DSME delays $1.7 bn interest payment to Export-Import Bank

Major South Korean shipbuilder Daewoo Shipbuilding & Marine Engineering Co. (DSME) is facing harsh criticism that it has benefited from delaying interest payments on a huge debt from a state-run bank.

As of the second quarter of 2022, the Export-Import Bank of Korea (KEXIM) owns 2.33 trillion won ($1.7 billion) worth of permanent convertible bonds that DSME has issued, according to Korea’s Financial Supervisory Service (FSS) on Sunday. 

KEXIM bought the bonds on three occasions from late 2016 to early 2018 to revive then debt-laden DSME. The state-owned bank set the maturity of the bonds at 30 years, and the bonds were classified as equity due to their long maturity.  

DSME’s financial health was significantly enhanced as the convertible bonds were recognized as equity, not liabilities. The shipbuilder’s total equity is 1.55 trillion won as of the second quarter of 2022, which means it is actually in the red without the convertible bonds. 

CUMULATIVE INTEREST ON THE DEBT

DSME has not paid any interest to KEXIM so far. The state-run bank allowed the shipbuilder to delay interest payments in the absence of certain events such as KEXIM’s dividend distribution or share retirement.

As a result, as of the second quarter, DSME has yet to pay 119.2 billion won of interest on the debt.   

“This can be seen as an excessive favor. Even financially healthy companies are struggling with borrowing money at high interest,” a shipbuilding industry official said.   

The interest rate is set to 1% until end-2022. Although the rate was initially set to be effective until end-2021, KEXIM has extended the period a year, considering Korean shipbuilder Hyundai Heavy Industries Co.’s previous plan to merge with DSME by this year. 

KEXIM is set to apply interest rate increases to the convertible bonds from 2023. Under the current regulations, DSME will have to add 25 basis points annually to the yields on five-year unsecured corporate bonds.

DSME’s credit rating is BBB-, and Korean companies with the same ratings show more than 10% of their public bond yields. Public corporate bond rates are forecast to increase more if the Bank of Korea decides to raise the interest rate on Aug. 25.   

DSME’s annual interest on the debt is calculated to be more than 230 billion won from 2023. The interest payment is said to be impossible as the shipbuilder has posted quarterly operating losses.

Also, the bonds have a condition to allow conversion to equity at 40,350 won or higher prices per share. DSME stock closed at 20,950 won on Aug. 19, far below the conversion criteria.

Some sources say KEXIM may postpone increasing the debt interest again to facilitate DSME’s future M&As as state-run Korea Development Bank, DSME's major shareholder, is considering splitting up the shipbuilder. The creditors of DSME haven’t decided whether or not to maintain the current debt interest rate, a creditor official said.

Write to Kyung-Min Kang at kkm126@hankyung.com
Jihyun Kim edited this article.