Financial regulators have demanded to the commercial banks to undertake debt-for-equity swaps up to 80 percent of debts owed by Daewoo Shipbuilding & Marine Engineering. This is an unusual demand in order to lower the debt ratio of the shipbuilder. The banks responded that they would agree to the swaps on condition that they won't provide new loans.
According to banking industry sources on March 17, the Financial Supervisory Service convened vice presidents of the nation's top-five commercial banks including KEB Hana, Kookmin, Woori, Nonghyup, and Shinhan to discuss the issue of the debt-for-equity swaps for the shipyard while asking for new fund injections and expanded refund guarantees.
The size of the debt-for-equity swaps is about 500 billion won given the remaining loan balance of the three banks (except that of Nonghyup and Shinhan) is 640 billion won. A banking industry official said, "The government's demand was based on the judgment that the shipbuilder needs a sufficient amount of support to survive." When there was a debt adjustment for Hyundai Merchant Marine last year, the debt-for-equity swap ratio was 60 percent.
Earlier, the government came up with a support plan worth 6 trillion won including the debt-for-equity swap of 3 trillion won and the new fund injection of 3 trillion won from Korea Development Bank and Korea EximBank. But it said the government's support will be given provided that other commercial banks and bond holders share some of the debt burdens.
The financial regulator's strong measure came after it figured that Daewoo Shipbuilding won't be able to survive with the support of the two state-run banks. Even though the two banks had injected a total of 4.2 trillion won since October 2015, the company's finances are still in shambles as new orders stopped coming in.