The cost of restructuring ailing Korean shipbuilders and shipping companies is estimated at 31 trillion won ($27 billion), with the cost projected to be offset after a decade, the International Monetary Fund’s report said Sunday. 

The report was based on the assumption that the creditors’ losses caused by debt restructuring would reach 5.5 percent to 7.5 percent of GDP along with 0.4 to 0.9 percent of the labor force employment impact.

The figure was only calculated for the companies whose times interest earned ratio stood below 1 percent for three years straight.

Assuming that corporate earnings drop by 10 percent compared to 2014, the total debt of the manufacturing industry, shipbuilders and shipping industry would equal about 12 to 14 percent of GDP while the employment impact would be 1.9 to 2.1 percent, according to the report.

Adding the loss from a default to the assumption, the creditors’ losses is projected to be 5.5 to 7.5 percent of GDP while the employment impact would be 0.4 to 0.9 percent, it said.

The IMF, however, forecasted that the restructuring would ultimately lead to mid- to long-term benefits and the cost would be offset after 10 years.

Once the corporate restructuring is complete, the IMF forecast that it would raise the country’s GDP by 0.4 to 0.9 percent while boosting the employment rate by 0.05 to 0.1 percent compared to the do-nothing alternative.

If the interest earned ratio exceeds 1 percent, the investment level would increase 3.1 percent and the annual employment rate by 2.3 percent, the report said.

The organization added that the restructuring in the shipbuilding industry would lead to a loss of around 10,000 workers. Some have speculated that the impact would be around 20,000 job losses.

Daewoo Shipbuilding and Marine Engineering is struggling with a net loss of more than 1 trillion won during the first half of this year, and the company’s debt-equity ratio breaking the 7,000 percent mark.

It recently said it would cut some 3,000 jobs by this year, speeding up the job cut plan than scheduled in order to seek tighter restructuring.

Hanjin Shipping has been put under court receivership since last month as its creditors, led by the state-run Korea Development Bank, rejected its last self-rescue package worth 500 billion won ($440 million), which fell short of the 700 billion won demanded by its creditors.

The court recently decided to sell the company’s Asia-US shipping network while the shipper is moving to sell a 54-percent stake in Total Terminals International that runs a terminal in the Port of Long Beach in California.

Meanwhile, according to the Bank for International Settlements, the amount of non-financial corporate debt equaled 106 percent of GDP as of the first quarter of this year, ranking the third among the 19 developing countries, followed by Hong Kong and China.

By Lee Hyun-jeong (rene@heraldcorp.com)