'Endure to Win Orders'... Why Samsung Heavy Industries is Proceeding with Capital Reduction and Rights Offering

RG issuance difficult during capital erosion... Overcoming capital erosion concerns through free capital reduction
Securing operating funds for shipbuilding via paid-in capital increase

[Asia Economy Reporter Hwang Yoon-joo] Samsung Heavy Industries has made a bold move by simultaneously implementing a capital reduction without compensation and a paid-in capital increase to actively respond to the expanding global ship order market. This decision is based on the judgment that improving the financial structure through capital expansion is essential for the smooth issuance of Refund Guarantee (RG), a prerequisite for order contracts, and to cover operating costs after securing orders.

According to industry sources on the 7th, Samsung Heavy Industries plans to reduce its debt ratio from 262% at the end of the first quarter to 198% through the capital reduction without compensation and the paid-in capital increase.

The capital reduction without compensation will reduce the face value (5,000 KRW) to one-fifth and is scheduled to be completed in early August. By converting 2.5 trillion KRW into capital surplus through this capital reduction, Samsung Heavy Industries will escape partial capital erosion. Along with this, Samsung Heavy Industries plans to hold an extraordinary general meeting of shareholders on the 22nd of next month to finalize the schedule for the paid-in capital increase. The paid-in capital increase will be carried out on a scale of about 1 trillion KRW through a rights offering to shareholders followed by a general public offering of forfeited shares.

Samsung Heavy Industries has simultaneously pulled out the cards of capital reduction without compensation and paid-in capital increase because it judges that its current financial condition could become an obstacle to order contracts. To conclude a shipbuilding contract, a shipbuilder must obtain an RG. RG is a guarantee provided by a financial institution on behalf of the shipyard for the advance payment received as construction costs, in case the constructed ship cannot be delivered to the shipowner. If the shipyard falls into capital erosion, issuing RG becomes difficult. A financial sector official said, "This year, both ship demand and ship prices are improving simultaneously, so there should be no need for low-price orders. In such a situation, if capital erosion is confirmed, issuing RG will be difficult, which could cause the company to fall behind in the order competition."

Improving the financial structure is also urgent to secure working capital after orders. Typically, the shipbuilding industry concludes contracts using the ‘heavy tail’ method. This method reduces the shipowner’s burden by receiving a small advance payment and collecting the remaining ship cost upon delivery. Generally, the advance payment is known to be about 40% of the total cost. Therefore, the shipyard must bear production costs such as labor and steel materials during ship construction. The more orders received, the more cash is needed.

A Samsung Heavy Industries official stated, "The planned capital increase and reduction this time are not due to liquidity issues but are decisions to proactively improve the deteriorated financial structure caused by years of continuous losses and to secure investment funds essential for strengthening future competitiveness." He added, "Given the high expectations for market recovery, to the extent that a supercycle was mentioned during past boom periods, we will do our utmost to normalize management."

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