S. Korea to Create 11t Won Fund to Aid Restructuring

  • Corrects company names in 12th paragraph of June 8 story
  • BOK, govt work in tandem to ensure fiscal soundness at banks

South Korea will bolster capital at policy banks through a fund to support restructuring of the nation’s shipping and shipbuilding industries, the government said Wednesday.

The plan is for the government and the Bank of Korea to create an 11 trillion won fund ($9.5 billion) to make sure state lenders can withstand losses as they facilitate the restructuring, according to a statement. The aim is to start operating the fund from July 1 and for it to run through the end of 2017.

President Park Geun Hye’s administration is pursuing a painful restructuring of companies that are struggling under mounting debt and diverting attention from efforts to find new growth engines for the the nation. The program could cost tens of thousands of workers their jobs in an economy that’s been hit by falling exports and weak demand at home.

"The fund will buy hybrid bonds issued by state-run banks," Finance Minister Yoo Il Ho said at a policy meeting in Seoul. "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," according to a written copy of his remarks.

For a quick explainer of the troubles facing Korean shipyards, click here.

Separately, the finance ministry will inject 1 trillion won of capital into the Export-Import Bank of Korea by September this year to make sure Kexim’s capital ratio doesn’t fall by too much.

Shipping and shipbuilding companies are battling losses after the oil price plunge of the past two years and overcapacity in the industry depressed freight rates. Policy makers are trying to streamline these businesses and have called for the central bank to join in efforts to ensure policy banks with heavy exposure to those companies stay afloat.

"The restructuring itself negatively affects growth sentiment, but these concrete plans announced now should ease uncertainties and improve the view of markets about the reform plans," said Lee Ho Seung, a director general at the finance ministry.

South Korea’s three-year government bond yield fell to an unprecedented 1.39 percent as of 1:36 p.m. in Seoul on Wednesday, as government’s announcement raised bets the central bank may cut interest rates as soon as Thursday as part of a coordinated move with the Park administration.

Government Estimate

While 11 trillion won in funds will be available, the government currently estimates that the lenders will need to be injected with about 5 trillion won to 8 trillion won, assuming that Korea Development Bank and Kexim meet BIS ratios of 13 percent, and 10.5 percent, respectively. KDB’s ratio now is 14.6 percent while Kexim’s is 9.9 percent.

Korea’s restructuring of vulnerable and over-supplied industries could cut economic growth by 0.2 percentage points to 1.3 percentage points, Citigroup Inc. economists including Chang Jae Chul wrote in a Tuesday report.

Although the central bank directly injecting capital had been mentioned as possible options by the government, BOK Governor Lee Ju Yeol told reporters in May that he preferred a way that can minimize losses for the central bank money.

Hyundai Merchant Marine Co. will try to join The Alliance, a global shipping group, and finalize talks on lowering charter rates for ships it has leased from shipowners by the end of this week, according to the government. Hanjin Shipping Co. is also making similar efforts on reducing charter rates.

The government will review progress of restructuring plans at shipbuilders Hyundai Merchant, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries. The companies have proposed to sell properties and dismiss workers as part of their reform plans.

(Corrects company names in 12th paragraph; Hyundai Merchant trying to join The Alliance, Hanjin seeking to reduce charter rates.)
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