Korea: A green light for the DSME debt-to-equity swap - Nomura

Young Sun Kwon, Research Analyst at Nomura, notes that after several rounds of negotiation, the National Pension Service (NPS) – which holds KRW388.7bn of Daewoo Shipbuilding & Marine Engineering (DSME) corporate bonds, or 29% of total KRW1350bn outstanding – last night agreed to the debt-to-equity swap deal with the Korea Development Bank (KDB, a 100% government-owned policy bank), which owns 79% of DSME.

Key Quotes

“We believe other bondholders will follow.”

“As a result, DSME will likely receive KRW2.9trn (USD2.6bn) via new loans from the KDB and the Korea Export & Import Bank (KEXIM, another 100% government-owned policy bank that has KRW9.3trn exposure to DSME).”

“In return for the debt-to-equity swap and bailout loans, DSME is expected to lay off workers, cut wages and reduce capacity. This is already incorporated into our below-consensus 2.0% GDP growth forecast for 2017.”

“We believe the success of the DSME restructuring depends largely on international oil prices and trade volumes. We are cautiously optimistic, as our equity research team expects Korean shipbuilding new orders to recover to USD17.3bn in 2017 from USD5.8bn in 2016, assuming oil prices stabilise at USD55-60bbl.”