South Korean government is increasing liquidity for the shipbuilding industry by promoting cooperation between state-owned financial institutions and the private banks. Especially for mid-sized shipbuilders, this is the first time in 11 years that South Korean commercial banks (including regional banks) have provided financial support and increased liquidity to mid-sized shipbuilders.
On June 17, Ministry of Trade, Industry and Energy of South Korea (MOTIE) and Korea’s Financial Services Commission (FSC) jointly organized the “Korea Ship Export Financial Support Agreement” and held a meeting with shipbuilders. Twelve Korean financial institutions and related shipbuilding companies formally reached an agreement to issue advance payment guarantees totaling 15 trillion won ( about US$10.857 billion) to support the development of Korea’s shipbuilding industry, to ensure the market competitiveness of Korea’s shipbuilding companies in the global shipbuilding industry and to further expand Korea’s ship export trade. In particular, the meeting decided to jointly participate in the issuance of advance payment guarantees to medium-sized Korean shipbuilders.
The 12 financial institutions include 5 commercial banks, 3 local banks and 4 policy financial institutions. Representatives of HD Hyundai Heavy Industries, K Shipbuilding and other related shipbuilding companies attended the signing ceremony.
During the signing of the multi-party agreement, Korean government officials pointed out that the shipbuilding industry has made a great contribution to Korea’s economic development and has shown a trend of large-scale shipbuilding enterprises winning high-value-added orders, ship exports are on the rise, but also acknowledged that Korea’s shipbuilding industry is facing increasingly fierce competition. From January to May 2024, Korea’s ship exports totaled US$10.4 billion, up 57% year-on-year.
With such a boom in orders, shipbuilders need financial institutions to increase advance payment guarantees in order to continue to receive many orders in a stable manner. In addition, while large shipbuilders are gradually returning to profitability, Korea’s medium-sized shipbuilders are still facing great pressure. Banks have stopped issuing advance payment guarantees to shipbuilders after their bankruptcies caused losses to banks over the past decade. In response, MOTIE and FSC, through cross-sectoral cooperation, aim to increase the issuance of advance payment guarantees to the shipbuilding industry by commercial banks, local banks and policy financial institutions.
Under the program, nine banks (five commercial banks, three local banks and one corporate bank), the Korea Trade Insurance Corporation (KTIC) and medium-sized shipbuilders such as DH Shipbuilding (formerly Daehan Shipbuilding) and K Shipbuilding (formerly STX Offshore & Shipbuilding) have reached an agreement, which decided to to provide these medium-sized shipbuilders with an increased advance payment guarantee amount of about 1 trillion won (about $720 million). These nine banks will first provide advance payment guarantee support for nine vessels totaling about US$260 million according to the advance payment guarantee issuance period of the relevant shipbuilders.
In addition, Korea Development Bank (KDB) plans to issue an advance payment guarantee of US$260 million to mid-sized Korean shipbuilders, which will support the construction of six new vessels worth US$570 million, and will issue an additional US$160 million in advance payment guarantees based on future orders, totaling US$420 million.On June 17, Shinhan Bank has issued its first advance payment guarantee to DH Shipbuilding.
As early as March this year, it was announced that MOTIE would work with several banks to increase the amount of advance payment guarantee for medium-sized shipbuilders. Advance payment guarantee is crucial for shipbuilders, promising to return the shipowner’s down payment to the authorized financial institutions in case of shipbuilders’ problems. Without the advance payment guarantee, shipowners will not be able to sign contracts.
Typically, large shipbuilders are able to obtain advance payment guarantees from commercial banks, while medium-sized shipbuilders usually rely on state-owned or local banks due to their lower credit ratings.However, state-owned and local banks usually set a ceiling on the amount of advance payment guarantee they can issue, and with shipbuilding prices rising by 30% in the past two years, the advance payment guarantee quota will soon be exhausted.
Medium-sized shipbuilders will not be able to sign new ship orders as the issuance of advance payment guarantees is blocked. In some cases, some of the new shipbuilding contracts will be canceled due to the prepayment bond limit issue. According to the Export-Import Bank of Korea’s Overseas Economic Research Institute, eight orders for large and medium-sized containerships were canceled in 2022 due to the non-issuance of advance payment guarantees, accounting for approximately 44% of the total number of orders for medium-sized shipbuilders.
For large shipbuilders who have accumulated at least four years of construction volume, eight banks, including five commercial banks and the Export-Import Bank of Korea, issue advance payment guarantees for them. However, due to the recent increase in orders for high-value-added ships, the advance payment guarantee lines of large Korean shipbuilders have almost been exhausted. As a result, the eight banks issued new advance payment guarantee lines worth a total of US$10.1 billion (about 14 trillion won) to HD Hyundai Heavy Industries, HD Hyundai Samho, HD Hyundai Mipo, and Samsung Heavy Industries to enable them to continue to take high-value-added orders.