Monday 27 March 2017

by Cichen Shen

Will the lenders and bondholders agree to the debt-to-equity swap?

THE creditors of Daewoo Shipbuilding & Marine Engineering, except for state-owned Korea Development Bank and the Export-Import Bank of Korea, are probably scratching their heads now.

As a prerequisite for the latest bailout package, including a $2.6bn debt-to-equity swap, they were asked by the two policy banks on Thursday to convert 50%-80% of the corporate bonds and commercial paper they hold into shares of the ailing shipbuilder, and grant the debtor a grace period of three to five years to settle the remaining liabilities.

Their dilemma: it is hard to reject the debt-to-equity swap as a court receivership scenario would incur more losses. But the risks in becoming the company’s shareholders are also high.

SC Lowy Co-Founder & CIO Soo Cheon Lee

A court-led restructuring, or court rehabilitation as it is called in South Korea, tends to be a lot costlier for the creditors — especially the unsecured ones — due to less favourable terms and delay in the process, compared with the latest state rescue plan, according to Soo-Cheon Lee, co-founder of Hong Kong-based fixed income specialist SC Lowy. He was the key figure behind the restructuring of Pan Ocean and Korea Line.

Also, a court receivership might well unsettle the builder’s shipowning clients, leading to disastrous cancellations of orders, with precedents already seen in other debt-ridden yards in the country, such as STX Offshore and Shipbuilding, Mr Lee added.

It would by no means be to the benefit of the creditors to put at risk South Korea’s largest shipbuilder’s $33bn worth of orderbook backlog and $12bn in refund guarantees.

Moreover, institutional creditors, making up the majority of DSME’s lenders and bondholders, have little incentive to go against policy makers’ intention.

With the presidential election looming, candidates from both ruling and opposition parties are keen to win voters’ hearts in the region where the yard is based, said a Seoul-based shipbuilding analyst who preferred not to be named. They would not want to risk the 50,000 jobs and Won48.4trn that DSME contributes to the local economy.

Mr Lee predicted: “Most of them are likely to agree on the debt-to-equity swap,” the same as what had happened during the workout process of Hyundai Merchant Marine. “What other choices do they have?”


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