DSME bailout plan likely to go haywire

The government’s plan to rescue liquidity-strapped Daewoo Shipbuilding & Marine Engineering (DSME) is facing complications, raising questions over the viability of the shipbuilder’s bailout.

According to industry sources on Sunday, DSME’s main creditors — the state-run Korea Development Bank (KDB) and Export-Import Bank Korea (Eximbank) — will meet officials today from commercial banks that have extended loans to the shipyard. Their meeting will be about rescheduling their 700 billion won ($623.6 million) of unsecured loans to DSME — one of the pre- requisites for the company to avoid court receivership.

The government last week announced a bailout plan for DSME, under which the KDB and Eximbank provide 2.9 trillion won of loans on condition the company’s creditors and bondholders agree to a 2.9 trillion won debt-to-equity swap and a 900 billion won debt rescheduling.

If the creditors fail to agree on the rescue, the government said DSME will be placed under a “pre-packaged plan,” a mixture of court receivership and a debt workout plan.

Commercial banks were also asked to agree to a debt-to-equity swap on 80 percent, or 560 billion won, of the unsecured loans and payment rescheduling of the remaining 20 percent.

According to the government, it has received “verbal agreement” from commercial banks for the plan. Banking sources also said that Monday’s meeting will be about pinning down the agreement.

However, the sources said banks are “reluctantly” agreeing because they have to secure up to 640 billion won in additional provisions.

Banks have shared the burden in restructuring Hyundai Merchant Marine (HMM), a shipping company that underwent a government-led restructuring scheme last year. They then agreed to a debt-equity swap on 60 percent of their unsecured loans to HMM.

Unlike HMM, however, DSME’s shares have been suspended from trading since July, meaning banks cannot liquidate DSME shares unless the Korea Exchange, the domestic bourse operator, lifts the suspension.

“The debt-equity swap to HMM had more advantages compared to that of DSME because shareholders could liquidate their HMM shares immediately to get back money immediately, even if the amount was not that big,” Shinhan Investment Corp. analyst Kim Sang-hoon said.

The financial authority said it is seeking the resumption of DSME trading in the second half of this year, but market observers expect a plunge in the company’s share price would be inevitable.