News Room - Steel Industry

South Korea will make a stronger push in restructuring debt-ridden shipping and shipbuilding companies, but the restructuring drive itself should be spearheaded by firms and their creditors, the country's top financial regulator said Tuesday.

In a press briefing on stricter self-rescue measures proposed for the financially troubled industries, the Financial Services Commission (FSC) urged shipping firms to complete renegotiations with ship owners to lower their charter rates by next month to stay afloat, South Korea's Yonhap news agency reported.

The regulator body also said it will ask troubled local shipyards to implement far stronger self-rehabilitation measures.

"Both Hanjin Shipping Co. and Hyundai Merchant Marine Co. are currently under contracts to pay charter fees four to five times higher than the current market rate by 2026. Their combined payments exceed 5 trillion won (US$4.3 billion) by that year," FSC Chairman Yim Jong-yong told reporters.

In the shipping industry, freight charges have dropped more than 25 percent from the end of last year, further hurting the bottom line of shipping lines, Yim said.

"If they (shipping companies) fail to cut their chartering costs and postpone payment of maturing debts, it will be inevitable for their creditors to put them under court receivership," he said, citing worsening business environment and little signs of recovery for the shipping business.

As of the end of 2015, Hanjin Shipping and Hyundai Merchant respectively had 5.6 trillion won in overall debts.

Reflecting declining shipping rates and lower demand, Hanjin Shipping on Monday applied for a creditors-led restructuring. Cho Yang-ho, chairman of Korean Air Lines Co. which owns a controlling 33.23-percent stake in the country's biggest container carrier by sales, on Tuesday offered to give up his management control over the company.

But the main creditor Korea Development Bank (KDB) refused to accept the company's initial self-rescue plan, demanding more drastic measures in the plan. A creditors-led restructuring requires approval from the FSC.

The authorities' firm stance toward restructuring helped Hanjin Shipping trade 4.11 percent higher at 1,900 won on Tuesday, outperforming the broader KOSPI index's 0.02 per cent gain. Hyundai Merchant was flat at 2,000 won.

Hanjin Shipping has so far raised 3.3 trillion won by selling assets and paid back 2.5 trillion won in debts. Hyundai Merchant, the second-biggest container shipper here, has raised 4.3 trillion won through asset sales, and now owes 1.1 trillion won less in debt.

In the shipbuilding sector, the FSC demanded Daewoo Shipbuilding & Marine Engineering Co. cut jobs and wages further and sell more non-core assets. It also asked creditors of Hyundai Heavy Industries Co. and Samsung Heavy Industries Co. to closely monitor their restructuring efforts.

"The overall value of new vessel orders clenched by local shipbuilders was $10 billion last year. But this year, new orders have nearly dried up, overwhelming shipbuilders' ongoing self-rescue efforts," Yim said.

The intensifying restructuring drive comes as the shippers and shipbuilders continued to perform poorly due to sharp declines in freight charges and ship orders amid oversupply and low demand.

It is part of the government's "three-track" approach to restructuring five major industries that also include steel, construction and petrochemicals.

The first track will cover industries that are highly vulnerable to economic conditions such as shipping and shipbuilding firms.

The second track is regularly restructuring companies according to their credit risk evaluation to normalize their businesses, or seek a swift liquidation in case of insolvency. In the third course aimed at restructuring companies or industries suffering from oversupply, they voluntarily draw up their own self-help plans including M&As and the government supports them.

"As the shipping and shipbuilding industries are the worst performers among the five industries, we will put a bigger focus on restructuring the two," Yim said.

To help finance restructuring, the FSC will form a task force with the finance ministry and the central bank to funnel funds into state-run banks such as the KDB and the Export-Import Bank of Korea, the chairman said.

"We have asked the Ministry of Strategy and Finance and the Bank of Korea to come forward in making financial support to the industrywide restructuring," he said without elaborating on the size of necessary capital.

If the planned restructuring results in massive layoffs in major industries, the government may have to consider a supplementary budget, a government official said.

Shipbuilders have suffered snowballing losses in recent years since the 2008 financial crisis. Hyundai Heavy posted a net loss of 1.36 trillion won in 2015, with Samsung Heavy and Daewoo Shipbuilding each reporting 1.21 trillion won and 3.307 trillion won.

The three shipbuilders are the world's three biggest shipbuilders by order backlog.

Their shares rallied, with Hyundai rising 3.21 percent at 112,500 won, Samsung up 0.93 per cent at 10,800 and Daewoo up 1.38 percent at 5,150 won.

In its restructuring plan announced last year, Daewoo Shipbuilding has sold 360 billion won worth of assets and cut 709 jobs. In similar efforts, Hyundai has sold assets valued at 1.6 trillion won while cutting 1,533 jobs, with Samsung getting rid of 100 billion won in assets and 1,500 workers.

Meanwhile, the FSC chairman said it was "too early to discuss" the merger among the shippers and shipbuilders.