The industry is marred by a slow growth in the world trade and overcapacity
In the pre-recession period (i.e. before 2008-09), the world trade was booming and freight rates were peaking. But in late 2008 to 2010, the container trade declined under the reeling impact of global recession. There was a slow recovery in the container trade, which mainly comprised electronics, packed food items, automobiles, machinery, etc. in 2010. This recovery was further interrupted by the European credit crisis. Furthermore, a slow growth in the US and Europe region kept the demand under the lid.
Global recession drove the demand to new lows in 2009. Thus, the further demand growth numbers seem equivalent to supply growth. However, the industry suffered from incremental overcapacity from such supplies. The situation started when a large number of ships began adding to the capacity from 2011 onwards, this was due to the orders placed prior to 2008-09 (increasing rates era). The freight rates, which recovered in 2010-11 became volatile and extremely sensitive to temporary spurts in demand and net capacity addition.
(Selected routes show the impact on key routes for Hanjin Shipping)
As compared to highs achieved in 2007-08, the freight rates on some routes fell by more than 80 per cent. Few shippers were not even able to cover the operating costs on the vessels. Despite the existing overcapacity, shippers continued to order more and larger ships (16,000 – 18,000 TEUs) in an attempt to lower the operating costs. In addition, the big players also tried to phase out small players through their larger capacities and lower costs. In this bid, some companies also formed alliances such as 2M alliance (Maersk and MSC), the Ocean Three alliance (CMA CGM, UASC, COSCO Shipping), the G6 alliance (NYK Line, OOCL, APL, MOL, Hapag-Lloyd and HMM). These large alliances were formulated as early as 2013-14. However, Hanjin missed the opportunity to take proactive measures and missed on the alliance formation/cargo sharing. The company entered the CKYHE alliance (K Line, COSCO, HANJIN, Evergreen, Yang Ming) in May 2016.
Business profile of Hanjin Shipping
Hanjin Shipping company is involved in maritime transportation with a major exposure to the container segment and some of the dry bulk segment. In Aug. 2016, the company owned only 44 per cent of the container fleet in operations and the rest was chartered-in the form of other vessel owner.
Hanjin Shipping handled a major portion of the traffic on the transpacific lane (Asia to Americas) and Asia-Europe lane. Thus, these economies had a major and direct bearing on the company.
Suffering from declining revenue and mounting debt, Hanjin calls for rescue
There was a volatile growth in the trade in the key destination countries of Hanjin. Additionally, increasing global fleet strained the freight growth during the past 5 years. Therefore, the revenue from the container business for Hanjin Shipping declined by about 8 per cent in the FY2015 as compared to FY2010. The company was cash strapped as the freight rates moved below the daily operating costs for most of the vessels.
The fall of Hanjin
The current situation of the company can be traced or was rooted in the order of ships, during the peak rates, this was prior to the 2008-09 recession. The company received a minimum delivery of 6 to 7 container vessels between 2010-13, these were ordered at the peak rates of USD 155-165 mn, for a ship with a capacity of 10,000-12,000 TEUs. These were the largest available containers at that time.
The company operated ships at a loss as the freight rates moved too low. This depleted the cash base of the company and it raised debt on various occasions in order to utilise the long-term assets, which were created by the company.
Debt doubled to sustain the operations
Long-term debt of the company doubled from USD 4 bn to USD 8 bn from 2010 to 2012, this was mostly driven by the delivery of new ships. Likewise, the short-term debt also increased from USD 1.5 bn to USD 3.0 bn in the same period:
- To meet the working capital requirements during the phase of a continuous loss
- Maturing portion of long-term loans for asset purchases
The company had to sell some of its assets including terminal operations, office buildings and ships to meet the debt obligations on a few instances. Presently, Hanjin has the highest short-term debt level, despite holding a relatively smaller capacity (ranked 10th globally) as compared to some of the largest players. While other companies reduced their capacity to manage their debt, Hanjin was relatively moderate on this front.
(Companies considered: Hanjin Shipping Co Ltd, AP Moeller - Maersk A/S, COSCO Shipping Co Ltd, Hapag-Lloyd AG, Kawasaki Kisen Kaisha Ltd, Mitsui OSK Lines Ltd, Nippon Yusen KK, Wan Hai Lines Ltd)
Stressed liquidity-cornerstone of the receivership filing
Hanjin filed for the receivership with the South Korean court as all the funds with the company dried up. Hanjin’s liquidity has been constantly worsening since 2010 as compared to a few of the other container carriers. Some of the other carriers managed to stay afloat by selling off their assets, scrapping older vessels and through cash infusions by the parent companies and lenders. On the other hand, Hanjin faced lower liquidity due to a heavy fall in freight rates and funding high operation costs of vessels.
