Is Uljanik nearing its end? Buyers cancelling orders, State Attorney investigating Management



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Shipyard Uljanik in Pula, Croatia

Uljanik shipyard has reached its lowest point. Buyers have cancelled orders for four ships, one of which was nearly completed, and the State might be forced to pay out its guarantees. At the same time, the State Attorney's Office has begun its investigation into the shipyard's business practices.

On September 1, Norwegian Siem Shipping Inc. canceled the purchase of four ships on order from the Uljanik shipyard. The public was informed about it on Monday by the Zagreb Stock Exchange.

The curt statement seays that, "Due to the inability of Uljanik to deliver the ship in accordance with the provisions of the contract concluded with Automarine Transport Inc. of Cayman Islands for a car and truck transport vessel of 7000 CEU, Uljanik's Build #514, the buyer unilaterally terminates the shipbuilding contract as of 1 September 2018 and the contract is no longer binding for the contracting parties". The same customer also terminated the contract for construction of Build #515 of identical technical features, on which the work had already been curtailed earlier on the customer's request.

Termination of contract

Furthermore, Siem Shipping Inc. has unilaterally terminated contracts for car and truck transport ships, Builds #524 and #525, on which all activities were suspended earlier at the customer's request and the physical construction had not even started. "Therefore, the contracts are no longer binding on the contracting parties" - says the release from Uljanik. "Both companies are part of the SIEM group."

If we know that Danko Končar, the owner of Kermas energija, the official (potential) strategic partner of Uljanik Group in the restructuring program, said in an interview with the Poslovni dnevnik in May this year that out of 17 ships in the Uljanik order book five had already been canceled, arithmetic says that the shipyard's order book now lists only six vessels, either under construction or not started yet.

Guarantees and loans

Namely, at least one more ship has been officially canceled in the meantime and one delivered. When one subtracts the four new cancellations, six ships remain on the books, of which three or four are in the process of construction. Although the cancellation of the four vessels really means the ultimate business collapse for the Uljanik Group, it is, paradoxically, good news in a way. This way the cost for the shipyard and the state will probably be lower than if the four vessels were built completely. Each of them was contracted with the government guarantee, whose documents stated the expected profit per vessel would be between EUR 400,000 and 500,000. However, it turns out that each ship has generated some EUR 13 million in losses on the average. By having those contracts cancelled, the shipyard will lose less and the state will pay less for the activation of loan guarantees, than for fully built ships.

But, let's look at the order of events. On May 19, 2018, at 2 pm, the 3. Maj shipyard launched Build #514 - Siem Ashanti - a car and truck carrier with the capacity of 7,000 vehicles. This means that today the ship is about 80 percent finished. Build #515 is at the very beginning of the construction, at the plate cutting stage, if that far. Construction on the other two new builds has not even started yet. According to the government's 2014 decision on issuing the guarantee, each of the first two ships, #514 and #515, was worth EUR 46 million, and the state guaranteed 80 percent of that value, i.e. EUR 36.8 million for each. Given that the first ship is about 80 percent built, the buyer can activate bank guarantees and get the money from the bank automatically (because Uljanik has no money) and the bank can then decide whether to activate its guarantees and charge the state or repossess the ship and try to sell it to the buyer's competitors, or make some other business deal with some other buyer. If the bank decides to activate state guarantees, it means that, at this stage, Build #514 would cost the state roughly EUR 37 million.

However, if the bank does activate the guarantees, the ship remains in Uljanik Group ownership. The shipyard can conclude a deal with a competing buyer and sell it either at this stage or complete the ship first and sell it afterwards. As the ship was initially underpriced, the deal could end up covering its cost or at a slight loss. When the interest on financing is taken into account, the bill is still likely to be significant. Build #515, was at the beginning of construction

and if we assume that the buyer had made the first advance payment of 20 percent, they can activate the guarantee and take about EUR 9 million in costs from the bank, whereupon the bank can take it from the state. In the case of ships whose construction has not started yet, #524 and #525, the buyer has probably paid the customary 10 to 20-percent advance to Uljanik, meaning EUR 5 to 10 million. (The ships were worth EUR 53.1 million each, according to the contracts.) The guarantee covers 80 percent of that value.

Bill footed by the State

The buyer can get that money from the bank immediately - with interest -- and the bank can charge it to the state. Because of this, the buyer does not hurry with the cancellation, as his paid advances are collecting tidy interest of at least 5 percent. So, with the four canceled ships, with the guarantees activated, the state will be roughly EUR 52 to 57 million poorer. With interest, the bill will exceed EUR 65 million. However, it may be able to recoup part of that money later on.

DORH (the State's Attorney Office) and the police confirmed on Monday that they had started an investigation of the situation at Uljanik, based on the recent developments. The Uljanik Group recorded a loss of over EUR 240 million last year. In the first six months of this year, the loss was EUR 51 million.