The South Korean financial authority and state-run Korea Development Bank (KDB) will seek ways to salvage Daewoo Shipbuilding & Marine Engineering Co. (DSME) from further falling into the liquidity crisis amid growing concerns that the delivery of two drill ships to Angolan state oil firm Sonangol EP would be indefinitely delayed.

According to multiple sources from the financial authority and KDB on Monday, they are mulling securing 500 billion won ($446 million) worth of funds by readjusting refund guarantees (RG) on DSME’s special vessels including defense ships. The Financial Services Commission (FSC) has requested Korea Defense Industry Association - the issuer of refund guarantees on behalf of DSME - and the Ministry of Trade, Industry and Energy to secure additional funds for the shipbuilder by allowing DSME to receive advanced payment on defense vessels including naval surface ships and submarines at an earlier date.

In the shipbuilding industry, RGs are a type of insurance provided to vessel purchasers in case ships are not delivered as in contract terms. Financial institutions issue RGs on behalf of the shipbuilders. If purchasers are not delivered proper ships, they can receive advanced payment from financial institutions instead. Normally, RGs are issued by financial institutions or Korea Trade Insurance Corporation, but the Korea Defense Industry Association is in charge of battleships considering distinct features in the building process.

Industry sources note that it is possible for DSME to secure additional liquidity by readjusting RG terms on defense vessels as unlike ordinary ships, advanced payments are made and RGs are issued more frequently - at each phase of the building process - for defense vessels.

The financial authority and KDB are seeking to come up with measures so that it can raise 1.1 trillion won worth of additional funds for DSME by readjusting RGs on defense ships and injecting unexecuted funds. As of end of last month, DSME has used up 3.1 trillion won of the maximum 4.2 trillion won worth of fresh funds promised by KDB in October last year.

In the event that the delivery of two drill ships to Sonangol are delayed beyond this year, the financial authority and KDB are expected to introduce emergency measures and secure 2.4 trillion won worth of liquidity mainly by reducing the number of docks that are essential facilities in shipbuilding. KDB is also expected to increase capital by about 1 trillion won to prevent DSME from becoming fully impaired in capital. Sources note that it is likely that KDB will increase capital by issuing new stocks and converting debt into equity.

By Park Yong-beom and Chung Seok-woo

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