150 Small Shipbuilders Face Bankruptcy

Written by Meenaa on Wednesday, November 19th, 2008

Following troubled construction firms and savings banks, the government and creditor banks are now moving to put small-and medium-sized shipbuilders under the microscope for drastic restructuring.

The preemptive restructuring is to minimize chain reaction bankruptcies of once-booming small-and medium-sized shipbuilders, suffering from cash flow problems in the wake of the global financial market turmoil.

Analysts say that large shipbuilding firms will ride out the current difficulties, as they have ample cash holdings and enough orders for the next several years.

But smaller ones are in serious trouble, as it has become almost impossible for them to borrow money from financial companies amid deteriorating global business conditions.

About half of some 300 small shipbuilders here are expected to go belly up through the first half of next year, unless bailout steps are taken, they said.

Against such a backdrop, a group of creditors are now looking to introduce an industry-wide restructuring program for struggling small shipbuilders, similar to the one offered to troubled builders. Under the scheme, shipbuilders will enter into an agreement with creditor banks if they want to have their debts rescheduled or receive new loans. But in return, companies will be required to sell assets and take a range of self-rescue measures in a bid to stay afloat.

Banks will then screen each firm and provide necessary financing to viable firms but stop extending credit to nonviable ones.

The Korea Federation of Banks (KFB) invited shipbuilders to a meeting, Tuesday, to explain the liquidity-provision program, called Fast Track. A KFB executive said small shipbuilders are suffering from the cancellation of orders and a liquidity crunch, saying that like builders, shipbuilding firms should also sign on to the restructuring agreements with creditors for survival.

A Financial Services Commission (FSC) official also supported the idea, saying banks should provide necessary financing to viable firms and liquidate nonviable ones to minimize the fallout on the economy.

It has become almost impossible for small shipbuilders to obtain refund guarantees (RG), which they need to receive orders from shipping companies, from banks as domestic lenders have strengthened their risk management and became reluctant to extend credit to small firms.

Banks currently only provide RG to cash rich large shipbuilders.

However, creditor banks could end up with massive non-performing loans unless action is taken to help struggling small shipbuilders and let them go bankrupt.

Analysts say it is inevitable for the shipbuilding industry to undergo drastic restructuring, adding many small shipbuilders over the past few years have sprouted up along the nation’s southern and eastern coastlines on strong demand for bulk ships and other types of marine carriers.

“With the booming global shipbuilding industry, many small players jumped into the sector to claim a piece of the pie. The sector has become overcrowded. Now, a restructuring mechanism should be in place to kick out nonviable ones,” Goodmorning Shinhan Securities analyst Joey Lee said.

Lee said increasing steel and other raw material prices have begun hitting shipbuilders hard, particularly small ones, chipping away at their profitability.

“Shipping companies have reduced new orders and canceled existing ones, as their business slows on the worldwide economic downturn. The domestic shipbuilding industry will likely remain stagnant until the second half of next year,” he noted.

Korean shipbuilders delivered nearly 45 percent of new ships across the globe last year, earning about 45 trillion won ($31 billion). But it is hard to estimate how much small-and medium-sized shipbuilders contributed to the sector because of no available data.

“We have about 120 members, who are all small shipbuilders across the country. They generated a combined 700 billion won last year. But there are many more small and medium-sized firms that are not members. It is hard to calculate the number of small shipbuilders at the moment,” said a spokesman for the Korea Shipbuilding Industry Cooperative.

leehs@koreatimes.co.kr

The Korea Times
2008-11-18