STX Offshore & Shipbuilding has filed for court receivership after three years of futile turnaround efforts led by its creditors.
Applying for court protection last Friday, the company asserted that its value as a going concern would be higher than that coming from sales of its assets.
The bankruptcy court is expected to decide in a couple of months whether to allow the shipbuilder to start rehabilitation efforts or to liquidate it.
The downfall of STX Shipbuilding highlights the flaws in creditor-led corporate restructuring. This approach is convenient as creditors can implement restructuring programs for troubled companies based on “voluntary” agreements with them. But it allows the government to make decisions on behalf of creditors.
STX Shipbuilding was set up in 2001 by now-defunct STX Group. In 2005, the company jumped up to become the world’s fifth-largest shipbuilder. In 2008, it placed third in the world in terms of new order volume.
Yet the company’s good fortune ended with the eruption of the global financial crisis in 2008. As the global shipbuilding industry entered a slump, it sought to win orders by offering low prices, which ultimately eroded its financial health.
As the company reeled under the weight of mounting accumulated losses, its creditors decided in 2013 to provide financial support to it under an out-of-court restructuring agreement.
Yet behind the creditors’ decision was the government’s invisible hand. The government wanted to keep the struggling company afloat in light of the negative impact its collapse would have on the national economy.
Since 2013, the creditors, led by the state-run Korea Development Bank and Export-Import Bank of Korea, provided as much as 4.5 trillion won ($3.8 billion) to STX Shipbuilding. Despite this massive support, the company has been unable to turn itself around.
The creditors’ decision last week to wean the company off financial assistance came too late. They should have cut support earlier and left its fate in the hands of the bankruptcy court.
In fact, commercial banks withdrew from the voluntary agreement with the company last December, concluding that it was hopeless. Yet the two state-run banks continued to provide support. Behind their unwise decision was pressure from the ruling Saenuri Party, which wanted to delay any decision against the shipbuilder until after the April general election.
The STX Shipbuilding case illustrates what happens when political logic prevails over economic logic in corporate restructuring.
Following the 2008 global financial crisis, a long list of domestic corporations fell into trouble. Under pressure from the government, creditors, especially the two policy banks, reluctantly assumed the responsibility for helping these companies normalize operations.
This approach, however, is ill-conceived, given that banks are not corporate turnaround experts. The KDB currently has more than 130 firms under its supervision. Given its lack of expertise and limited manpower, it is little wonder that the bank’s performance has been lackluster.
STX Shipbuilding’s application for court protection signals that the restructuring of the shipbuilding industry has kicked off. The government needs to ensure that market principles are applied to troubled companies.