[Funding] Hyundai Samho Heavy Industries Issues Private Bonds with Mandatory Redemption upon Downgrade

[Asia Economy Reporter Lim Jeong-su] Hyundai Samho Heavy Industries secured 30 billion KRW in liquidity by issuing privately placed corporate bonds (private bonds) that must be repaid immediately if its credit rating falls by two or more levels.

According to the investment banking (IB) industry on the 5th, Hyundai Samho Heavy Industries issued 30 billion KRW worth of private bonds on the 29th of last month, underwritten by DB Financial Investment. The maturity is two years with an interest rate of 3.67%.

These bonds include a mandatory clause requiring repayment before maturity if the credit rating declines. The condition is that if the corporate credit rating falls to BBB- or below, or the short-term credit rating drops to A3- or below, repayment must be made immediately. Hyundai Samho Heavy Industries’ credit ratings are currently BBB+ and A3+, leaving two levels before reaching the trigger rating.

Shinhan Bank acquired these bonds through a special purpose company (SPC), and Hyundai Samho Heavy Industries issued short-term bonds backed by the principal and interest repaid by the company as underlying assets to raise funds for bond acquisition. The short-term bonds are refinanced every three months.

Hyundai Samho Heavy Industries began issuing private bonds with mandatory repayment conditions starting in October last year. This was due to concerns over further credit rating downgrades as long-term performance and financial repayment improvements were not achieved amid a heavy debt burden.

As of the end of June this year, Hyundai Samho Heavy Industries’ borrowings amounted to 1.3159 trillion KRW. This more than doubled from 611 billion KRW at the end of 2018 over two years. Among this, short-term borrowings that must be repaid or refinanced within one year reached 895 billion KRW.

Hyundai Samho Heavy Industries is expected to continue increasing its borrowings. Although profitability is gradually improving, it is insufficient to secure liquidity for debt repayment and operating funds solely through its own cash generation capacity.

An IB industry official said, "There is great expectation for the expansion of LNG ship orders, but uncertainty about orders remains high due to the prolonged COVID-19 pandemic," adding, "If the shipbuilding industry downturn continues, a decline in financing capability will be inevitable."

Meanwhile, Hyundai Samho Heavy Industries’ major shareholder changed from Hyundai Heavy Industries to Korea Shipbuilding & Offshore Engineering last year due to a group governance restructuring. As of the end of June, Korea Shipbuilding & Offshore Engineering held an 80.54% stake.