The South Korean government decided Thursday to inject 2.9 trillion won (2.6 billion U.S. dollars) in public funds into Daewoo Shipbuilding and Marine Engineering, one of three major South Korean shipbuilders.
The public funds would be provided only when creditor banks agree to swap 2.9 trillion won of debts for equities, according to the Financial Services Commission (FSC). State-run lenders, including the Korea Development Bank and the Export Import Bank of Korea, will be required to exchange 1.6 trillion won in debts for equities, while 80 percent of 700 billion won in debts owed to banks will be subject to the debt-for-equity swap.
Investors into corporate bonds and commercial paper issued by Daewoo Shipbuilding will be asked to exchange 50 percent of 1.5 trillion won in debts for equities.
If the creditors fail to reach the agreement, Daewoo Shipbuilding will immediately enter a so-called pre-packaged plan in which the creditors are forced into the debt-for-equity swap under the three-month court receivership.
Creditor banks and the financial regulator agreed in October 2015 to inject 4.2 trillion won in financial assistance into the cash-strapped shipbuilder, declaring no more assistance in Daewoo Shipbuilding.
The declaration was reversed due to an immediate liquidity crisis. Daewoo Shipbuilding will face a debt maturity worth 440 billion won on April 21, followed by a total of about 1.5 trillion won of debts that will mature until next year.
Daewoo Shipbuilding's debt-to-equity ratio fell below 1,000 percent as of end-2016 thanks to financial assistance, but it surged above 2,700 percent about four months later as the absence of new vessel orders were prolonged on falling global trade.
The shipbuilding company will be forced to cut 1,000 jobs among the 10,000-strong workforce and lower wages by 25 percent in return for the public funds and the debt-for-equity swap deal.
The company had already cut jobs and reduced facilities in exchange for the October 2015 financial assistance.