Shipbuilder pays for faith in China

For shipbuilders such as STX Group, China was once a gold mine. Now it’s a graveyard.

China’s lower appetite for commodities undermined the group’s plan to sell its shipping line, wiping out a combined $435 million of investor wealth at the Korea-based conglomerate’s three main companies this week. That also threatens the group’s ability to repay $1.2 billion of debt by the end of the year.

STX’s crisis comes after last decade’s boom prompted the group to set up a shipbuilding and offshore complex in Dalian, northeastern China. With Asia’s biggest economy slowing down and the European crisis adding to a plunge in cargo rates, China Cosco Holdings, the nation’s biggest mover of bulk commodities and containers, last week reported a loss for 2012, a third straight annual loss.

“China was the promised land, something STX Group saw as an opportunity to help it become much bigger,” said Park Moo-hyun, an analyst at ETrade Securities Korea, who doesn’t rate any of the group companies. “It’s turned into a nightmare, a big investment that is coming back to bite them.”

STX, a conglomerate that owned $23 billion in assets as of April last year, is trying to raise 2.5 trillion won ($2.2 billion) through asset sales. It will know this week whether creditors will accept a request for voluntary debt rescheduling by its shipbuilding unit. The group has 1.37 trillion won of bonds due this year, it said.

Since the credit crisis, orders for new ships have plunged. Contracts for new vessels halved to $84.7 billion last year, compared with $174.7 billion in 2008, according to Clarkson, the world’s biggest ship broker.

China Cosco reported a bigger-than-expected loss of 9.56 billion yuan ($1.5 billion) last year on a slump in dry-bulk rates. The company plans to sell its logistics unit. It may raise as much as 27 billion yuan selling assets to its parent, said two people with knowledge of the matter last month.

A downturn affects STX significantly as the group builds ships as well as engines and other components that go into it. All five of the group’s listed units lost money last year. STX Offshore & Shipbuilding, the world’s fourth-largest shipbuilder by order book, had its biggest loss in 2012 since 1998, when it started compiling data.

STX’s founder and Chairman Kang Duk-soo, 62, is no stranger to dealing with struggling companies. In 2001, he bought Daedong Shipbuilding, then just out of court protection and renamed STX Offshore.

Creditor banks were expected to make a decision on STX Offshore’s request last week but the meeting did not take place, according to state-run Korea Development Bank, the biggest lender to the group. STX will work closely with the creditor banks as well as sell additional assets to improve finances at the shipbuilding unit, the group said in an e-mailed response to questions.

Of the 2.5 trillion won it’s trying to raise through asset sales, the group has received 1.13 trillion won from selling its stakes in STX Energy and STX OSV Holdings. It also merged STX Metal with STX Heavy Industries, the world’s third-biggest maker of marine engines, to improve finances.

The group has about 11.3 trillion won in debt. Shipbuilders typically receive money from customers in several installments while a vessel is being built.

While STX seeks to reschedule STX Offshore’s debt, efforts to sell STX Pan Ocean may gain pace, according to Park Eun-kyung at Samsung Securities. That’s because earnings may improve in the second half as freight rates are expected to increase, she said.

Korea Development Bank has said that it may consider buying STX Pan Ocean shares if the sale attempt falters. The state-owned lender is the second-biggest shareholder of the commodities shipping company after STX.

STX Group is also trying to sell a stake in the Dalian shipyard to Chinese investors, scrapping an earlier plan to sell shares in a Hong Kong or Singapore listing.

“This should help the group over the immediate, short-term problem,” said Um Kyung-a, an analyst at Shinyoung Securities. “But it really needs the shipping industry to recover before it can pull itself out of its current situation.”

Bloomberg