South Korean financial authorities and state lenders are putting together yet another bailout package for Daewoo Shipbuilding & Marine Engineering Co. (DSME) that would include fresh funding of 2.9 trillion won ($2.6 billion) and rescheduling on existing 3.8 trillion debt on condition that private debt-holders all go along with the new plan.

If private debt-holders resist taking in haircut and relief in borrowing terms, the shipbuilder would most likely to fail to meet with 440 billion won obligation due in April and could be headed for the bankruptcy court with prepackaged restructuring arrangement excluding smaller creditors, the state bank warned.

DSME’s main creditor and largest shareholder Korea Development Bank (KDB) announced the new rescue scheme on Thursday, admitting that the shipbuilder is in deep trouble despite 4.2 trillion won injected by two state lenders in 2015. It must repay 1.5 trillion won bonds by next year starting with 440 billion won maturing on April 21.

Since the shipbuilder admitted of hiding losses of 5.5 trillion won in 2015, state lenders have spent more than 7 trillion on the company through new loans and debt-to-equity swap. But the elephantine shipyard have used up all the funds for operation amid dearth of new orders.

Unlike the 2015 bailout package that entirely relied on the two state creditors - KDB and Export-Import Bank of Korea (Korea Eximbank), the new plan demands pain-sharing from private banks and bondholders.

Under the scheme, both public and private lenders are required to swap their debt worth 2.9 trillion won into equity, and push back due date from three to five years as well as lowering the lending rates to around 3 percent on the remaining 900 billion won. Bondholders also are asked to convert half of their 1.5 trillion won holdings into equity. Institutional players like National Pension Service (NPS), Korea Post, banks and insurers are estimated to hold 70 percent of the papers and retail investors the rest. Commercial banks also must convert 80 percent of their stake in unsecured papers of DSME worth 700 billion won into equity. KDB and Eximbank will convert their entire 1.6 trillion won holding in the company’s unsecured bonds into equity.

If commercial lenders and bondholders refuse to go along with the debt restructuring, the remaining option is to place DSME under court-led prepackaged program, a new pre-bankruptcy program that expedites debt write-off and reorganization and allows fresh funding so that a company can escape bankruptcy situation within months.

The government and state lenders are eager to save DSME in fearing of squandering massive public funds already spent on the shipbuilder and in consideration of massive toll on financial institutions and jobs should the mega-size shipbuilder go under.

By Chung Seok-woo

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