Low-interest coverage, liquidity, freight rates and high leverage made the recovery difficult
Hanjin was leveraged twice as much in relation to other players in the industry due to new deliveries, passive management of fleet and cash crunch. On the other side, lower freight rates made it difficult for the company to service the debts.
Hanjin leveraged twice as compared to average…
…while interest coverage remained significantly lower
N.M.: Not meaningful (company reported a negative EBITDA)
The company was in need of a cash infusion, but this is something about which the creditors or the stockholders were cautious. Moreover, given the state of overcapacity in the container shipping industry and the economic health of the United States and Europe region, Televisory do not expect any major funding in the company.
State of the affairs (Sep.-Oct. 2016)
The company filed for restructuring on the 31st of August 2016 due to its mounting debt and declining freight rates. The proposal was rejected by the creditors, which included lead creditor, the Korea Development Bank (KDB) and other government agencies. Further, the company filed for receivership in September.
The company had a total debt of ~USD 5 bn and a short-term debt of ~USD 2.7 bn (as on June 2016). Companies’ creditors and shareholders, the Korean Development Bank, the Korean Airlines and the parent-Hanjin Group were mulling providing funds to the company. However, it was unlikely for the company to receive a big funding in the backdrop of the current state in the shipping sector.
Hanjin was losing USD 2 mn a day by keeping its vessels under operations.
- It was unable to deliver its cargo as various creditors were seizing the ships at ports. Though the company had sought stay orders to protect its ships from seizures in South Korea, Japan and the United States, but ships continued to be seized elsewhere
- Cash strapped-Hanjin faced difficulty in arranging funds required to call at ports
- It was unable to book new cargo
- Fixed costs involved
- The company had to pay a daily charter rate to vessel owners (for chartered fleet)
- The daily operating costs like crew, fuel, water ballast, etc.
The company accumulated a debt of USD 5.6 bn at the end of June 2016. The chairman of the company-Cho Yang Ho infused close to USD 40 mn from his personal wealth for ships to call at ports.
Downsizing of Assets
South Korean bankruptcy court asked Hanjin to submit the rehabilitation plan by 23rd December 2016, the date which was extended to 3rd February 2017. Meanwhile, the company carefully pruned its assets since November 2016. The company decided to sell:
- Pacific routes assets, relevant client management information, units in seven countries assets and manpower related to logistics systems for 31 million USD
- Equity in Algeciras container terminal in Spain to Hyundai Merchant Marine (HMM) for an undisclosed amount
Survivors vs Hanjin - parent/lender support is indispensable
So far, Hyundai Merchant Marine (HMM, a part of Hyundai Group and backed by KDB) and Korea Lines Corp. (backed by Samra Midas Group) have majorly bid for the assets for sale by Hanjin. KDB has recently rolled over the loan of USD 171 mn to HMM. It is interesting to note that the KDB (largest shareholder of Hanjin), which is also a lender to Hanjin chose to back HMM over Hanjin. This is because:
- HMM has recently undergone debt-for-equity swaps with its lenders, which has significantly reduced the liabilities. HMM has also renegotiated charter contracts, which reduced the costs up to USD 453 mn (as per the company reports).
- HMM has been selling off the non-core assets and the focus is on container business. The container business contributed 2/3rd of the revenue in the early part of 2016, from lesser proportions in erstwhile periods
On the other side, Korean Air, the largest shareholder in Hanjin Shipping does not plan to infuse more money due to the lack of a credible plan of operations, which was to be submitted to the board by the management.
Samra Midas group, which has its interests in infrastructure acquired a stake in Korea lines in 2013 when it was on the verge of bankruptcy. Backed by the group, Korea line survived from a bankruptcy situation in 2013. Korea Line recently acquired around 74% stake in Samsun Logix for about USD 143 mn. Yet again, with the parent’s support, the company signed a USD 31.5 mn deal to acquire the assets of Hanjin.
Way ahead for Hanjin and impact on the industry
Televisory believe that this downsizing of assets is unlikely to result in the full recovery of debt carried out by Hanjin as the company will be able to recover only a fractional amount from these sales. Televisory expect the company to be liquidated or scale down its operations when the receivership is evaluated.
Hanjin Shipping holds about 4 per cent capacity of the top 10 shipping companies. The company has been ordered to return the ships held on charters to vessel owners. This capacity, although, when returned to the owners, would find few takers (on charter) as the freight rates are too low.
On the other side, in the case of a liquidation or if the company is downsizing some of the ships held by the company would find buyers. This is because these ships are comparatively newer. Generally, the ships have an average age of about 20 to 25 years.
In the short-term, the freight rates on the selected routes between Asia to Europe and the United States would experience a temporary bump. However, this would eventually normalise to the current level or even lower because of the existing capacity. On a broader note, the shipping industry is set to experience further consolidation/joint operations of larger players. The companies which have strong parent/lenders support would survive while others would perish.