South Korea’s conglomerate STX bankruptcy filing is a reminder of the prolonged slump in the marine-transport business; STX Group has $9 billion in total debt

June 9, 2013, 11:44 a.m. ET

STX Bankruptcy Filing Reflects Global Slump in Shipping

By KYONG-AE CHOI and KANGA KONG

SEOUL—The bankruptcy filing by what once was a major profit driver of one of South Korea’s conglomerates is a reminder of the prolonged slump in the marine-transport business. STX Pan Ocean Co., 028670.SE -14.93% the bulk-transportation unit of STX Group,011810.SE -2.03% the country’s 13th-biggest company by assets, filed for court receivership Friday after failing to find a buyer. STX Group had put up for sale its almost 36% interest in STX Pan Ocean, but no buyers came forward. The company, which is listed in Seoul and Singapore, was valued at $231 million in early April but that fell to $170 million by the end of last week. “A combination of a sharp decline in freight rates, a delayed industry recovery, oversupply of ships due to an increased production at Chinese shipyards and higher fuel costs drove up debt and squeezed margins,” STX Pan Ocean said Friday. The decline in the shipping and shipbuilding industries since the 2008 financial crisis has hit STX Group particularly hard. About 90% of the group’s sales come from those businesses. Its other main business, construction, also has been hit by the global economic downturn. “Even if a company ran one of the three businesses—shipping, shipbuilding and construction—it would be hard to survive today. STX has all of them,” said an executive who left STX late last year. STX Group, with more than 10 trillion won, or $9 billion, in total debt, has sold 1.13 trillion won in assets as part of a 2.5 trillion won asset sale plan announced in May of last year. STX has said it would continue to cut its workforce, wages and benefits. It has already cut the number of executives and annual salaries by around a fifth.Under a creditor-led bailout plan, the group is aiming to re-emerge with a focus on shipbuilding. Creditors are drawing up a restructuring plan for its core business unit,STX Offshore & Shipbuilding Co., 067250.SE +2.40% and could overhaul other affiliates.

State-owned Korea Development Bank, the group’s main creditor, said STX Pan Ocean’s filing for court protection won’t have a negative impact on the restructuring of other STX affiliates. Court receivership is similar to a U.S. Chapter 11 bankruptcy, in which the court takes a leading role in restructuring the company.

The decline of STX Group also marks a precipitous fall for company Chairman Kang Duk-soo, a self-made South Korean tycoon who pursued years of expansion after betting all his wealth on a 2001 takeover of SsangYong Heavy Industries, the precursor of STX Group. Through 2007, STX Group spent more than two trillion won to buy four companies, including cruise-ship maker Aker Yards ASA from Norway.

Then the financial crisis caused international trade to collapse, first slamming the shipping industry and then shipbuilding. But Mr. Kang continued to push for expansion, including expressing interests in Daewoo Engineering & Construction Co.047040.SE -0.78% in 2010 and Hynix Semiconductor Inc. 000660.SE +5.31% in 2011 before dropping out of both bids.

“As chief executive, I’m fully responsible for the group’s current dire situation,” the 63-year old Mr. Kang said by email to employees last month. “I will do whatever it takes and sacrifice all my personal interest to minimize the impact on jobs,” he wrote.

Current and former STX executives said a cause of STX Group’s problems was that the group spent much of its advance payments from clients in takeovers without leaving funds for operating capital.

“Mr. Kang should have put aside some money to continue to build ships during the down cycle,” an STX executive said.

Mr. Kang declined to be interviewed.

STX Group is likely to get support from its creditors since its failure would deal a heavy blow to the Korean economy and creditors’ balance sheets. The company has 21 affiliates and 60,000 employees.

But analysts warned that restructuring is unlikely to be a panacea.

“Restructuring efforts may go nowhere unless demands perk up,” Shinhan Investment Corp. analyst Byun Jeong-hye said.

STX Pan Ocean, which became one of STX Group’s most profitable units after emerging from receivership in 2002, swung to a net loss of 91 billion won in 2009. Its loss deepened to 467 billion won last year.