Daewoo`s Creditors Devise Contingency Plan If Sale Fails

Creditor banks of Daewoo Engineering & Construction Co. yesterday said they have drawn up a contingency plan if the sale of the company fails.

Under the plan, the lenders will buy about half of Daewoo E&C’s shares from joint investors and jointly manage the builder.

The measure was drawn up in consideration of the possibility that failure to sell Daewoo E&C could cause a financial squeeze for its main shareholder, Kumho Asiana Group, and increasing the burden on the creditor banks.

If the plan is implemented, Daewoo E&C will return to a corporate debt workout six years after it got out of debt restructuring led by its lenders.

According to domestic banking industry sources, the state-run Korea Development Bank, Daewoo E&C’s main creditor, and other lenders agreed in a meeting late last month to cooperate if the construction company’s sale failed.

They recently agreed to deal with a condition attached to the sale of Daewoo E&C.

“We need to focus on selling the company right now but are also preparing measures to deal with failure, which could have a huge negative impact on the financial market,” a Korea Development Bank official said.

A source at one of the creditor banks said, “If Daewoo E&C’s problem aggravates Kumho’s financial squeeze, banks that lent some 18 trillion won (15.5 billion U.S. dollars) to Kumho could face trouble, too.”

The lenders plan to buy 39.6 percent of Daewoo E&C’s shares sold by financial investors at 13,000 (11.17 U.S. dollars) to 14,000 won (12.01 dollars) in return for taking over Kumho’s 32.5-percent stake in Daewoo E&C for under half the market price.

The creditors say that if Daewoo E&C’s financial investors exercise their right to sell the company’s shares, Kumho will lose around 2.5 trillion won (2.1 billion U.S. dollars), eroding the equity capital of the conglomerate’s key units such as Kumho Industrial and Kumho Tire.

If they purchase the shares for lower than the predetermined option prices and give out newly issued Daewoo E&C shares, the lenders can cover much of the promised profits for the investors by returning the difference to them if and when Daewoo E&C’s stock rises later.

If the plan is implemented, Daewoo E&C’s creditor banks will become the largest shareholder. While Kumho will suffer a hefty investment loss, it could escape from the problem of the put-back option given to financial investors.

The investors have not yet agreed to the plan, but the lenders call it the best possible way to satisfy the banks, Kumho and investors.

legman@donga.com nuk@donga.com