bank of Korea are the two main creditor banks for Daewoo Shipbuilding & Marine Engineering. Once the additional liquidity supply gets the green light, the two state-run banks have to provide most of the funds. The losses of the banks have already snowballed since they prepared allowances for shipbuilding and shipping sector restructuring last year and they may fail to meet the BIS ratio requirement in that case.

The South Korean government’s stance is firm to the point of mentioning coercive legal measures. “We are currently examining various ways such as court receivership, debt workout and split-off and the options will include coercive measures if interested parties fail to reach a voluntary agreement,” he explained.

What the government is most concerned about is the possibility of brain drain to China. Daewoo Shipbuilding & Marine Engineering has approximately 10,000 employees now and one-fourth of them are designers and researchers, who have made a particular contribution to its five-year technology gap in the field of LNG carrier building and offshore plant construction. If the brain drain does occur, the gap between Daewoo Shipbuilding & Marine Engineering and Chinese shipbuilders will be reduced at a rapid pace with the average labor cost of the latter at 40% or so of the former’s. Then, global ship owners have no reason not to partner with Chinese shipbuilders and even Hyundai Heavy Industries and Samsung Heavy Industries may be in danger as well.

Another matter of concern is the fact that the predicament of Daewoo Shipbuilding & Marine Engineering is directly related to 1,100 or so firms supplying their products to the shipbuilder. 80% of them are currently supplying their products to Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering at the same time. Once the latter goes under, only two options are left for the partner firms, that is, going under with it or entering the Chinese market where they can sell their technology.

The government is also worried about the possibility that the financial sector could completely stop providing financial assistance for the shipbuilding industry in the case of bankruptcy of Daewoo Shipbuilding & Marine Engineering. According to a local credit rating agency, the financial sector’s exposure to Daewoo Shipbuilding & Marine Engineering is estimated at 21.4 trillion won. “Once the shipbuilder goes bankrupt, banks will stop funding the companies in the same sector,” said a high-ranking government official, adding, “At the same time, they will become less and less generous in holding debts for Samsung Heavy Industries and Hyundai Heavy Industries and the financial conditions of the two shipbuilders will be deteriorating.”

Source: BusinessKorea