DSME's Creditors Struggle to Reach Bailout Agreement

Troubled South Korean shipbuilder Daewoo Shipbuilding and Marine Engineering  (DSME) edged closer to a pre-packaged bankruptcy plan on Tuesday as a disagreement between Korea's National Pension Service and the Korea Development Bank threatened to scuttle a new bailout package. 

State-controlled KDB and Korea Export-Import Bank have already provided DSME with two multibillion-dollar assistance packages, and KDB has become the yard's majority shareholder through a series of recapitalizations. KDB and KEXIM have offered an additional $2.6 billion in new loans if bondholders will contribute by extending maturity dates on their loans and accepting a debt-for-equity swap. 

However, on Tuesday the National Pension Service – one of DSME's largest creditors, with $340 million in corporate bonds – announced that it needs more time to review the agreement. "Though it may take time, DSME and the main shareholders of KDB and the Export-Import Bank of Korea should make a decision which can be accepted by involved parties," NPS said in a statement. The pension fund has suggested that KDB should take up more of the burden of keeping DSME solvent, but the bank says that it cannot accept a greater share in this round.

Next week, DSME's bondholders are due to meet for a two-day summit, and if they cannot agree to the government's proposed package, DSME will likely be placed into court receivership under a pre-packaged bankruptcy. The filing could be as soon as April 21, the date that the yard is expected to default on a round of maturing bonds. KDB officials began preparing a contingency plan for the bankruptcy under a "two-track approach" last month. Estimates of the economic damage from a DSME receivership vary between $15 and $50 billion, depending upon how it would affect the shipbuilder’s giant Okpo yard.

DSME's backers reportedly have an additional challenge ahead: government officials have based their arguments for keeping DSME out of bankruptcy on the premise that the shipbuilding industry will turn around within the next several years, putting the yard's capacity back to productive use. However, this week, Clarksons Research adjusted its outlook for 2018 ordering activity downwards by about 13 percent, with notable weakness in the gas carrier market, an area of competitive strength for DSME.