Issuance of refund guarantees to major shipbuilders is expected to be resumed within this year. Refund guarantees allow a financial company to make an advance payment to a shipowner on behalf of a shipbuilder in a case where the shipbuilder fails to build its ship as scheduled or go bankrupt during the shipbuilding process. A shipbuilder can sign a contract with a shipowner only after a refund guarantee is issued.
The Korea Trade Insurance Corporation (KTIC or K-SURE) President Moon Jae-do said on April 30 that hurdles for issuing additional refund guarantees are disappearing as the KTIC’s business conditions are improving along with shipbuilding conditions. He also said that the KTIC would issue refund guarantees to Samsung Heavy Industries and Hyundai Heavy Industries within this year after discussions with the government.
During the shipbuilding boom back in the late 2000s, the corporation failed to manage risks by setting an excessive maximum refund guarantee limit with regard to small shipbuilders and the failure of risk management resulted in losses amounting to hundreds of billions of won. As a result, the corporation’s net asset dropped and the South Korean government had to make up for the losses on repeated occasions. The Board of Audit and Inspection of Korea imposed punishments, including strictly limited refund guarantee issuance.
This is why no refund guarantee has been available for Samsung Heavy Industries and Hyundai Heavy Industries. The former has been in the red for three consecutive years and the latter has already exceeded its maximum support limit. The KTIC issued refund guarantees worth a total of 1.060 trillion won (US$954 million) from 2015 to 2017 and 70.5% of the total went to shipbuilders in restructuring processes.
The president of the KTIC mentioned that refund guarantee issuance for shipbuilders needs to be increased from the current level and discussions are underway with the government to that end, adding that the corporation’s risk management rules would be revised within the first half of this year in relation to refund guarantee issuance.
The current situation has to do with the corporation’s improving business conditions as well. The KTIC’s current net loss amounted to 41.9 billion won (US$37.7 million) last year, but it is expected to turn a profit this year. In addition, the corporation’s trade insurance fund, that is, its net asset increased to 1.229 trillion won (US$1.1 billion) last year after its current net loss soared to 195.7 billion won (US$176.1 million) in 2015 and 557.8 billion won (US$502.0 million) in 2016.
Still, the corporation is going to provide no refund guarantee for Daewoo Shipbuilding & Marine Engineering, which is in the process of restructuring led by the Korea Development Bank. “With the KTIC currently having no debt in Daewoo, the corporation has to increase its allowances with the fund and the fund will decrease to the same extent as refund guarantee issuance if the corporation issues a new refund guarantee to Daewoo,” the president explained, adding, “When it comes to small shipbuilders in restructuring processes, the corporation will provide refund guarantee in accordance with their restructuring programs.”
The original Posted By Jung Suk-yee/Business Korea