South Korea to create $9.5bn fund to save state banks exposed to shipbuilding debts

The government and central bank will create a KRW11trn ($9.5bn) fund to support Korea Development Bank (KDB) and Export-Import Bank of Korea (Kexim). KDB is the main creditor of struggling Samsung Heavy Industries (SHI) and Hanjin Heavy Industries & Construction (HHIC) while Kexim is the main creditor of Sungdong Shipbuilding & Marine Engineering, which is currently undergoing restructuring.

Bank of Korea will lend a maximum KRW10trn for the state bank fund via a conduit bank, Industrial Bank of Korea (IBK), and that fund will later purchase contingent convertible bonds from the two state banks, according to a Reuters report.

The remaining rescue fund will be provided by loans from Korea Asset Management Corporation (Kamco), which will also be in charge of setting up the actual fund.

The KRW11trn fund is expected to be available by end-2017.

“Our key industries like shipping and shipbuilding are being aggressively caught up by countries like China and management conditions have worsened due to weak global trade,” Yoo Il-ho, Korea’s finance minister, was quoted saying.

The exposure for Korean banks to the shipbuilding sector is an astonishing KRW70trn or more. Between KDB and Kexim, the two have around 60% of their banking sector’s credit exposure to shipbuilding.

With the major shipbuildings implementing austerity self-rescue plans and debt restructuring, South Korea expects a 20% drop in major shipbuilding capacity and a 30% fall in workforce by 2018 from 2015.

Korea’s largest shipbuilder, Hyundai Heavy Industries (HH), recently announced a $3bn management improvement plan to be implemented by 2018, on top of its ongoing self-rescue measures.

Compatriot Daewoo Shipbuilding & Marine Engineering (DSME) reportedly saw its offices raided on Wednesday by prosecutors investigating alleged company mismanagement by two former chief executive officers.