Debt crisis blows South Korea’s STX on to the rocks

June 26, 2013 2:22 pm

Debt crisis blows South Korea’s STX on to the rocks

By Simon Mundy in Seoul

Kang Duk-Soo was sanguine when asked three years ago whether choppy industry conditions could spell trouble for STX Group, which he had built into one of the world’s leading shipping and shipbuilding groups in less than a decade.

“We have no liquidity problems because we never seek excessive expansion. We will make efforts not to follow in the footsteps of Daewoo,” the chairman told the Financial Times, referring to the defunct South Korean conglomerate wound up in 1999 after years of debt-fuelled international growth.This appears ironic in light of recent events at STX Group, which has plunged into a devastating debt crisis of its own amid a slowdown in its key markets. This month STX Pan Ocean, its shipping business, entered receivership after failing to find a buyer. The flagship division, STX Offshore and Shipbuilding, is relying on emergency liquidity support from creditors to avoid a similar fate.

STX’s crisis is a bitter turnround for Mr Kang, whose rise from salaryman to the head of a leading chaebol conglomerate had made him an inspiration for many South Koreans.

He began his career as an administrator at the cement division of Ssangyong, which, like most of the chaebol, rose to prominence in the 1960s and 1970s with support from the then military government. Mr Kang worked his way up through the ranks before moving to Ssangyong Heavy Industries, where he became financial director in 1993.

The company struggled to service its extensive debts after the 1997 Asian financial crisis, and was acquired in 2000 by a consortium of investors who appointed Mr Kang chief executive. The following year, he used $2m of his savings to become the single largest shareholder of the company, which he renamed and set on a path of aggressive expansion.

First came the $100m acquisition of local rival Daedong Shipbuilding in 2001, followed by a $375m takeover of bulk carrier group Pan Ocean in 2004. It broadened its global presence by buying Norway’s Aker Yards in 2008 for $800m. In a little more than 10 years, Mr Kang had built the world’s largest bulk shipping group by sales and fourth-biggest shipbuilder by orders received, and had fought his way into the elite of South Korea’s most powerful businessmen.

“Kang Duk-Soo is a great man, when you consider that he started as an ordinary office worker,” says Jun Jae-cheon, an analyst at Daishin Securities. “But he put too much focus on acquisitions, and neglected risk management to focus on expansion.”

STX’s recent woes reflect broader problems in the shipping and shipbuilding industries in the wake of the 2008 financial crisis: the shock to international trade volumes hurt shipping revenues and prompted the industry to cut back on orders for new vessels. Having broadly cleared a backlog of orders placed before the crisis, the shipbuilders struggled to secure new ones.

Analysts say STX Pan Ocean was more vulnerable than other shipping groups because it had a particularly risky strategy of leasing a high proportion of its fleet.

Second, when shipping rates reached record levels in 2008, many shipping companies locked them in through long-term contracts in order to hedge against a market downturn. But STX, expecting still higher rates, mostly resisted doing so, leaving it severely exposed to the subsequent downturn. The Baltic Dry index, the main global benchmark of shipping costs, now stands at about a tenth of its 2008 peak.

“They were one of the most aggressive,” says Bonnie Chan, an analyst at Macquarie. “They expanded in such a way that, when the market swung against them, they paid the price for the expansion.”

A further drag on STX Pan Ocean, says Park Eun-kyung at Samsung Securities, was the fact that management ordered too many vessels from STX Offshore in order to support the group flagship. But this was too little to stave off serious problems at the latter company, which had accumulated dangerously high leverage. Even in 2008, before its industry had felt the brunt of the financial crisis, its net debt was more than 10 times its earnings before interest, tax, depreciation and amortisation.

A co-operative attitude from South Korean creditors – notably state-owned institutions such as Korea Development Bank and Woori Bank – should be enough to ensure the survival of STX’s two main businesses, analysts say. But it is offloading non-core assets, signalling a retreat from Mr Kang’s ambition of building one of the nation’s leading conglomerates.

“They went over the limit,” says a senior banker who has dealt with STX. “They should have managed their risk in a better manner – they didn’t expect this sort of global turmoil. Although the company itself could recover, it will be difficult to regain the former status.”