The recent bankruptcy of South Korea's largest shipping liner has served as a dramatic illustration that imbalances in the global shipping market are no longer sustainable. Can the industry restructure or are further collapses inevitable?
On 31 August 2016, Hanjin Shipping – the world's seventh largest container carrier by capacity – filed for receivership in South Korea. Burdened with US$5.5 billion in debt, and having failed to deliver a consensual restructuring with creditors in April, Hanjin's collapse was not entirely unforeseen.
Nevertheless, such a major shipping bankruptcy, particularly given that Hanjin reportedly facilitates nearly 8% of annual trans-Pacific trade for the United States, has sent shockwaves throughout global shipping and logistics markets.
Immediate impacts of Hanjin Shipping collapse
The ripple effects of Hanjin's failure have been immediate and wide-ranging. Ports across the globe, lacking confidence that the company has the resources to pay docking fees, rejected Hanjin vessels and their cargoes. As a consequence, dozens of container ships were stranded outside major seaports in possession of some US$14 billion worth of undelivered cargo.
The most immediate impact is therefore being felt by those companies whose supply chain has been interrupted. These parties' priority will be to secure continuation of supply to limit losses arising from lost production or sale.
Once the initial crisis management period passes, stakeholders will face difficulties quantifying their losses and this has the potential to result in significant multi-jurisdictional disputes.
Looking at the wider shipping industry, it is clear that many direct competitors of Hanjin will benefit in the short term. However, there will also be a large number of counterparties who will have to recognise losses as a result of the collapse, and this will only add to an already complicated financial picture for them.
This is particularly true for those parties who will now need to fix vessels anew, and may have to do so at market rates well below those under existing agreements with Hanjin.
Ship financing under the microscope
In recent years, many shipping companies have been in danger of breaching their LTV (loan-to-value) covenants as the value of their vessels declined at a rate faster than that at which they have been able to repay their loan requirements.
In the months prior to the collapse of Hanjin, the Korea Shipowners Association (KSA) made numerous appeals to different Korean banks requesting that they relaxed their LTV covenants to allow struggling shipping companies to work through their liquidity issues. A number of reprieves were granted, however, it is likely these loans will now fall under renewed scrutiny.
We feel that the attitude of the banks to these circumstances will be critical – they are the key stakeholders who can force the issue. Traditional ship-finance providers, especially those in Greece and to a lesser extent Germany, have had their own financial difficulties to resolve.
Our intelligence suggests that those banks are now being forced to confront their shipping loan books and are beginning to work out problem loans. This has the potential to act as a major catalyst for industry players to engage with their banks in a restructuring context.
Hanjin insolvency – tip of the iceberg?
Could Hanjin be the first of a number of bankruptcies in the next year or so? The global shipping market has arguably been in a state of semi-permanent crisis since 2008 and yet, despite the extremely challenging trading environment, there have been remarkably few bankruptcies (OW Bunker and STX among a few notable exceptions).
It is clear that, fundamentally, supply and demand remains unbalanced across key segments of the industry. A significant contributor to this is that new containerships have been added to the market at an increasing rate, in spite of stagnant growth in trade (trade itself has been curtailed by a slowing of the world economy, not least driven by macro-economic dynamics in China).
The resultant supply-driven overcapacity has put enormous downward pressure on freighter rates, and this has led to businesses struggling to meet not only their financing obligations but also operating costs.
To this end, and although we recognise that there have been a number of high-profile restructurings (such as Frontline, TORM, TOP Ships and, most recently, Hyundai Merchant Marine), it is our view that the industry and its stakeholders have yet to adequately address the financial challenges that face them.
While we would anticipate that the major tier 1 carriers will have the scale to survive, it is the smaller operators that are the most vulnerable. Over the course of the next 12 to 24 months, deteriorating finances and increasing liquidity pressures will result in further restructurings and, we believe, ultimately a number of bankruptcies throughout the industry.