[Market Close-up] Doosan Heavy looks to sell affiliates

Debt-saddled Doosan Heavy Industries & Construction was once considered South Korea’s leading power equipment maker for coal fire, nuclear and gas energy.

But over the past few years, it has been losing investors’ interest, as it won fewer bids amid the global attempt to shift reliance on fossil fuel and nuclear energy, leaving its businesses dependent on debt to continue its faltering operations.

In the wake of the coronavirus pandemic, Doosan Heavy is facing a liquidity crisis which led the state-run creditors -- the Export-Import Bank of Korea and the Korea Development Bank -- to extend a 1 trillion won ($817.32 million) credit line as part of a relief package to cushion it.

Eyes are now on the self-rescue plan to be proposed this month by Doosan Heavy in response to the state-led corporate bailout program. The company, with some 850 billion won in market cap, is likely to put stakes in its key affiliates on sale and lay off up to 2,600 employees. It might consider receiving nonmonetary contributions from its parent holding firm Doosan Co., according to market watchers.

The most visible option to mitigate its financial pressure appears to be to divest stakes in its affiliates to potential buyers looking for a new business opportunity.

Doosan Heavy holds a 36.27 percent stake in Doosan Infracore, a construction equipment maker, and wholly owns Doosan Engineering and Construction, an apartment builder. Doosan Bobcat, another construction equipment maker, is an indirect subsidiary.

When asked about the possibilities of forcing the sale of affiliates, KDB Vice President Choi Dae-hyun told press last week, “(Doosan) must be at the crossroads for the ways to reorganize its company structure, because (its affiliates) Doosan Bobcat or Doosan Infracore have been performing well and have shown relatively robust financial health.”

Creditors have also reportedly urged Doosan Heavy to sever its shareholding ties with Doosan Infracore and Doosan Bobcat, in order to prevent a negative spillover effect from Doosan Heavy.

Once up for sale, however, the affiliates’ latent financial risks appear to be discounting their value, posing hurdles to Doosan’s efforts to cash out its investment.

Doosan E&C, known for its apartment brand We’ve, has been in the red for four consecutive years. Its borrowings came to 725.7 billion won as of end-2019, with 585.1 billion won maturing within a year.

Since 2013, Doosan Group has injected over 1.5 trillion won in Doosan E&C to address the liquidity issue, to little avail. After several failed selloff attempts, Doosan Heavy last year announced plans to delist the construction arm by acquiring the remaining shares.

Doosan E&C is reportedly looking for potential buyers again, working with New York-based investment banking adviser BDA Partners in the lead. Doosan Heavy said nothing has been finalized.

On the other hand, it is facing a complaint to reimburse over 700 billion won to its investors in its Chinese unit, on charges of breaching the investors’ rights to exit after a failed initial public offering attempt.

This comes as the minority shareholders of Doosan Infracore China -- Mirae Asset Private Equity, IMM Private Equity and Hana Financial Investment Private Equity -- sued Doosan Infracore in March 2018 at the Seoul Central District Court, in order to force the company to exercise its obligation to purchase their shares. Trials are underway.

In the meantime, Seoul’s high court ruled in 2018 that Doosan Infracore has to pay 10 billion won plus interest to the investor group. The litigation is ongoing.

“Even if there is a change in Doosan Infracore shareholders, Doosan Infracore would still be responsible for the reimbursement when it loses a legal battle,” said a source familiar with the matter.

Refinancing risk

Without the state’s extra round of financing or Doosan Heavy’s likely efforts to cash out its investment in key affiliates, the state-led bailout plan in March appears to be short-lived.

Before end-June, Doosan Heavy is obliged to repay debts worth 1.2 trillion won, which outsizes the credit line unveiled in March. These include an obligation to repay the dollar-denominated $500 million bonds, which was used to publicly raise fund in 2015, by April 27. Doosan is asking its guarantor Eximbank of Korea to convert the bonds into loans. It also faces short-term obligations to repay 550 billion won.

In the meantime, market watchers are keen on whether the investors in its 499.7 billion won bond warrants, including its parent Doosan, would withdraw money earlier than the maturity in May 2022.

The firm’s reliance on debt has risen sharply in the past couple of years, numbers indicate.

As of end-2019, Doosan Heavy’s debt-to-equity ratio came to 230.2 percent, up over 40 percent in two years, according to its consolidated report. The debt-to-EBITDA ratio was 16, up nearly 50 percent over the cited period.

Its auditor for 2019, Samjong KPMG, highlighted a “significant uncertainty that could raise a serious question about (Doosan Heavy’s) ability to go on as a continuing company.” in Doosan Heavy’s latest audit report released in March.

Samjong KPMG cited its loss-making status for the 7th consecutive year and its lack of ability to mobilize cash to cover or refinance debts. The company’s current liabilities came to 7.41 trillion won as of end-2019, outsizing net liquid assets worth 4.42 trillion won.

Don’t blame COVID-19

On the other hand, there is criticism that the bailout to the ailing company is pointless, provided that the company’s bad financial readings have existed long before the pandemic.

Critics also say it was the firm’s failure to shift away from fossil fuel and nuclear power that undermined its financial health, not the coronavirus.

Civic activist groups including Greenpeace Wednesday called for creditors to urge Doosan Heavy to halt fossil fuel business on the premise of the credit line.

“Doosan Heavy’s crisis did not stem from coronavirus,” read the statement Wednesday. “We hope that financially stable companies are not losing opportunities to overcome the coronavirus crisis because of the state financing to Doosan Heavy.”

Market watchers also say the government’s latest decision to bail out the firm in the time of the coronavirus pandemic poses a “strategic challenge,” leaving the policy lenders exposed to the moral hazard.

“The question is why did (KDB and Eximbank of Korea) so abruptly had to use funds to that had been tagged for COVID-19 to address what is actually a very commonplace: financial insolvency for a company that is struggling in its core market,” Melissa Brown, director of the Institute for Energy Economics & Financial Analysis, told The Korea Herald.

“It would be natural to ask what the government’s accountability mechanisms are to ensure that this would be of public interest and how it compares to what would be an arm’s length market bailout,” Brown said.

By Son Ji-hyoung (consnow@heraldcorp.com)