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‘Big 3’ Shipyards Get State Aid

Monday, June 13, 2016

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Following several consecutive quarters of extreme financial losses, the Korean government is stepping in to assist the world’s three largest shipbuilders.

Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries—the so-called “Big 3” of the industry—will be the beneficiaries of an 11 trillion-won ($9.5 billion) fund to help lenders absorb losses while the businesses restructure, business news source Bloomberg reported.

These shipyards are reportedly suffering from the effects of a poorly timed venture into offshore oil facility construction. This diversification was meant to make up for the losses they felt from a supply glut in the commercial ship market.

LNG-LPG carrier, Daewoo
Daewoo Shipbuilding & Marine Engineering

The world's three largest shipbuilders have revealed plans describing how they intend to manage their financials, reduce debt, improve efficiency in response to steep losses following the recent shipbuilding downturn.

And while most of the shipyards’ losses have been attributed to those offshore projects (in play since 2010), canceled orders, the delivery of underpriced ships, a rise in shipbuilding costs and increased costs stemming from delays in their offshore construction have also contributed to the financial hurt.

According to Bloomberg data, the Big 3 show a 9.57 trillion won ($8.2 billion) in debt and loans with maturities that extend as far out as 2022.

Government Funding

In an effort to help the Big 3—said to employ 62,000—stay afloat during this slump, the South Korean government and the Bank of Korea established the 11 trillion-won fund to help the state-run banks that serve as the industry’s lenders.

The fund is intended to shore up the lenders’ capital to better help them absorb any losses as they aid the shipbuilders in their restructuring, the government noted.

Slated to be active as of July 1, the fund is expected to be available through year-end 2017.

Plans to Restructure

Meanwhile, as part of its proposal, the government asked the shipbuilders to share how they intend to better manage their financials, reduce debt, improve efficiency and minimize the effects on the economy going forward, the Australian Financial Review reported.

"We will swiftly carry out restructuring of shipping and shipbuilding companies under the principle that the companies strictly implement their own reform plans and take losses incurred," Finance Minister Yoo Il Ho said in a statement.

Those plans indicated that the shipbuilders propose raising a combined 8.41 trillion won ($7.2 billion) that will include the sale of assets as part of the restructuring, Bloomberg said. Some of these plans are expected to impact tens of thousands of workers, sources said.

Samsung Heavy Industries

The South Korean government and the Bank of Korea established a $9.5 million fund to help strengthen the capital of the state-run banks and help them absorb any losses as they aid the shipbuilders in their restructuring plans.

Specifically, Daewoo Shipbuilding hopes to raise 3.45 trillion won ($2.97 billion) through sale of 14 subsidiaries, two floating docks and its specialty shipbuilding business. Job and salary cuts will also be implemented in order to save money, according to the company.

Hyundai Heavy expects to raise 3.5 trillion won ($3 billion) by selling its shares in other companies, including KCC Corp. and Hyundai Motor Co., as well as its three financial units, the company said. Cuts in jobs and pay are expected to save it 900 billion won (about $770 million), while the shipbuilder says it will also reduce its debt-to-equity ratio from the current 134 percent to 80 percent.

Samsung Heavy said it will raise 1.46 trillion won ($1.3 million) by selling assets through bond sales, as well as cutting jobs, adding that it will sell new shares if more cash is needed.

Outlook

With the restructuring plans in place, Daewoo Shipbuilding anticipates achieving an operating profit in the second quarter, it told Bloomberg.

Similarly, Hyundai Heavy intends to rebuild market confidence through its efforts.

Samsung Heavy said it expects to see a boost in new orders in the second half of the year and is targeting $5 billion in contracts by year-end.

“They aren’t out of the woods,” said Hong Seok Jun, an analyst at Korea Investors Service. “The industry needs new shipbuilding orders to really start showing signs of a recovery and after that there has to be high-quality orders.”

Park Moo Hyun, a Seoul-based analyst at Hana Daetoo Securities Co., indicated that these efforts happen to coincide with the earliest signs of a potential recovery. Deliveries in terms of deadweight tons increased 39 percent in May from a year earlier, he said.

“Things are starting to turn around for the shipyards as more vessels and offshore projects are delivered to clients,” Park said. “The focus now should be on providing funds to help them win new orders.”

   

Tagged categories: Business conditions; Construction; Daewoo Shipbuilding & Marine Engineering Co.; Finance; Hyundai Heavy Industries Co.; Marine; Offshore; Oil and Gas; Samsung Heavy Industries Co.; Shipyards

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