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(LEAD) Seoul to form W12 tln fund to rehabilitate shipbuilders, shippers

All News 17:50 June 08, 2016

(ATTN: REWRITES throughout; CHANGES photos)
By Choi Kyong-ae

SEOUL, June 8 (Yonhap) -- South Korea's government and central bank announced Wednesday that they will jointly create a 12 trillion won (US$10.38 billion) recapitalization fund to help creditor banks rehabilitate the nation's debt-stricken shipping and shipbuilding companies.

The decision was reached at a meeting of economy-related ministers after months of intensive debate within the government on how to restructure the ailing core industries.

The recapitalization fund includes 1 trillion won directly injected by the government into the Export-Import Bank of Korea (Korea Eximbank), another 1 trillion won provided by the Industrial Bank of Korea (IBK), and a loan of 10 trillion won extended by the Bank of Korea (BOK), the Ministry of Strategy and Finance and the Financial Services Commission (FSC) said in a joint statement.

The BOK's loan will be extended through the IBK to the fund and part of the 12 trillion won fund will be ready for use from July, the statement said.

"The country's shipping and shipbuilding companies have inked heavy losses for years since the 2008 global economic crisis due to a glut of vessels, low freight rates and competition with lower-cost Chinese rivals. Whether they survive or not will be decided in the next two to three years depending on their restructuring results," Finance Minister Yoo Il-ho said in a press conference held after the ministers' meeting.

Under the guidance of their creditor banks, shipping and shipbuilding firms have cut jobs and sold non-core assets in recent years, though the companies have yet to satisfy stricter restructuring demands from their creditors.

On Wednesday, creditor banks finally approved the self-rescue plans worth a combined 10.35 trillion won presented by the country's three biggest shipbuilders -- Hyundai Heavy Industries Co., Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co., FSC Chairman Yim said.

The government estimated that 5 trillion to 8 trillion won needs to be injected into KDB and Eximbank to allow them to increase lending to shipping and shipbuilding firms.

"We have three basic principles when raising a public fund: quick formation of a fund, its preemptive execution ahead of a crisis and an ample amount of funds. So we have set the fund at 12 trillion won," Yim said. "If shipyards continue to struggle with falling orders and losses in coming years, they will put their contingency plans into action to raise additional funds."

The recapitalization fund will buy the contingent convertible, or CoCo, bonds of KDB and Eximbank during the restructuring process. It will be operated by 2017, he said. CoCos automatically convert into equity when things go wrong so that the issuer has little obligation to the investor.

The two state banks have a mandate to lend to business sectors important to the country's economic development. They also carry around 60 percent of the banking sector's credit exposure to the shipbuilding sector alone.

Under its 5.3 trillion won self-rescue plan, Daewoo Shipbuilding plans to sell two of its seven floating docks, which could translate into a 30-percent cut in its overall production facilities.

Hyundai Heavy said it will raise 3.5 trillion won by selling three docks, cutting further jobs and selling noncore assets. Samsung Heavy plans to raise 1.5 trillion won by reducing its workforce and selling noncore assets.

Hyundai Heavy Industries said the company and its two smaller affiliates are expected to bag an annual average of US$15.6 billion in new orders until 2018, about 85 percent of the past six-year average of $18.3 billion, while Daewoo Shipbuilding expects to win an annual average of $8.1 billion in new orders until 2018, compared to a volume of $12.3 billion over the past six years. Samsung Heavy Industries said it is expecting its annual average of orders to fall to $5.5 billion from 2016-18.

On the shipping front, Hanjin Shipping Co., the country's top container carrier, is still in talks with 22 shipowners to lower charter rates, a core condition to get a rollover for its loans from its creditors. Hyundai Merchant Marine Co. is also in negotiations to cut charter fees and has to join an alliance involving major shipping firms to stay afloat.

Meanwhile, the Ministry of Employment and Labor rolled out measures to support employment stability amid companies' plans to slash workforces as part of their rehabilitation schemes.

The labor ministry said it will extend financial support to those shipyards that do not lay off workers and provide diverse programs, including vocational training, to employees who lost their jobs.

"As a full-scale restructuring will take place throughout the shipbuilding industry by next year, we will inject some 470 billion won to push forward with diverse measures to secure employment stability," Labor Minister Lee Ki-kweon said.

kyongae.choi@yna.co.kr, scaaet@yna.co.kr
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