Korean Shipping Lines Face Cash Crunch After ExpansionKyunghee Park
South Korea’s three biggest shipping companies face a cash crunch as 3 trillion won ($2.8 billion) of bonds are due for repayment in the next two years amid mounting losses from a global slump in rates to carry cargo.
Hanjin Shipping Co., Hyundai Merchant Marine Co. and STX Pan Ocean Co. are all forecast to post losses in 2013 for a third consecutive year, further denting the combined 1.3 trillion won of cash and near cash items they had as of the end of September. The companies need to repay 1.4 trillion won of bonds next year and 1.6 trillion won the year after.
A debt-fueled expansion after the 2008 Lehman Brothers Holdings Inc. bankruptcy filing pushed the carriers into losses so deep they may need financial assistance to repay loans taken to buy new vessels, said Kim Ik Sang, a credit analyst at HI Investment & Securities Co. As China’s economy cools and weak consumer spending persists in the U.S. and Europe, the companies are unlikely to turn around to improve their ability to repay loans, said Um Kyung A, an analyst at Shinyoung Securities Co.
“It’s pretty much out of their control,” said Seoul-based Um. “Cash is depleting quite fast while the shipping industry isn’t showing any signs of a recovery. I don’t think we can completely forgo the possibility of things turning worse next year.”
Hanjin, South Korea’s largest shipping company, and Hyundai Merchant are expected to post losses next year as well, according to analyst estimates compiled by Bloomberg. STX, the largest commodity-mover and under court receivership since June, may post its first profit in four years in 2014.
The three shipping lines widened their losses in the third quarter from a year earlier because of an increase in interest payments while demand to move cargo remained weak, according to separate statements filed by the companies today.
Shares of Hanjin Shipping dropped 1.3 percent to close at 6,990 won in Seoul. STX Pan Ocean fell 3.9 percent to 1,115 won. Hyundai Merchant advanced 2.3 percent after it teamed up with Posco and Korea Railroad Corp. to develop a rail project linking Khasan on Russian border and North Korean port of Rajin.
Hanjin Shipping’s Chief Executive Officer Kim Young Min resigned Nov. 11 to take responsibility for the company’s losses and a delay in receiving financing from creditors. The company has 1.1 trillion won of bonds due in the next two years, compared with cash and near-cash items of 382 billion won at the end of September.
Hanjin has been selling assets and has sufficient cash for payments, said Kim Young Tae, a spokesman at the shipping company. The carrier will continue to look at financing options, including a perpetual bond sale, he said.
Hyundai Merchant has 1 trillion won to pay in the same two years, compared with 678 billion won in cash. STX owes 900 billion won with a cash pile of 237 billion won in that period, according to data compiled by Bloomberg. STX is in talks with its main creditors on maturing debt, according to an e-mailed response to Bloomberg News.
Hyundai Merchant has secured funds to meet payments until the first half of next year, said Lee Jun Ki, a spokesman. Hyundai will look at “various options,” if the shipping industry doesn’t improve, he said.
“The amount coming due may not seem big, but it’s a problem if you have a similar size of loan maturing for three straight years and you are not making enough money,” said HI Investment’s Kim. “Of all the industries, shipping is having the biggest problems because of the liquidity issues they face.”
The government holds one of the keys to easing the debt crisis for companies through its Korea Development Bank.
To help troubled shippers and other companies pay down the bonds, the government in July put forward a temporary plan in which KDB will help raise 80 percent of funds needed for repayment. The companies need to bring the rest. That enabled Hyundai Merchant refinance 280 billion won of maturing bonds last month.
“We prepared corporate bond market stabilization steps in July preemptively,” Shin Je Yoon, chairman of South Korea’s regulator Financial Services Commission, said Oct. 24. “I don’t have immediate concerns about the debt market, but we can review easing the July measure to provide help to a broader range of companies if needed.”
KDB declined to comment, it said in an e-mail response.
The state-owned bank has played a key role in helping distressed companies restructure in the past. It’s taking the lead role in rescheduling debt for STX Offshore & Shipbuilding Co. and one of its funds became the biggest shareholder of Daewoo Engineering & Construction Co. by swapping debt for equity.
“KDB is very important,” HI Investment’s Kim said. “If not for them, the circumstances in the shipping industry could be far worse than what they are now.”
Hanjin, which has reported a loss in each of the past 10 quarters, got a loan from affiliate Korean Air Lines Co. in October while Hyundai Merchant sold shares this month.
Hanjin is considering selling stakes in port terminals, it said in a regulatory filing Nov. 12.
A glut of vessels has contributed to the slump in the Baltic Dry Index. The most popular global measure of commodity-shipping rates plunged 90 percent from its peak to a record low of 647 in February last year. The gauge has since more than doubled.
Spot rates to haul container cargo from Asia to Europe, the world’s busiest trading lane, have dropped 12 percent from this year’s high, according to the Shanghai Shipping Exchange.
The global downturn has already claimed two victims in Japan. Last year, Sanko Steamship Co., a Japanese operator of 185 ships, went into bankruptcy protection after failing to reach agreement with creditors on an out-of-court turnaround.
Daiichi Chuo Kisen Kaisha, based in Tokyo, received a bailout from its lead shareholder Mitsui O.S.K. Lines Ltd. earlier this year.
Unlike Denmark’s A.P. Moeller-Maersk A/S, operator of the world’s largest sea box carrier, and Hong Kong-based Orient Overseas (International) Ltd., South Korean shipping lines have been burdened by higher financing costs since the 1997-1998 Asian financial crisis, according to Shinyoung’s Um.
“The Korean shipping lines had the worst timing for investment,” Um said. “While their competitors were able to order ships when prices were low, Korean companies ended up buying at a high.”
While the global container cargo market and commodity shipping rates have improved, South Korean shipping companies will still be at a disadvantage, said Kang Seong Jin, an analyst at Tongyang Securities Inc. in Seoul.
“Koreans are losing competitiveness,” he said. “While the bigger players have been investing to grow their economy of scale, Koreans have been busy trying to repay debt.”