CEO of cash-strapped DSME forgoes salary

The chief executive of Daewoo Shipbuilding & Marine Engineering, the Korean shipyard whose continuous liquidity issues are putting it on the brink of insolvency, has decided to give up 100 percent of his salary and called on employees to follow his cost-cutting example in a drastic move to show creditors the company’s determination to survive.

“Outsiders say we are turning away from taking responsibility while asking creditors to share the burden,” said Jung Sung-leep, CEO of DSME. “We must take a voluntary step and before asking employees to sacrifice, I will first return the entire amount of my salary.”

Jung’s announcement to DSME employees Wednesday comes as the shipbuilder’s major creditors are sitting on a government bailout plan announced last week. On Tuesday, after an internal review session, the National Pension Service said it was unable to determine whether it should support the plan based on currently available data. It requested DSME and Korea Development Bank, the main creditor, to provide supplementary data.

The state-run pension fund owns 390 billion won ($350 million) in corporate bonds at DSME. Many in the industry predict that other institutional creditors like the Korea Post will follow whatever decision is made by the National Pension Service. Although a source at DSME said the pension fund is likely to agree to the bailout - since it would minimize losses the most - unfavorable factors loom large.

Most notably, the National Pension Service is reportedly considering a lawsuit against DSME for accounting fraud between 2010 and 2014, when the company reported losses as profit. The pension fund is also wary of appearing to support a conglomerate like DSME after the scandal that brought down President Park Geun-hye revealed overly cozy ties between big business and government.

If the National Pension Service gives the go-ahead, 50 percent of 1.55 trillion won debt held by creditors in the form of corporate bonds and commercial papers will turn into equity, and the payment deadline of the remaining 50 percent will be pushed back five years.

If pension fund rejects the plan, DSME will likely have no other option but to file for court receivership under a prepackaged plan that regulatory authorities, including the Financial Services Commission, believe could lead to the shipbuilder’s bankruptcy.

Other than the National Pension Service, local commercial banks agreed earlier this week to provide an additional refund guarantee of $500 million on orders that DSME will acquire, under the condition that creditors agree to the bailout plan during a meeting slated for as late as April 18. The refund guarantee will provide protection to buyers of DSME’s ships in case the company goes bankrupt.

This means DSME will have a little more room to breathe as it works to obtain new profit sources. The amount of refund guarantees that local commercial banks are responsible for providing already stands at as much as 13.5 trillion won.

Such a decision, however, will come with strings attached. The banks have demanded DSME further reduce labor costs, which is the only way it can cut costs after having already sold off most of its assets.

“What the creditors and major shareholders are asking of us to do is cut labor costs by 25 percent, including all of our employees returning 10 percent of their salary,” Jung told DSME employees. “We are running out of time, and I ask all of us share the pain together.”

Adding to DSME’s woes, accounting firm Samil PwC on Wednesday gave the company a “qualified opinion” on its 2016 audit report. The firm said the information that DSME provided last year on the report was limited in scope and lacked sufficient information for the auditor to verify certain aspects of the shipbuilder’s financial statements.

With the qualified opinion, the Korea Exchange will place DSME on the stock market’s list of administrative issues, meaning its stock will be excluded from the main index, the Kospi 200. Investors of the company’s shares will likely lose money.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]