Doosan Heavy may separate Infracore, Bobcat for survival

Doosan Heavy Industries & Construction CFO Choi Hyoung-hee speaks during the firm's annual general meeting in Seoul, Monday. Yonhap

By Nam Hyun-woo

Korea Development Bank Chairman Lee Dong-gull / Yonhap

Liquidity-stricken Doosan Heavy Industries & Construction is under pressure to separate its subsidiaries, Doosan Infracore and Doosan Bobcat, in an effort to save the entire business group from a complete collapse, sources said, Wednesday.

They said Doosan Group, a mid-tier business conglomerate, is currently in the process of fine-tuning its self-salvage plan and plans to submit it to its creditors ― the state-run Korea Development Bank (KDB) and the Export-Import Bank of Korea (Eximbank) ― once all necessary paperwork is done.

“We are working on a self-salvaging plan to meet creditors' demands quite faithfully,” a Doosan Heavy official said. “However, we have yet to fix the coverage of the plan, and we need to have further conversation with the creditors.”

Doosan Heavy, the flagship unit of Doosan Group, is facing a serious liquidity crunch as weak orders and financial losses continue despite some project wins. Specifically, with its debt at three times the value of its investors' shares and operations losing money last year, the big risk is Doosan Heavy's unstable capital structure.

The company is heavily loaded with debt and has shown weak cash flow. In particular, this year the company will be required to repay 709 billion won ($597.8 million) in bond debt. President Moon Jae-in's drive to gradually phase out nuclear power plants has also been cited as one of the core factors hurting the firm's coal- and nuclear-centric portfolio.

To help Doosan Heavy, the KDB and the Eximbank last week decided to extend a 1 trillion won ($820 billion) credit line ― 500 billion won by each bank ― to the ailing power equipment firm. In return, KDB chairman Lee Dong-gull demanded Doosan Heavy demonstrate its “thorough self-salvaging plan” clearly, in terms of improving its financial structure.

Doosan has been forced to rely on high-cost asset-backed funding strategies including the securitization of project receivables. Analysts said this is a risky trade that may solve current cash flow problems while making long-term financial problems worse. Meanwhile, the seriousness of near-term liquidity risks is also raising the possibility of the need to sell assets.

Regarding the specifics of the “self-salvaging plan” that Doosan is working on, a KDB official said it has nothing to confirm, adding it will need more time; however, the creditors have already dropped hints on the self-salvage plan they want Doosan to implement.

KDB rarely mentioned the financial prudence of Bobcat and Infracore with industry officials expecting Doosan Group to present detailed plans including various types of structural reforms.

“The first step in a corporate restructuring is separating the target from solid companies,” a source familiar with corporate restructuring said. “Since Infracore and Bobcat remain solid, separating them from Doosan Heavy could be included in the self-salvaging plan.”

Doosan Heavy is the largest stakeholder of Infracore with 36.28 percent. Infracore has a 51.05 percent stake in Bobcat, thus creating a vertical shareholding structure starting from Doosan Heavy. Due to this structure, Doosan Heavy's credit risks are feared to spread to the subsidiaries.

Korea Investors Service said in its March 24 report that “There is a necessity to monitor a group-wise self-restructuring plan because Doosan Heavy's heightened financial risks may spread to Infracore and Bobcat, and downgrade their credit ratings.”

Doosan Group Chairman Park Jeong-won

Industry officials raised two scenarios of separating Infracore and Bobcat from Doosan Heavy.

The first scenario is creating a new investment company that will receive Doosan Heavy's equity in Infracore and Bobcat. After this, the separated firm could be merged to Doosan Corp., the holding firm of Doosan Group.

Through this, Infracore and Bobcat would be well-positioned to be freed from liquidity risks stemming from Doosan Heavy. For creditors, it will be much easier to recollect their lending because profit-making Infracore and Bobcat are under Doosan Corp., which provided collateral of 1 trillion won in order to support to Doosan Heavy.

Another scenario is Doosan Corp. directly purchasing Doosan Heavy's ownership share in the two subsidiaries through rights issuing. In this method, Doosan Corp. will directly support Doosan Heavy, while Infracore and Bobcat will also be freed from risks.

However, all of these scenarios would be painful choices for both Doosan Heavy shareholders and investors because both plans will separate the more profitable subsidiaries from Doosan Heavy.

Doosan Infracore, a construction machinery manufacturer, logged 840 billion won in operating profit last year, down 0.9 percent from a year earlier when its operating profit reached a record high.

After handing over Infracore and Bobcat to Doosan Corp., however, Doosan Heavy will only have loss-making Doosan Engineering & Construction (E&C) under its wing. Doosan Heavy's liquidity crunch is also attributable to Doosan E&C, as the former continued its support to the construction firm despite its own difficulties.