Banks reluctant to issue refund guarantees for new shipbuilding orders

South Korean banks, increasingly concerned about their credit exposure to the ailing shipbuilders in the country, are reluctant to offer refund guarantees for new orders, industry sources said Wednesday.

According to the sources, KEB-Hana Bank, the main creditor of Hyundai Heavy Industries Co., asked that rival banks offer refund guarantees on time, and not retrieve loans extended to Hyundai Heavy.

A refund guarantee issued by a shipyard's bank is important for a ship owner when ordering a new vessel from a shipyard. If the shipyard defaults, the bank's refund guarantee provides the shipowner with the money already paid.

Without a refund guarantee, winning a new shipbuilding deal is almost impossible for a shipyard.

Hyundai Heavy bagged an order in May to build two LNG carriers, but banks delayed issuing the refund guarantee. Also, Sungdong Shipbuilding & Marine Engineering Co., a mid-sized shipyard, won a deal earlier this year to construct four oil tankers. But it has failed to win a refund guarantee from banks so far.

"It is fully understood that local banks want to reduce their credit exposure (to shipyards), but no firm can survive under such tightened criteria," said an official at the Financial Services Commission.

New orders clinched by South Korean shipyards fell to record lows in the first half of the year, largely due to a protracted industry slump, mirroring their worst-ever business performance.

According to the data compiled by global research firm Clarkson Research Services, a total of 6.32 million compensated gross ton worth of orders were placed around the globe in the January-June period, sharply down from 18.04 million CGTs the previous year.

In case of South Korean shipyards, their new orders tumbled to 830,000 CGTs in the first half, compared to 6.85 million CGTs a year earlier, the data showed.

The first-half figure marks the lowest number of deals that South Korean shipbuilders have ever clinched since the global research agency began to compile the related data in 1996.

South Korean shipbuilders have been under severe financial strain since the 2008 global economic crisis which sent new orders tumbling amid a glut of vessels and tougher competition from Chinese rivals.

The country's top three shipyards -- Hyundai Heavy Industries, Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. -- suffered a combined operating loss of 8.5 trillion won ($7.4 billion) last year. The loss was due largely to increased costs stemming from a delay in the construction of offshore facilities and an industry-wide slump, with Daewoo Shipbuilding alone posting a 5.5 trillion won loss.

The shipbuilders have recently drawn up sweeping self-rescue programs worth 10.35 trillion won in desperate bids to overcome the protracted slump and mounting losses. (Yonhap)