Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Depending on whom you ask, South Korea's largest container-shipping company filing for court receivership has shades of good, traces of bad, and dollops of ugly.

The last of the three is the most obvious. During the past four years, as global trade first stumbled and then stalled, shareholders in Hanjin Shipping lost almost 93 percent of their investment, with a two-thirds decline occurring just this year.

Against the Tide
Hanjin Shipping's options to remain solvent are fading
Source: Bloomberg
Note: Data not available for some quarters.

But the ugly outcome for shareholders wasn't entirely unexpected -- not with Hanjin's debt at the end of last year surging to 152 years' worth of earnings before interest and taxes.

Liquidity, too, became an insurmountable challenge. Between now and end-2017, the company had to repay or refinance more than $900 million of obligations, according to data compiled by Bloomberg. Besides, with control of smaller rival Hyundai Merchant having already passed to creditors, it was clear that Seoul was in no mood to engineer a last-minute rescue for Hanjin.

Maturity Peak
Hanjin Shipping has a total of $4.71 billion in bonds and loans outstanding
Source: Bloomberg

From taxpayers' perspective, it's a good thing that their interests are getting precedence over the mighty chaebol, especially the likes of Hanjin Group, whose Chairman Cho Yang-Ho's daughter was the central character in the country's infamous "nut rage" drama two years ago.

To be sure, there wasn't much of a case for a state-sponsored bailout. Contagion risks are low because the big creditors to the industry aren't commercial banks but state-controlled policy lenders, such as Korea Development Bank. With the latter joining other claimants in rejecting Hanjin's restructuring plans as inadequate, it became clear the government wouldn't postpone the inevitable by throwing good money after bad. 

Still, it's nearly impossible for an export-driven "Asian Tiger" to stand by and watch its role in global trade flows wane. Sure enough, the Korean Financial Services Commission responded to Hanjin's receivership announcement by saying it would seek ways for Hyundai Merchant to buy the bankrupt company's healthy assets.

Hyundai Merchant's shares jumped as much as 28 percent on the news. For Korea Development Bank and other lenders who now own the biggest chunk of its stock, this is probably the best chance to recoup as much as they can of their soured advances. But it's bad news for global shipping. If consolidation alone was enough to save the industry from its gross oversupply of vessels, Hanjin might not have got into this position in the first place.

Moving the Deck Chairs
Four of the world's top container shipping lines are disappearing. The fleet is still growing
Source: Alphaliner
Note: TEU=Twenty-foot Equivalent Units. Forecasts are based on August 2016 figures, with current totals for UASC and Hanjin Shipping added to current totals for Hapag-Lloyd and Hyundai Merchant. No adjustments have been made for future deliveries and demolitions.

Over the past 18 months, Hamburg Sued has bought the container unit of Chile's CCNI; France's CMA CGM has spent $2.4 billion buying Singapore's Neptune Orient LineHapag-Lloyd has taken over United Arab Shipping Co.; and the web of shipping and ports businesses controlled by Cosco Group and China Shipping have been remixed into a more focused group of companies. But the global container fleet has continued to grow, if at a reduced pace, while rates remain on the floor.

High in the Water
A rash of mergers over the past year hasn't reversed the relentless growth of the global container fleet
Source: IHS Global, Bloomberg

Changing the names on the ownership documents of vessels, as would happen with a sale of Hanjin's fleet to Hyundai Merchant, would do nothing to change that dynamic. What's needed is either for global trade volumes to grow into the spare capacity that's floating around the high seas, or for shipowners to send more vessels to India, Bangladesh and Pakistan to be broken up.

The solution to the crisis in global shipping doesn't lie in the office of a bankruptcy lawyer, but in a scrapyard.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. In South Korea, only about 30 percent of the beleaguered shipping industry's loans are from commercial banks, for which such advances account for only 0.6 percent of their total credit, according to Fitch Ratings.

To contact the authors of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net