YNCC avoids default with $220 mn lifeline from DL Chemical, Hanwha

Yeochun NCC Co. (YNCC), South Korea’s third-largest ethylene maker, has narrowly avoided default as its shareholders – DL Chemical Co. and Hanwha Solutions Corp. –  agreed to provide a combined 300 billion won ($220 million) in new loans to the debt-laden joint venture.

With losses piling up, YNCC needs to raise 310 billion won in fresh financing by the end of the year, including 180 billion won to cover debt coming due this month.

The financial support marks a shift for DL Chemical, which had previously rejected Hanwha’s call for a capital injection into the naphtha cracker operator, whose losses have mounted amid a flood of low-priced products from China and the Middle East.

DL Chemical will raise 177.8 billion won through a private placement of new shares to DL Holdings Co. on Aug. 18, the holding company said in a regulatory filing on Monday.

The company is expected to use the proceeds to lend about 150 billion won to YNCC.

It will join Hanwha Solutions, which in July agreed to extend 150 billion won in loans to the joint venture.

However, analysts warn that the move will offer only brief relief unless the company undertakes drastic restructuring amid a prolonged slump in the petrochemical industry.

DL Chemical had been reluctant to inject more money into YNCC, doubting the company’s chances of survival. It instead pushed for the 50-50 joint venture to pursue a debt workout.

In March, DL and Hanwha injected a combined 200 billion won into YNCC.

However, the joint venture posted a loss of about 100 billion won in the second quarter, following an operating loss of 49.8 billion won in the previous quarter.

YNCC relies heavily on basic chemical products such as ethylene, polyethylene and butadiene, which are highly vulnerable to the flood of low-price imports from China and the Middle East.

The prices of these chemicals, which account for 66% of its revenue, are unlikely to rebound as the Middle East has joined the ranks of ethylene producers.

Investors shrugged off the new financial support from YNCC's shareholders. Its bonds closed in the domestic bond market at a yield 15 percentage points higher than that estimated by credit rating agencies.

Analysts say a potential clash between DL Chemical and the Hanwha Group over YNCC’s future is also seen as an obstacle to restoring the company’s operations.

DL argued that YNCC’s ethylene supply price was set in a way that benefits Hanwha at the expense of YNCC. Hanwha countered that the pricing complied with the Corporate Tax Act and the Fair Trade Act.

Industry observers urge the government to step in to lead the restructuring of petrochemical companies within the Yeosu Industrial Complex, where YNCC operates, while mediating between DL Group and Hanwha over YNCC.

The government has considered gradually reducing YNCC’s output and combining the company with Lotte Chemical Corp.'s petrochemical complex in Yeosu.

Write to Jun-Ho Cha at chacha@hankyung.com
 

Yeonhee Kim edited this article.