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KDB to end up with biggest stake in HMM

Korea Development Bank (KDB) is becoming the biggest shareholder of the troubled Hyundai Merchant Marine (HMM) by converting the debt it is owed to equity.

The state-run bank on Tuesday disclosed a plan to convert 700 billion won ($600 million) of debt owed to creditors to shares in HMM. Creditors will be given until May 24 to agree to the plan. The 700 billion won of debt includes half of 800 billion won worth of private placement corporate bonds and 60 percent of 500 billion won in unsecured loans.

When the debt is converted to equity, KDB will own 40 percent of the shares in HMM, which effectively allows creditors management control of the shipping company.

The company will be given a grace period of five years on the remaining loans and pay them in installments in the following five years. The interest rate on the loans will be lowered to the 1 percent range.

Once the conversion of debt to equity is completed, the company’s debt-to-capital ratio will be lowered to the 200 percent range, which puts the company in a position to receive funding from the government.

The government last year said 400 percent was the upper limit on the debt-to-capital ratio for troubled shipping and shipbuilding companies to receive government financial support.

HMM, which has been suffering from losses for the past five consecutive years, has a debt-to-capital ratio of 11,811 percent as of the end of March. The company on Monday announced a massive operating loss of 163 billion won for the first quarter.

The company is optimistic it can lower its debt ratio to 700 percent when it receives payment on the sale of some assets, including Hyundai Securities and Hyundai Pusan New-Port Terminal.

“When we achieve a debt ratio of lower than 400 percent, which is a condition the government has given for financial support, HMM’s shipping competitiveness will further strengthen,” an HMM official said. “We expect our financial structure to improve and also speed up management normalization.”

However, the key to successfully converting the loans to shares is HMM negotiating lower charter rates from foreign shipowners.

The company will begin those negotiations today and has until Friday to reach an initial agreement. The final results are expected to be released in June. Creditors have given HMM a target of bringing down charter rates by 28 percent. This would be the equivalent of saving roughly 720 billion won over the next three and half years.

HMM charters 71.6 percent, or 83 vessels, of the total 116 it operates, and last year, it paid 975.8 billion won to lease the ships.

The 83 vessels are owned by 22 shipowners, with the top five being Greece’s Danaos, Navios and Capital Ship Management as well as the U.K.’s Zodiac and Singapore’s Eastern Pacific Shipping. They account for 60 to 70 percent of the charter fees HMM pays.

On the news of KDB converting debt to equity, HMM’s stock rose nearly 7.5 percent to close at 12,250 won.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]