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South Korean Yards Suffer Due to “Heavy Tail” Deals

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May 9, 2016

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South Korean Yards Suffer Due to “Heavy Tail” Deals

DSME-16x9

Debts owed by South Korea’s top shipbuilders have more than doubled since 2010.

The combined borrowings by Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME) jumped to 23.9 trillion won ($20 billion) at the end of 2015 from 10 trillion won at the end of 2010, reports Yonhap news agency.

Heavy tail contracts, where the buyer makes a larger payment late in the building process, may have contributed to the surge in debt. Before the financial crisis, shipbuilders typically received four similar payments over several years. However in recent years, owners are more likely to pay over half at delivery time. This means cancelled orders can result in greater losses for the yards.

“As new orders have nearly dried up this year, it will be hard for shipbuilders to refuse to accept any vessel order even if it is a heavy tail contract,” said an official from a shipbuilder’s creditor bank.

DSME is currently undergoing a creditors-led restructuring, and early this week, Hyundai Heavy Industries is expected to submit its self-help plans which include cutting 3,000 jobs (10 percent of its total workforce) to its main creditor KEB Hana Bank, says Yonhap. Samsung is also likely to present further restructuring measures to its creditor Korea Development Bank.

2015 was the first year that all three yards registered losses. However, DSME returned to the black in the first quarter this year as a result of cost reduction efforts. Net profit was 31.4 billion won ($2.7 million) compared to a loss of 1.12 trillion won in the previous quarter, the company said in a regulatory filing. Hyundai Heavy Industries and Samsung Heavy Industries also returned to the black in the first quarter.

According to Clarkson Research Services, South Korean shipbuilders had an order backlog of 27.59 million compensated gross tons at the end of March, the lowest since March 2004.

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