SEOUL: South Korean state banks are preparing a fresh $2.6 billion (Dh9.5 billion) bailout for the floundering Daewoo Shipbuilding & Marine Engineering Co. Ltd, which has built up huge losses from offshore projects and risks missing debt repayments.

Daewoo, Hyundai Heavy Industries and Samsung Heavy Industries are South Korea’s top shipbuilders — a massive economic force and a source of national pride. But they slipped into the red in 2015 amid a commodities downturn and bleak trade volumes, prompting cost cuts and asset sales.

Of the three, Daewoo’s situation is the most difficult.

Without the infusion of funds, Daewoo is not expected to be able to redeem 940 billion won ($840.49 million) in corporate bonds maturing this year — starting with 440 billion won due in April, the country’s financial regulator, the Financial Services Commission (FSC), said on Thursday.

Bondholders and other creditors, however, will have to agree to painful debt-for-equity swaps for the 2.9 trillion won bailout to go through. In case of disagreement, Daewoo could enter a form of court receivership under an alternate plan.

“A liquidity crunch is expected in April, and without additional measures Daewoo Shipbuilding will not be able to meet its obligations and bankruptcy cannot be avoided,” the FSC said.

Already bailed out in the aftermath of the Asian financial crisis of the late 1990s and supported again in 2015, Daewoo’s financials have deteriorated rapidly since then due to delays and trouble building complex offshore facilities. It reported a record net loss of 3.3 trillion won in 2015.

Additional delays in the payment for a drillship ordered by Angola’s Sonangol EP, and fewer-than-expected orders in 2016, have reduced Daewoo’s liquidity to critical levels, the FSC said. Sonangol could not be immediately reached for a comment.

In the event of a bankruptcy, about 50,000 people would be expected to lose their jobs and about 1,300 sub-contractors could go under.

Daewoo’s creditor banks would be liable for massive refund guarantees of prepaid construction fees and would have to set aside bad-loan provisions of up to 14 trillion won, the FSC said. The South Korean economy could take a 48.4 trillion won hit if Daewoo goes bankrupt this year, it added.

South Korea’s central bank said the bailout plan was “inevitable” when considering the economic consequences of letting the company go under.

“We will be looking at this from here on out, but whether the creditors will agree to change the debt and what Daewoo does to save itself will be very important,” Governor Lee Ju-yeol told journalists.

Korean haircuts

The FSC’s plan to keep Daewoo afloat requires corporate bondholders, which hold about 1.5 trillion won of Daewoo debt, to agree to a 50 per cent debt-to-equity swap and a three-year repayment grace period on the remaining.

Daewoo’s two largest state creditors, Korea Development Bank (KDB) and the Export-Import Bank of Korea, will accept a 100 per cent debt-to-equity swap of 1.6 trillion won in unsecured loans. This is separate from the 2.9 trillion won the two will inject into Daewoo if all stakeholders agree to the plan.

A Daewoo creditors’ meeting will be called around April 14, KDB said.

But non-state-owned creditor banks, which hold about 700 billion in unsecured loans, must agree to an 80 per cent debt-to-equity swap and a 5-year grace period on the remaining.

Trading in Daewoo shares is currently halted.