Dongbu creditors tighten the screws

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Dongbu creditors tighten the screws

Dongbu Group, the nation’s 17th-largest conglomerate, is under pressure by creditors to speed up its restructuring process now that the sale of Dongbu Steel’s Incheon plant and Dongbu Power Dangjin Corporation, better known as the “Dongbu package,” has fallen through.

Korea Development Bank (KDB), the main creditor of Dongbu Group, said yesterday the creditors decided to start supervising the restructuring process of Dongbu Steel, the group’s flagship business, based on a voluntary agreement.

KDB’s decision came soon after Posco, the nation’s largest steelmaker, announced it had decided against buying the Dongbu package.

Dongbu Group last November unveiled a plan to raise 3 trillion won ($2.9 billion) by selling all or some shares in selected affiliates by 2015 to lower its debt.

However, execution of the plan has been sluggish as the group got only about 560 billion won from selling shares in Dongbu Express and Dongbu Metal and its port in Dangjin, South Chungcheong. Compared to Hyundai Group or Hanjin Group, which announced similar restructuring plans last year, Dongbu’s progress was considered “slow” by creditors.

“We proposed supervision of the creditors to Dongbu Group Chairman Kim Jun-ki yesterday, and Kim said he will think about the proposal positively,” said Ryu Heui-kyoung, vice chairman and chief operating officer of KDB at the bank’s headquarters in Yeouido. “The creditors’ supervision can begin only at the request of the company.”

Ryu said Dongbu is expected to request creditors’ supervision by the end of this week, and they will start discussing it next week. KDB also needs to receive approval from the Korea Credit Guarantee Fund (Kodit).

Dongbu Steel, Korea’s fourth-largest steelmaker, is suffering serious liquidity problems and will be the only group company under creditor supervision, said Ryu. However, industry insiders speculate creditors could take additional action involving other Dongbu affiliates if necessary.

Dongbu Steel was tabbed as the affiliate in most urgent need of support with 70 billion won in corporate bonds set to mature July 5 and an additional 40 billion won by Aug. 26. Its debt level is 307 percent, with short-term loans of more than 602 billion won.

But Ryu said there is not much possibility of a legally binding debt workout program since Dongbu Steel doesn’t have much debt with secondary financial institutions.

Dongbu and KDB have been pinning their hopes on the sale of the Dongbu package because they expected the deal could generate more than 1 trillion won, or a third of the self-restructuring plan.

“We thank KDB for giving us this chance and we really thought a lot about the deal,” said Posco Chairman and CEO Kwon Oh-joon yesterday. “But with our own financial burden, we concluded that the synergy for profitability the acquisition would bring to us was not that great.”

Posco, Korea’s largest steelmaker, has conducted due diligence since it received the offer from KDB in March.

As the package deal falters, KDB said it will split the package and launch open bidding. Dongbu Group has asked KDB to sell the affiliates separately.

“As far as we know, since there are a few interested in Dongbu Power Dangjin Corporation, splitting the deal will help speed up the sale process,” said Ryu, adding there still is no interest in the steel plant.

Industry insiders speculate that Posco might reconsider if the companies are sold separately. Kwon yesterday said Posco has a “big attraction” to coal power generation, hinting that Dongbu Power Dangjin could still be on its shopping list. Posco Energy, the affiliate of Posco, already announced it will acquire Tongyang Power for 431 billion won.

“If each of the companies were sold separately, we would have evaluated the purchase by a different standard,” said Kwon. “I think Posco has strength in coal-related business, and we have lot of knowledge and experience with coal.”

Analysts expect that Dongbu Group will have to speed up the debt clearance effort quickly as the situation is worsening.

Korea Investors Service (KIS) yesterday announced it is lowering the credit rating of Dongbu affiliates because of the sluggish execution of the restructuring agreement. KIS said Dongbu CNI and Dongbu Metal’s credit rating will be lowered from BBB to BBB-.

“Uncertainty over the execution of the restructuring plan increased because the Dongbu package, the core part of the plan, is faltering,” said KIS. “Other parts of the restructuring plan, such as selling Dongbu HiTek and the personal contribution of the chairman, are also delayed.”

Rumors have been circulating that creditors consider replacing the group’s chairman because of reported friction between KDB and Dongbu over Chairman Kim’s contribution.

Under the original proposal, Kim planned to put in 100 billion won of his own money to be used in a capital increase by stock issuance at Dongbu Steel, but it was changed to Dongbu Investment. KDB opposed the plan because Dongbu Investment is entirely owned by Kim.

Creditors also reportedly asked Dongbu to offer Kim’s first son’s share in Dongbu Insurance as collateral for carrying out the restructuring plan, which Dongbu rejected, saying the heir’s share has nothing to do with the restructuring.

“Replacement of the top management is not the main purpose of the corporate restructuring,” said Ryu of KDB. “It can be a tool for normalizing the company, but we will see later whether Chairman Kim is capable of reviving the company or not.”

In the stock market, Dongbu Group’s shares plunged on speculation that additional Dongbu affiliates might undergo voluntary restructuring or debt workout programs.

Dongbu Steel, Dongbu Construction, Dongbu CNI, Dongbu HiTek and Dongbu Lightec plunged the daily limit of 15 percent on the Kospi yesterday, while financial affiliates like Dongbu Insurance and Dongbu Securities also fell nearly 5 percent on the main bourse.


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