- Shipyard could face another $2.6 billion of losses, KDB says
- Company has been worst performer this year on Kospi 200
Creditors of Daewoo Shipbuilding & Marine Engineering Co. will provide 4.2 trillion won ($3.7 billion) to the world’s second-largest shipbuilder to help ease a cash shortage after two quarters of large losses.
Korea Development Bank and Export-Import Bank of Korea will take the lead in providing funds through new loans and equity, Korea Development Bank, the biggest shareholder of Daewoo Shipbuilding, said in a statement Thursday. That should help the shipyard report profits from next year, the state-run lender said.
“The company has the technology to help it turn around through restructuring and production improvements,” said Joung Young Suk, director of the corporate restructuring department at Korea Development Bank. “By 2019 the company should be fully recovered.”
Daewoo Shipbuilding is the worst performing stock on the Kospi 200 index this year as delays in delivering offshore drilling and production units have forced the company to load up on debt. The shipbuilder is selling non-core assets, reducing its operational presence at a loss-making Romanian shipyard and shedding workers as it hustles to raise cash after posting its biggest quarterly loss earlier this year.
The company will do its best to normalize operations as soon as possible, Daewoo Shipbuilding said in an e-mailed statement.
Korea Development Bank and Export-Import Bank of Korea have carried out due diligence since July on Daewoo Shipbuilding’s management and its long-term business plan, trying to determine how much money the shipyard will need. The company plans to raise 750 billion won by selling non-core assets such as its headquarters building and a golf course to raise cash.
The due diligence uncovered that the company could face additional losses of as much as 3 trillion won from the second half of this year under current management conditions, Korea Development Bank said. While Daewoo Shipbuilding could face a severe cash shortage in the first half of 2016, that could ease as the company receives payments on drill ships it will deliver, KDB said.
Global shipyards, including Daewoo Shipbuilding and Samsung Heavy Industries Co., are seeing customers delay projects as weaker economic growth and sluggish oil prices make it difficult for them to pay for offshore drilling rigs and ships they’ve ordered.
With most of the value of offshore drilling and production contracts paid on completion -- only about one-tenth is paid upfront -- delivery delays leave the shipbuilders scrambling to come up with cash in the course of construction.
South Korea is drawing up measures to bring more transparency to the accounting methods construction and shipbuilding companies use, to prevent them from showing huge losses when projects are delayed.
Hyundai Heavy Industries Co., Daewoo Shipbuilding and Samsung Heavy, the world’s three biggest shipyards, shifted toward floating drilling and production facilities when the global financial crisis hit ship orders. Now they’re pulling back from that business after the slump in oil prices last year has prompted companies such as Royal Dutch Shell Plc and Petroleo Brasileiro SA to cut spending.
Daewoo Shipbuilding ended a contract in August after an unnamed client in the Americas failed to make payment on a drill ship under construction. Daewoo Shipbuilding also said Tuesday that two drill ships it’s building will be delivered a year later than originally agreed. Those setbacks contributed to a 3.65 trillion won loss over the last two quarters.
The shipyard may turn to a profit in the fourth quarter as the company “conservatively” reflected losses in its July-September period earnings, MoneyToday reported Thursday, citing an interview with Chief Executive Officer Jung Sung Leep.
Daewoo Shipbuilding will reduce its exposure in the offshore business to about 40 percent of the company’s orderbook from over 50 percent currently, Korea Development Bank said. The shipyard will also steadily downsize its manpower, it said.
The shipbuilder plans to plans to eliminate 300 jobs and cut salaries for executives, Korea Development Bank said. The shipbuilder will also sell or liquidate its overseas units, including a shipyard in Romania and wind power unit, it said.
Other shipyards also are under pressure. Samsung Heavy has accepted requests from customers to defer delivery of six drill ships, and a Hyundai Heavy client canceled an order for a semi-submersible rig.
Some offshore projects now under construction have yet to be hired for any drilling or production jobs once they’re completed, meaning more orders may ultimately be delayed, according to Shinyoung Securities Co. in Seoul.