DSME secures 2.8 trillion won in investments

Troubled shipbuilder Daewoo Shipbuilding and Marine Engineering (DSME) has finally received a dim light of redemption as it was able to secure 2.8 trillion won ($2.4 billion) in investments from its largest shareholder and main creditor to further help propel its restructuring.

However, even with the investment the shipbuilder has still a long road ahead before it stabilizes.

On Thursday Korea Development Bank (KDB), the largest stakeholder of the shipbuilder, invested 1.8 trillion won and the Korea Export-Import Bank (Exim) fronted 1 trillion won.

KDB has also announced it’s taking steps to fulfill the promise made last year in a capital reduction of the 49.7 percent stake it has in the shipbuilder.

However, the investment that DSME comes with a condition. Until the issue is approved by the KDB’s board of directors’ meeting on Nov. 18, the shipbuilder’s union must not strike and also must agree to several painstaking changes including layoffs.

The measure is expected to keep the company from being delisted on the stock market due to its capital erosion while allowing DSME to regain the foundation that will help compete in bidding for orders.

Currently DSME is faced with a dire situation, as the order that it was able to win only amounts to 10 percent of its target while the company’s debt has exceeded its total assets. The company had a deficit of more than 1 trillion won in the first half alone.

KDB will provide 400 billion won in the form of paid-in capital increase while the remaining 1.8 trillion won will convert debt into equity. Exim Bank will be providing the 1 trillion won in perpetual bonds. Perpetual bonds are registered as capital and not as debt in the company’s book, which will as a result raise DSME’s capital.

When including the 400 billion won paid-in capital increase by KDB at the end of the year, the investments made in DSME amount to 3.2 trillion won.

KDB, which owns a 49.7 percent stake on the shipbuilder, said it will cancel all of the 22 percent stake or 60 million shares in taking responsibility for the shipbuilder’s debacle. KDB has been accused of failing to oversee the shipbuilder’s mismanagement including cooking books and bribery.

The remaining 27.7 percent that KDB owns through the 400 billion won paid-in capital increase made last year will be reduced to one tenth of its original amount.

The 8.5 percent DSME stake owned by the second-largest stakeholder, the Financial Services Commission, as well as minority shareholders will be reduced to one tenth as well.

Once the investments are complete, the 1.2 trillion capital erosion will be turned around to an equity capital amounting to 1.6 trillion won. Additionally the company’s debt-to-capital ratio will drop from 7,000 percent to 900 percent. The stake of KDB will go up from current 49.7 percent to around 80 to 85 percent as the result of the capital reduction.

However, experts say even if the DSME financial structure improves it will be still difficult to normalize the shipbuilder and that there are still a lot of obstacles.

This includes the delayed delivery of a 1 trillion-won drill ship to the Angolan state-run refiner Sonangol. Furthermore, the company is faced with the maturity of 900 billion won worth of corporate bonds next year.

“Unless the government pushes strongly with a corporate restructuring [including the selloff major production facilities] the recent decision on capital increase will only be a temporary solution,” said Kim Sang-jo, trade professor at Hanyang University. “Especially with the presidential race starting next year, the additional injection of finance on DSME will likely become the center of controversy.”

BY LEE TAE-KYUNG [lee.hojeong@joongang.co.kr]