Hanjin Shipping has decided to file for court protection after losing the support of its banks in South Korea, sending shockwaves through the shipping and financial world.
The writing was on the wall after the country’s largest shipping line had trading of its stocks suspended on the Korea Exchange yesterday after a liquidity plan submitted to Korea Development Bank on Aug. 26 was rejected.
The KDB felt that the plan, which involved cash injections of up to 500 billion South Korean won ($446.5 million), was insufficient to solve the liquidity shortfall facing Hanjin Shipping, which had already raised more than 1.7 trillion South Korean won since former chairwoman Choi Eun-young handed over the reins to her brother-in-law, Korean Air Lines chairman Cho Yang-ho.
The Financial Services Commission’s earlier assessment was that Hanjin Shipping would lack 1.2 trillion won over the next two years. Hanjin Shipping had been in the red for four of the last five years, dealing a blow to its equity even as it soldiered to raise funds.
While Hanjin Shipping has yet to issue any official confirmation of its application for receivership, the FSC has already issued a statement to the same effect. The latter statement stated that at a presentation yesterday, Hanjin Shipping’s creditor banks decided that they could not accept the liquidity plan.
Considering the impact on the economy, the Seoul Central District Court is expected to approve Hanjin Shipping’s receivership application.
The impact on the liner shipping industry is expected to be significant and will affect Hanjin Shipping's CKYHE Alliance partners, its future THE Alliance partners, slot sharing with other carriers, its charter contractors and countless shippers with cargo moving on major trades on its 98-ship fleet.
In the meantime, Hanjin Shipping’s debt repayments are expected to be stayed and creditors would be precluded from seizing the company’s assets. Once the receivership application is granted, Hanjin Shipping would continue rehabilitation procedures under the direction of the court and KDB, its main creditor.
The company could implement layoffs and asset sales while its banks reschedule loan repayments. Hanjin Shipping on Monday said it had made significant progress in its negotiations to lower charter costs and delay loan repayments to foreign banks. The company’s counterparties include Seaspan, Doun Kisen, Ciner Ship Management, HSH Nordbank, Credit Agricole and Commerzbank.
In a manner similar to Pan Ocean, which was in receivership from June 2013 to early 2015, Hanjin Shipping could sell vessels that are not part of its core business of container shipping, in addition to terminals in South Korea and elsewhere.
Cash injections from Hanjin Shipping’s banks are unlikely as KDB and other South Korean banks have been massively burdened by the downturn in the shipping and shipbuilding industries. There also will not be any government bailouts, although debt-for-equity swaps could be possible, as seen with Pan Ocean and Korea Line Corporation. If debt-for-equity swaps are executed, the Hanjin Group could lose control of its shipping subsidiary and a new management team is likely to be appointed.
The FSC, South Korea’s financial watchdog, has moved to mitigate the impact of Hanjin Shipping’s situation on the latter’s associated companies, banks and investors.
The FSC said: “While Hanjin Shipping will be applying for receivership soon, the restructuring efforts that the company undertook in the meantime should limit the impact on the financial market. Firstly, although Hanjin Shipping dos not carry heavy weight on the stock market, the company’s stock price has already adjusted downwards since the start of the year. Furthermore, the credit rating of Hanjin Shipping and Korean Air Lines has been adjusted to reflect the negative market conditions, and this should mitigate the impact on the corporate bond market .”
On the other hand, the FSC acknowledged that a significant proportion of Hanjin Shipping’s bank debts may become unrecoverable and, to this end, the company’s banks have been making provisions.
“Following Hanjin Shipping’s filing for receivership, we have been assessing the total possible amounts that the banks can absorb,” said FSC.
Contact Xiaolin Zeng at firstname.lastname@example.org.