The likelihood of Daewoo Shipbuilding applying for bankruptcy protection is increasing.
2017-04-13 09:00
As the National Pension Service (NPS) of South Korea's debt restructuring request for Daewoo Shipbuilding & Marine Engineering (DSME) was rejected by the Korea Development Bank (KDB), the possibility of DSME initiating a pre-packaged bankruptcy plan is increasing.
Pre-packaged bankruptcy refers to creditors agreeing to restructure debt before a company files for bankruptcy protection. The completion time for a pre-packaged bankruptcy is significantly shorter than that of a typical bankruptcy procedure.
The NPS holds 388.7 billion won in claims against DSME, accounting for 29% of DSME's total liabilities. Previously, the NPS requested that KDB, as a major creditor of DSME, further reduce DSME's equity capital. Simultaneously, the NPS also requested that KDB repay all of DSME's debts due in April.
However, on April 10, KDB stated that it would not accept the NPS's request. KDB reiterated that unless all bondholders agree to the debt-to-equity swap plan, DSME will begin court-administered bankruptcy proceedings.
KDB's position is that all stakeholders must share all losses from DSME equally and fairly. KDB stated that it would not concede to the NPS's demands.
Last month, South Korean state-owned banks KDB and the Export-Import Bank of Korea stated that, as creditors of DSME, they would provide a new aid package totaling 6.7 trillion won (approximately $5.98 billion) to the struggling DSME; however, this was conditional upon all stakeholders agreeing to a debt-to-equity swap plan.
This is the second round of aid provided by KDB and the Export-Import Bank of Korea for DSME. Under this plan, if lenders and bondholders agree to exchange 2.9 trillion won of DSME's debt for new shares, DSME will be able to obtain 2.9 trillion won in new loans. The aid plan also includes a 3-to-5-year grace period for 900 billion won in unsecured loans.
Last week, the NPS held a meeting to discuss whether to accept DSME's debt-to-equity swap plan; however, due to doubts about DSME's financial condition, the NPS ultimately made no decision.
Currently, the NPS holds 388.7 billion won in corporate bonds sold by DSME, totaling 1.35 trillion won. It is particularly noteworthy that DSME has 440 billion won in bonds maturing on April 21, with approximately 45% owned by the NPS.
Analysts believe that unless the NPS agrees to the debt-to-equity swap plan and other debt adjustment measures, DSME's aid plan will not succeed. DSME will hold a bondholder meeting on April 17-18. If the debt-to-equity swap plan fails to obtain the consent of bondholders by then, DSME is expected to begin a pre-packaged bankruptcy procedure starting April 21.
Analysts say that creditors are currently in a difficult position. According to Shinhan Financial Investment's forecast, even if the debt-to-equity swap successfully saves DSME, the debt recovery rate for creditors will only be 57-59%. However, under the current sluggish shipbuilding market, it remains unknown when DSME will resume normal operations. If creditors do not agree to debt restructuring and allow DSME to enter a pre-packaged bankruptcy reorganization procedure, the debt recovery rate will be only 1.76%, resulting in even greater losses.
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