As the specter of bankruptcy rises for Korea’s shipbuilders, concern is growing over local banks’ exposure to the ailing sector.

According to industry sources Wednesday, local banks’ exposure to the shipbuilding sector exceeds 70 trillion won ($59.3 billion) in total, which is far larger than to shipping, another troubled sector with high default risks. 

The high exposure stems partly from ship financing, which typically involves shipbuilders’ banks providing refund guarantees to buyers to ensure that their money, paid to the shipyard when an order is placed, will be returned if the yard fails to deliver.

The banks’ exposure to STX Offshore & Shipbuilding Co., seen most likely to default on debt maturing at the end of this month, is estimated at 5.5 trillion won, consisting of refund guarantees and loans.

The state-run Korea Development Bank has the largest exposure to STX Offshore at 3 trillion won; followed by NongHyup Bank at 1.3 trillion won and Export-Import Bank of Korea at 1.2 trillion won. If STX does default later this month and files for court receivership as widely expected, these banks will have to set aside 2.8 trillion won in loan-loss provisions.

For most banks, however, Daewoo Shipbuilding & Marine Engineering, which is desperately trying to avoid court receivership, is a far bigger concern than STX.

While their exposure to the country’s second-largest shipyard reaches 23 trillion won, they have not stowed away reserve money for the loans, classifying them as “normal” assets.

“Only KB Kookmin Bank has DSME loans rated as ‘precautionary,’” an industry insider said.

A fall in the risk scale from “normal” to “precautionary” would requires other banks up to 4.3 trillion won in bad-loan provisions, he said.

DSME’s creditors on Tuesday approved a debt restructuring plan on condition that the shipyard cuts fees it pays for chartered fleet. Negotiations with foreign shipowners are dragging on past the initial deadline of May 20. If no deal is reached by the end of the month, the firm will have no option but to file for court receivership, industry observers said.

Local banks’ exposure to the industry’s biggest Hyundai Heavy Industries is 17.4 trillion won and third-largest Samsung Heavy Industries 14.4 trillion won.

By Lee Sun-young (milaya@heraldcorp.com)