Daewoo Shipbuilding & Marine Engineering Co., one of the "Big Three" shipbuilders of South Korea, appears to see a loss of 2 trillion won ($1.7 billion) in the second quarter of this year, according to its largest shareholder, the Korea Development Bank and the financial experts.
This appears to come from the loss caused from the contract of offshore plant it won in 2011. The company wasted a huge amount of money for the project after the change in design delayed the process. In addition, the delay of the drying period of semi-submersible, oil prospecting ships came with a hefty price tag.
With the loss issue rising, the former management is accused of not properly reflecting the poor performance in the financial statements in a bid to serve another term. For the concealing of the poor performance, the government showed its willingness to enforce strong sanctions against DSME as well as its largest shareholder Korea Development Bank.
"(The government) is considering blaming the former chiefs of DSME and employees in charge of bidding at the time, who concealed the poor performance," said a government official declining to be identified.
"The Korea Development Bank is also responsible for the poor management," he added.
DSME said on Thursday that "Since the chief Chung has newly taken office this year, we have reviewed the company's performance last year with doubt and found out the loss. We will all reflect this in this year's financial statement."
Industry watchers said the company may have large-scale restructuring as its creditors are reviewing all the possibilities including autonomy agreement and corporate workout.
Due to the company’s massive loss, the credit offering amount of local banks related to the firm is estimated to be around 21 trillion won, according to NH Investment & Securities. Among them, the amount of specialized bank is predicted to be around 18 trillion won and commercial banks 3 trillion won.
For now, however, the possibility of autonomy agreement and restructuring is higher than workout.
"If a shipbuilder has a corporate workout program, there is a possibility that existing shipping bidding contracts would be scrapped. So the possibility of workout seems low for now," said one bank official declining to be identified.
Amid the ongoing struggle, speculation has been rising that POSCO, Korea's largest steel-making company, may acquire the company.
However, Lee Young-hoo, the vice president of the steel maker, denied the rumor on Wednesday at the company's briefing, saying, "There is rumor that POSCO may acquire DSME but we will never buy that."
In recent years, the local shipping building industry has competitively made forays into offshore plant business to make a breakthrough as the industry has seen weak sales. However, with the lack of experiences, they excessively won contracts and evaluated production cost without any plans.
Amid the loss issue of DSME is arising in South Korea, Samsung Heavy Industries is also expected to see an operating loss of 1 trillion won in the second half of this year in the offshore plant, according to market watchers on Friday.
Samsung Heavy Industries saw massive loss as the construction of floating production storage offloading in Nigeria worth $3 billion was delayed. As one local lawyer raised safety and environmental issue on the construction, Nigerian government ordered the construction stop last May.
Samsung Heavy Industries also reportedly had a loss of $2.7 billion in Australia's central processing facility project it earned in 2012 because of design changes. The two projects account for 23.5 percent of the total sales of this year, according to financial observers.
