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Business deals

Philippine banks in deal to save South Korea's Hanjin

$410mn debt-equity swap intended to put shipbuilder back on track

The future of HHIC's Philippine shipyard has been in question since the unit filed for bankruptcy protection in January. (Photo courtesy of Subic Bay Metropolitan Authority)

SEOUL/MANILA -- Philippine banks are coming to the rescue of South Korea's troubled shipbuilder, Hanjin Heavy Industries & Construction, with a $410 million debt for equity swap that could help keep the company afloat.

The banks' decision to take shares in HHIC comes as the shipbuilder prepares to shutter its Philippine unit's Subic Bay shipyard with the loss of some 3,500 jobs.

The shipyard's closure after it failed to repay its debts has become a political issue in the Philippines, with government agencies mobilized to find a white knight. The Philippine Chamber of Commerce also this week called for a locally-led rescue.

HHIC said on Friday that Rizal Commercial Banking Corporation, state-owned Land Bank of the Philippines, Metropolitan Bank & Trust, Bank of the Philippine Islands and BDO Unibank would swap their debt to the Subic shipyard for equity in the parent company.

HHIC will seek court approval for the debt for equity swap by the end of the month.

The shipbuilder said that it would also ask its South Korean creditors, led by state-owned Korea Development Bank, to swap their $900 million debt for equity. HHIC's shares have been suspended since Wednesday following news that its net worth had turned negative, but stock in its holding company surged on news of the deal with Philippine creditors.

"We expect that the debt for equity deal with creditors at home and abroad will help us overcome capital erosion and the risk related to the Subic shipyard, normalizing management of the company quickly," HHIC said in a statement. "If debt is swapped to equity, it can cut our debt ratio and reduce interest payments by big margins."

The deal could also help to speed recovery at HHIC's Philippine unit, which owns the Subic Bay shipyard. The unit was put into bankruptcy protection in January after failing to repay the total $1.3 billion in loans from the Philippine and South Korean lenders. The outgoing receiver appointed by Philippine court to oversee the rehabilitation process, Stefani Sano, said it could "shorten the receivership time if it results in Hanjin becoming capable of paying its payables in less time than originally estimated." HHIC-Phil, the local unit, had previously estimated it would take five to eight years to recover.

The shipyard's troubles have dealt a heavy blow to the finances of parent HHIC. The South Korean shipbuilder recorded a net loss of 1.3 trillion won ($1.2 billion) last year due to losses at the Subic shipyard. HHIC's total debt stood at 3.4 trillion won in December, exceeding its total assets by 742.2 billion won.

KDB -- which has previously voiced its willingness to step in to help stem the crisis -- said the swap deal with Philippine creditors, as well as its own potential deal with Hanjin, will be done through a new share issuance. The banks said HHIC will be partly owned by the bank and the Philippine lenders after the deal, but declined to reveal how much stake each will have.

Currently, HHIC Holdings is the largest shareholder of HHIC with 30.98% stake. HHIC Holdings CEO Cho Nam-ho controls the holding company with a 46.50% stake.

Shares of HHIC Holdings jumped 20.94% to 3,350 won on Friday with expectation of turnaround of its shipbuilding affiliate. The benchmark Kospi fell 1.34% to 2,196.09.

Hanjin Heavy's shipyard in Busan was the first in the country. It was established by Mitsubishi Heavy Industries during Japanese colonial rule in 1937. It later became part of the Hanjin group, which also owns Korean Air Lines, but was spun off in 2005.

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