South Korea to create 11-trillion Won fund for banks exposed to shipping and ship building
South Korea and the Bank of Korea will create a 11 trillion Won ($9.50 billion) fund to support two state-run banks most exposed to shipping and shipbuilding firms currently being restructured.
"Our key industries like shipping and shipbuilding are being aggressively caught up by countries like China and management conditions have worsened due to weak global trade," said Yoo Il-ho, finance minister, in a speech announcing the corporate restructuring plans.
South Korea expects a 20 per cent drop in major shipbuilders' capacity and 30 per cent drop in their workforce by 2018 versus 2015 after the restructuring process.
The two state-run banks to be capitalized are Korea Development Bank (KDB) and the Export-Import Bank of Korea (KEXIM).
"The government is planning to create a 11 trillion won fund combining a 10 trillion won loan from the Bank of Korea and one trillion won subordinated loan from the Korea Asset Management Corporation via the Industrial Bank of Korea (IBK), which will be run from July," Yoo said.
The fund will later purchase contingent convertible bonds (CoCos) from the two state-banks.
Contingent convertible bonds are hybrid assets that can be switched by the borrower from bonds into shares if a pre-set trigger is reached.
The rest of the capital for the state-bank fund will be provided by loans from Korea Asset Management Corporation (KAMCO), which will also be in charge of setting up the actual fund.
The fund will be in operation by end-2017, although this date may change during year-end reviews.
Separately, South Korea plans to transfer 1 trillion won worth of assets to the Export-Import Bank by September this year and this will be reflected in the next year's Korean budget.
The central bank will also consider direct capital injection into the Export-Import Bank in future if needed.
South Korean markets were unmoved by the announcement as the funding measures were widely expected.
Yoo added that South Korea's top three shipbuilders have also come up with a plan to weather the difficult market conditions, which they see lasting for two to three years ahead.
The world's three largest shipbuilders, Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering, have submitted additional plans to sell up to 4.8 trillion won in combined assets and find 3.6 trillion won through cost cuts, South Korea said in a statement.
Daewoo Shipbuilding plans to sell up to 1.6 trillion won in assets including 14 subsidiaries and raise 1.9 trillion won in cost cuts, S. Korea said, while Samsung Heavy said in a separate statement it plans to sell shares to raise funds, without elaborating.
Hyundai Heavy said in a statement it will sell shares in Hyundai Motor and construction materials maker KCC Corp among other assets and spin-off businesses.
S. Korea will also support its second-largest shipper, Hyundai Merchant Marine, in its attempt to enter into a shipping alliance, while a creditor bank-led restructuring is ongoing at the country's largest shipper Hanjin Shipping Co Ltd.