Six Korean commercial banks agreed to extend refund guarantee of up to $500 million for vessels Daewoo Shipbuilding & Marine Engineering Co. (DSME) wins over the next year to ensure security of new orders on top of converting 80 percent of their bond holdings of 700 billion won ($627 million) into equity under a new government-led bailout package.

After several meetings led by financial authorities, KEB Hana Bank, KB Kookmin Bank, Shinhan Bank and three other commercial banks offered to extend refund guarantee on condition that bondholders consent to debt rescheduling scheme.

The new bailout calls for 2.9 trillion won in new fresh funds and rescheduling of existing 3.9 trillion won debt through debt-to-equity swap, rollover, and lowered rates from all private lenders and bondholders.

Refund guarantee - typically capped at 30 percent of a vessel order - is essential for a troubled shipbuilder like DSME to win orders as the purchaser would not want to place orders on concerns that it won’t get its advance installments back when the contract breaks down from insolvency of the shipyard or other risks.

State lenders that organized a 4.2 trillion won rescue package in October 2015 then had agreed to offer refund guarantee of up to $4.5 billion.

Given the fact that DSME hopes to win $2 billion orders this year and has secured $600 million worth, private banks according to their stake ratio would likely be responsible to cover refunds for $1.7 billion worth orders up until the first half next year.

Acting president and Prime Minister Hwang Kyo-ahn on Tuesday’s cabinet meeting pleaded public understanding for the new debt relief program for DSME claiming it is “necessary step” to save the shipbuilding industry that was hard built over decades against global slump and called for “reasonable” burden-sharing among creditors, shareholders, management, and workers.

By Cho Si-young and Chung Seok-woo

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