[Exclusive] Korean Shipbuilding Is Booming, but Ships Still Cannot Be Built—the 'RG Barrier' Blocking HSG Sungdong Shipbuilding [fn Market Watch]

[Financial News] Korean shipbuilding is riding a supercycle, but the advance payment refund guarantee (RG) bottleneck facing small and medium-sized shipbuilders remains. Overseas shipowners have even changed their contract structures, and domestic financial groups have stepped in to help. However, guarantee limits remain a barrier. HSG Sungdong Shipbuilding's return to newbuilding after nine years has also been stalled at the RG hurdle.
According to investment banking industry sources on the 30th, HSG Sungdong Shipbuilding, which received investment from private equity fund manager DK Partners, recently received an indication of interest from an overseas shipowner. However, it is having difficulty securing the RG needed by the end of this year. The guarantee limit available from Korea Trade Insurance Corporation (K-SURE) is reportedly virtually exhausted.
HSG Sungdong Shipbuilding delivered its last vessel in November 2017 and has since continued operating mainly by producing blocks for large shipbuilders.
To reduce HSG Sungdong Shipbuilding's burden, the shipowner proposed a contract structure in which the vessel's upper section would be covered by performance guarantees from Seoul Guarantee Insurance (SGI) and other providers, while an RG would be required only for the lower section. Hana Financial Group and BNK Financial Group were also reportedly considering issuing an RG as part of their mutually beneficial financing efforts.
However, support has become difficult to implement immediately as K-SURE's capacity to provide additional guarantees is limited. HSG Sungdong Shipbuilding is considering asking the shipowner to delay the deadline for submitting the RG and resuming the issuance process once next year's guarantee limit is secured.
Heo Seong-mu, a lawmaker from the Democratic Party of Korea, told Financial News, "Orders are being blocked because the fund limit at K-SURE for the special guarantee program for small shipbuilders is too low to provide guarantees properly. We allocated KRW 40 billion–50 billion through the supplementary budget to increase the guarantee limit, and we will also actively work to secure funding in the 2027 budget."
He added, "Korea Development Bank (KDB) and Export–Import Bank of Korea (Korea Eximbank) should also take a more active role in issuing RGs. Since current conditions in Korean shipbuilding differ from those during past restructuring efforts, support should be provided based on thorough screening."
An RG is a payment guarantee under which a financial institution refunds the advance payment to the shipowner on behalf of the shipbuilder if the shipbuilder fails to deliver the vessel. Without an RG, securing a shipbuilding contract is virtually impossible.
Of the KRW 57.762 trillion in RGs issued by state-run institutions over the past five years, KRW 51.7203 trillion went to the three large shipbuilders—HD Korea Shipbuilding & Offshore Engineering (HDKSOE), Samsung Heavy Industries, and Hanwha Ocean. By contrast, KRW 6.0417 trillion was provided to the three mid-sized shipbuilders HJ Shipbuilding & Construction, K Shipbuilding, and Daehan Shipbuilding.
K-SURE unveiled a plan this year to provide KRW 740 billion in RG support for small and mid-sized shipbuilders. However, the recovery in orders is outpacing the expansion of guarantee supply, and bottlenecks are emerging again on the ground.
An investment banking industry official said, "There is work to be won, but companies cannot sign contracts because of RGs. To utilize the production capacity of small and mid-sized shipbuilders, the guarantee supply structure also needs to change in line with industry conditions."
[email protected] Kang Gu-gwi Reporter