Daewoo Shipbuilding & Marine Engineering Co. (DSME), South Korea’s second-largest shipbuilder, will likely face yet another delay in the delivery of two drill ships to Angolan state oil firm Sonangol EP, which could be another big blow to the Korea shipbuilder already suffering from liquidity woes.

According to multiple sources from the financial and shipbuilding industries on Monday, Sonangol and its creditors have decided to conclude their negotiations over loan terms by the end of September, instead of mid-September, the deadline that they initially aimed to strike a deal. This suggests that the delivery date of DSME-built drill ships to the African state oil firm would be deferred beyond October. The African state oil firm in Angola has been struggling to meet its obligation to pay more than 1 trillion won ($893 million) to DSME for the order of the two drill ships.

According to the original contract, DSME was supposed to deliver each of the two drill ships to Sonangol in the end of June and in the end of July. With Sonangol’s deteriorating financial health, however, their delivery has been delayed and the Angolan state oil firm entered into negotiations with about 20 international creditors including Standard Chartered to receive waiver for its loans. A waiver would push back creditor banks from collecting loans earlier than the expected deadline when a debtor falls to meet an event of default due to deteriorated financial status. The Korean shipbuilder announced on August 17 that it would hand over the two ships to Sonangol by the end of this month based on recent talks between DSME President Jung Sung-leep and the African state oil firm in Angola.

DSME won the order to build the two drillers for the Angolan state firm for $1.24 billion in 2013. Upon signing the deal, the Korean shipbuilding received 20 percent or $250 million of the total contract value as advanced payment. Under the so-called heavy tail contract terms where a shipbuilder makes larger payment in the final phase of the building process, DSME should receive the remaining $990 million upon delivery.

The shipbuilder, its creditors, and financial authorities have been putting out all efforts to collect the remaining payment from Sonangol, and the situation for DSME was optimistic until early this month when it agreed with Sonangol to receive $770 million of the $990 million in cash and the remaining payment through dividends after acquiring a stake in a special purpose company invested jointly by Sonangol and DSME. The Korea Trade Insurance Corporation has even agreed to provide collateral for the payment. But now it remains highly uncertain whether the plan would go as planned.

Industry observers even warn that in the worst-case scenario that the African state-run oil company fails to take the drill ships and the two drill ships built by DSME would never leave DSME dockyard and become scrap metal.

By Park Yong-beom, Chung Seok-woo

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