S. Korean shipyards, other firms queue up to tap bond market

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Friday, 20 March 2009

South Korean shipyards and other major firms with high credit ratings are rushing to sell debt as a deeper-than-expected economic slump dries up their cash holdings, market watchers said Wednesday. Hyundai Heavy Industries Co. and two other South Korean shipyards are expected to borrow about 3 trillion won (US$2.13 billion) by tapping the bond market for the first time in seven years. POSCO, Hyundai Motor Co. and other high-rated are mulling debt sales as well.
"Companies' cash holdings will continue to drop this year because of the severe economic slump, and their cash flows are unlikely to improve any time soon," said Lee Jong-woo, an analyst at HMC Securities. "They are preparing for that."
Shipyards in South Korea, the world's largest shipbuilding nation, received record orders in the past few years on rising shipbuilding demand.
But shipbuilding orders have all but vanished since September as declining global trade slashed cargo rates and demand for new vessels.
In the first two months of the year, only Samsung Heavy Industries Co., the world's second-largest shipbuilder, has won a single shipbuilding order valued at US$680 million. To compound their woes, shipping lines worldwide reportedly are demanding that orders be canceled and delivery of new ships be delayed.
"Because there are no new orders, shipbuilders' cash holdings are shrinking," said an official at Samsung Heavy Industries Co. "Our balance sheet is still solid, but we are moving to secure enough cash on the back of strong credit ratings."
Hyundai Heavy, the world's leading shipyard, may sell debt worth up to one trillion won soon, according to industry sources. Its cash and cash equivalent dropped to 2.26 trillion won at the end of December from 4.14 trillion won three months earlier.
Samsung Heavy also saw its cash and cash equivalents drop to a 2-trillion won level recently from 3.37 trillion won at the end of September.
The shipyard, which sold 700 billion won worth of commercial paper last month, is seeking to sell another 700 billion won worth of bonds this month.
Daewoo Shipbuilding & Marine Engineering Co., the world's third-largest, is also considering tapping the local bond market this month to raise up to 500 billion won.
"Their cash levels have dropped, but they have to spend on facility upgrades and building ships they have already won orders for," said Cho In-kap, an analyst at Goodmorning Shinhan Securities.
Analysts said the country's major shipyards have order backlogs that stretch up to three years ahead, but they are tempted to amass cash in preparation for further potential difficulties down the road.
Hyundai Heavy plans to spend 1.43 trillion won this year to build a new yard and purchase shipbuilding equipment. Daewoo Shipbuilding also plans to spend about 500 billion won to add cranes and build a floating dock.
Other major South Korean companies are also considering debt sales in order to tackle weakening cash flows.
POSCO, the world's fourth-largest, is eying the sale of debt worth $700 million to overseas investors. The steelmaker said earlier it would increase its spending up to 53 percent this year to 7.5 trillion won.
Hyundai Motor Co., the country's leading automaker, had sold 2.19 trillion won worth of debt so far this year. Samsung Electronics Co., the country's leading electronics maker, sold 800 billion worth of bonds as well.
Kia Motors Corp., the country's second-largest automaker, also sold 400 billion won worth of bonds this week.
According to the Bank of Korea, net debt offerings by local firms hit a record high of 6.1 trillion won in February, marking the largest monthly gain since January 2000 when the central bank began to compile related data.
Local companies have had difficulty selling bonds or other short-term corporate debt instruments in the aftermath of the collapse of U.S. investment bank Lehman Brothers Holdings Inc.
Despite a series of rate cuts by the central bank, yields for corporate bonds with higher credit risks remained at a high level. But a continued liquidity supply helped drive down the returns of company bonds and commercial papers, easing worries over a credit squeeze.
Source: Asia Pulse