Biggest Korean Shipping Defaulter Has New Owners, Same Old Slump

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Pan Ocean Co., the biggest defaulter in South Korea’s shipping industry, has new owners and a fresh debt workout plan. Trouble is, the company’s market is worse than when payments were first missed two years ago.

The nation’s largest drybulk carrier agreed to a 1 trillion won ($899 million) purchase by poultry and animal-feed company Harim Group and private equity firm JKL Partners, along with a debt restructuring proposal. Unsecured creditors will receive 67 percent of their money in new stock and 33 percent in cash by 2023, with old shareholders losing 92 percent of their capital.

As a global commodities rout deepens, freight rates this year are lower than the levels preceding Pan Ocean’s default, offering scant comfort for creditors being repaid in coming years. The company had $4.5 billion of liabilities when it filed for Chapter 15 U.S. bankruptcy protection in June 2013, the most in South Korea’s transportation industry, according to Bloomberg-compiled data.

“The reorganization did cost a lot of people a lot of money and for a lot of creditors they will be happy to forget and move on,” said Robert Southey, managing partner in London at Trench Capital Partners, who has traded the shipper’s distressed loans. “It’s quite an ambitious consortium, they have a vision that most people wouldn’t share because the world shipping market is not over its worst time.”

Harim Vision

The Harim-JKL consortium is receiving 340 million new shares, or 65 percent of its enlarged share capital, and 158 billion won of five-year bonds. The recapitalization plan was approved by Seoul’s Bankruptcy Court on June 12.

“We see a lot of cost benefits having a drybulk shipping operation with our livestock and animal feeds business,” Kim Hong Kuk, chairman of Harim, said by e-mail. “When Pan Ocean exits from court protection, hopefully next month, we expect its credit rating to improve so as to allow us to borrow at a lower cost in the future.”

Pan Ocean, which derived 80 percent of its $1.5 billion sales from bulk-carrier service in 2014, will have more than 2 trillion won of net assets and a debt-to-equity ratio of less than one time by the end of 2015 from 2.2 times at end-2014, said Kim, who is based in Seongnam city near Seoul. The shipper’s old debt can be repaid as profitability improves, he said.

Formerly known as STX Pan Ocean, the company evolved and expanded by buying bankrupt shipbuilders from 2001 to 2004 to capture demand for moving goods. It became the first Korean company to be listed in Singapore’s stock exchange in July 2005. The firm had seven local-currency bonds with a total face value of 1 trillion won when it sought court protection.

Debt Settlement

Since December 2013, the shipper has issued 1.22 billion of new stock to settle 2.2 trillion won of debt, including from its former key shareholder Korea Development Bank. Other claimants include Korea Finance Corp., the Korean Teachers’ Credit Union, Dong-A Tanker Corp. and Merrill Lynch International.

Drybulk companies are the hardest hit by a capacity glut in global shipping as China’s economic slowdown weighs on demand for commodities, according to Bloomberg Intelligence.

“I don’t expect any meaningful rebound in global trading volume in the near future,” said Kim Jinha, the head of global fixed income in Seoul at Mirae Asset Global Investments Co. “I don’t think it’s the right time to be positioned for a cyclical upturn.”

Generates Profit

Pan Ocean made $749 million in net income in 2014 after losing $1.76 billion in 2013, according to its latest financial statement, while sales declined 36 percent to $1.56 billion. The profit was generated by terminating contracts on high-cost chartered vessels, the filing shows.

As fleet size and cargo volume shrink, it has trimmed seagoing personnel to 1,573 in 2014 from 2,098 over two years. The shipper forecasts operating profits to drop to $160 million this year from $204 million in 2014. That implies operating margin will narrow to 10.7 percent from 13 percent.

“What to expect is uncertain due to prolonged depression in the shipping market,” administrator Kim You Sik said on its website. “The harsh winter still continues for the survival of shipping companies.”

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