Samsung Heavy preps Korea’s largest rights issue

The chaebol's shipbuilding unit could be on the brink of bankruptcy if it fails to complete the $1.5 billion rights offering scheduled for April, analysts say.

Samsung Heavy Industries is turning to existing shareholders for fresh capital for the second time in three years, as the struggling shipbuilder presses ahead with plans to raise W1.6 trillion ($1.5 billion) from what could be biggest rights issue in Korean history.

The cash call, first announced in December and finalised on Friday, comes soon after the shipbuilding heavyweight announced a full-year operating loss of $492 million in 2017, marking the third consecutive year of losses since 2015 as shipbuilding orders fell amid a sharp plunge in oil prices.

The oil price is crucial to shipbuilders because it drives offshore production and exploration, and in turn increases demand for drilling and offshore support vessels.

Samsung Heavy Industries posted a devastating loss of over $1 billion in the 2015 fiscal year, the biggest in the company’s history. It eventually led to former chief executive Park Dae-young stepping down from his role.

Plunging oil prices were also the main cause behind the bankruptcy of Hanjin Shipping, Korea's largest container line, in late 2016.

In face of the industry downturn, the shipbuilder reacted quickly by raising $985 million from a highly-dilutive issue of 159 million rights shares, raising equity for the first time since it became a listed company in 1994.

This time around, it is pursuing an equally aggressive capital-raising exercise by issuing 240 million rights shares, implying an immediate equity dilution of 38% for shareholders that decide not to subscribe to the new shares.

Tentatively, the shares will be sold at W6,510 per share and the final price will be fixed on April 8. The subscription period will run between April 12 and April 13, while the new rights shares will begin trading on May 4.

In Korean won terms, the rights offering will be the biggest completed deal in the country’s history, topping Samsung Engineering’s W1.2 trillion rights issue in October 2015.

Joint bookrunners of the rights issue are Korea Investment & Securities, Mirae Asset Daewoo Securities and NH Investment & Securities.

Some equity analysts believe Samsung Heavy Industries’ survival will hinge on the success of the rights issue because it is key to settle the company’s short-term borrowings, which amounted to $1.6 billion as of the end of September. The company has only $400 million in cash according to its latest financial statement.

Samsung Heavy Industries is not alone in the pursuit of fresh capital. Hyundai Heavy Industries, the world’s largest shipbuilder by revenue, announced a $1.2 billion rights issue last month. That was four months after Daewoo Shipbuilding & Marine Engineering secured $700 million in cash through a debt-to-equity swap in August last year.

Glimpses of hope

While Korea’s underperforming shipbuilding sector has many investors turning away, the middle- to long-term prospects may not be as bleak as they appear. Some investors are already tipping a gradual rebound in the sector as the oil price recovers from the trough it hit in early 2016.

Since plunging below $30 per barrel in February 2016, the Brent oil price has been rebounding steadily and edged above the $70 mark for the first time earlier this month. 

Operational figures from Samsung Heavy Industries also indicated the business is on track to recovery. They include a significant improvement in new shipbuilding orders to $7.7 billion this year, up from $6.9 billion last year and just $500 million in 2016.

However, some analysts believe the likes of Hyundai and Daewoo will benefit more from the gradual recovery of global trade, while the outlook for Samsung is still uncertain until clear signs of offshore oil production activities start to appear.

Compared to its peers, Samsung Heavy Industries is more affected by oil price fluctuations because revenue from its offshore business accounted for a large part of its business. The company’s revenue from construction of offshore vessels is estimated to have surpassed its container vessel business last year, for the first time since the oil price plunged in 2015.

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