Shaken by Nuclear Phase-Out... Doosan Heavy Industries Faces 'Cash Flow Blockage'

Over 10 Years, More Than 2 Trillion Won Financial Support
New Orders for Nuclear and Coal Power Halved
Prolonged Poor Performance Worsens Cash Flow
Short-Term Borrowings of 4 Trillion Won a Pressing Issue
Public and Private Bond Issuance Also Unlikely

Korea Electric Power Corporation (KEPCO) and Doosan Heavy Industries & Construction are cited as companies that suffered massive damage due to the government's nuclear phase-out policy. Doosan Heavy Industries faced a liquidity crisis, while KEPCO recorded a deficit exceeding 1 trillion won, leading to controversies over electricity rate hikes. While the nuclear phase-out undoubtedly impacted these two companies, can the entire blame be placed solely on the government's power policy? We take a closer look at the situations of these two companies with some doubts.

[Asia Economy Reporter Lim Jeong-su] Doosan Heavy Industries & Construction, essentially the core of the Doosan Group, is evaluated to be in a de facto liquidity crisis. With short-term debt repayment burdens exceeding 4 trillion won, securing funds for debt repayment is not an easy task. The support of several trillion won to save Doosan Construction, a subsidiary, coupled with poor orders due to the government's nuclear and coal phase-out policies, worsened the situation.

◆ Hurting the body while trying to save the tail

Doosan Heavy Industries' liquidity crisis began with support for its subsidiary Doosan Construction. After the global financial crisis, other large corporations cut ties with their affiliated construction companies to overcome the crisis. This was to prevent the construction sector's insolvency from spreading to other affiliates.

In contrast, Doosan Group maintained its stance to keep Doosan Construction. They expected that once the crisis passed, Doosan Construction would become a profitable affiliate.

Doosan Construction has not made a profit for 10 years. After recording a net loss of 294.2 billion won in 2011, it suffered losses for nine consecutive years. The cumulative net loss over nine years reached 2.8 trillion won. The large-scale unsold inventory crisis at Ilsan's 'Doosan We've the Zenith' in 2009 was the starting point.

Doosan Heavy Industries had to support Doosan Construction continuously for 10 years. When Doosan Construction posted a 500 billion won capital increase in 2011, Doosan Heavy Industries invested 390 billion won. In 2013, it supported about 870 billion won through paid-in capital increases and contributions in kind. In 2016, it bore a burden of 400 billion won due to the settlement of redeemable convertible preferred shares (RCPS) issued by Doosan Construction. Over the past decade, Doosan Group has invested a total of 2.47 trillion won in supporting Doosan Construction. Of this, Doosan Heavy Industries bore 84%, amounting to 2.07 trillion won.

Doosan Heavy Industries' situation was not exceptionally good enough to continuously support Doosan Construction. Doosan Heavy Industries posted net profits in 2011 (171.6 billion won), 2013 (438 billion won), and 2017 (15.8 billion won), but recorded net losses in all other years after 2011. Its performance deteriorated continuously regardless of government policies. The cumulative net loss during this period was 1.2 trillion won. Sales and operating profits also showed a continuous downward trend.

Long-term poor performance and financial support for Doosan Construction worsened Doosan Heavy Industries' own financial situation. Its borrowings increased from 2.88 trillion won in 2011 to 4.03 trillion won in 2015, and exceeded 5 trillion won last year. During the same period, net borrowings excluding cash equivalents rose from 2.49 trillion won to 4.64 trillion won.

◆ Poor coal-fired power plant orders and excessive borrowings are a 'burning issue'

Declining orders for nuclear and coal-fired power plants due to the nuclear and coal phase-out policies further worsened Doosan Heavy Industries' situation.

New orders for Doosan Heavy Industries, which exceeded 9 trillion won in 2016, dropped to 4.6441 trillion won in 2018. Since the inauguration of the Moon Jae-in administration, new orders have halved. As of the third quarter of last year, new orders amounted to only 2.1484 trillion won. The order backlog shrank from 20.5 trillion won to about 15 trillion won during the same period. Due to the decrease in orders, sales also fell from 4.7 trillion won to below 4 trillion won.

As performance declined, cash flow also worsened. Operating cash flow (OCF) decreased from 350 billion won in 2016 to 200 billion won at the end of 2018. As of the third quarter of last year, OCF was 57.6 billion won, about one-third of 171.5 billion won in the same period the previous year. Net operating cash flow (NCF) recorded a net outflow of 745 billion won, increasing by about 300 billion won from 464 billion won in the same period the previous year.

Since a quick recovery in performance is difficult, the burden of debt repayment and refinancing is expected to increase. As of the end of September last year, Doosan Heavy Industries' borrowings on a separate basis amounted to 5.112 trillion won. Of this, 4.33 trillion won in borrowings and long-term liquidity liabilities must be repaid or refinanced within one year. Short-term borrowings account for 85% of total borrowings.

Immediately, a 600.6 billion won public foreign currency bond matures in April this year. In May, the early redemption (put option) exercise date for 500 billion won worth of bonds with warrants (BW) approaches. Repayment demands are expected for 408 billion won excluding 92 billion won worth of Doosan Corporation shares. Corporate bonds worth 60 billion won maturing within the year and private foreign currency bonds worth 100 billion won are also pending. The refinancing burden for commercial paper (CP) and electronic short-term bonds amounting to about 650 billion won remains.

To repay borrowings, large-scale liquidity must be secured, but the ability to raise funds has significantly deteriorated. Credit rating agencies downgraded Doosan Heavy Industries' credit rating by one notch to 'BBB' last year. The credit rating outlook remains 'negative.' The short-term credit rating also fell to A3. An investment banking (IB) industry official said, "With the current credit rating, issuing public bonds or even private bonds is difficult," and "the possibility of further credit deterioration cannot be ruled out."

Doosan Heavy Industries is also making every effort to respond to borrowings. It is negotiating with the Export-Import Bank of Korea to convert maturing foreign currency bonds into loans. Early redemption of BW will be repaid using internal cash and other assets. Additionally, at this week's shareholders' meeting, the company plans to amend its articles of incorporation to increase authorized shares from 400 million to 2 billion and raise the issuance limit for convertible bonds (CB) and BW from 500 billion won to 2 trillion won. A Doosan Heavy Industries official said, "We do not currently plan to issue capital increases or CBs or BWs," adding, "This is a measure to enhance financial responsiveness in case of emergencies."

This content was produced with the assistance of AI translation services.