The collapse of Korean shipping giant Hanjin will have a ripple effect throughout Asian trade, according to regional experts.
Earlier this month, the company in command of the world’s seventh-largest fleet filed for the largest-ever bankruptcy in the shipping industry. The collapse came after the company’s creditors, led by the state-owned Korean Development Bank (KDB), refused to extend the terms of the debt Hanjin owed.
In total, Hanjin owed some US$5.5bn to a range of secured and unsecured creditors, with those involved in Asian trade and shipping now trying to count the potential cost the disruption may have.
A court in Seoul has granted Hanjin a rehabilitation proceeding, meaning it has temporary protection against insolvency. Subsequently, its legal advisors have been seeking similar court rulings around the world, from London to Singapore.
While this has offered the company a matter of months to get its debts restructured and potentially emerge as a viable company, it was granted to the ire of unsecured creditors, who must now wait and see if Hanjin can successfully sell enough assets to meet its debt obligations.
“It’s the first step either to save the company or put it into liquidation. In simple terms, it gives the receiver breathing space to organise a gathering of debts and termination of contracts to see if there’s a company that can be saved at the end, or whether it is so indebted that the best thing for it is to put it into liquidation,” Beth Bradley, legal director of Clyde & Co in London, who specialises in maritime law and South Korea, explains to GTR.
She continues: “I don’t suppose any of their unsecured creditors are remotely happy about this protection being in place because of the knock-on consequences. The main creditor is the KDB. The other big ones will be the trading partners: container leasing companies, the ship owners they have chartered ships from, the charterers and bunker suppliers – they’ll be the main unsecured creditors.”
A few years ago, there was an issue with the multiple financing of the same shipments in Qingdao, and it’s a similar drill you go through. Mark Evans, ANZ
Hanjin accounts for 3% of the global container trade, according to Nomura analysis. It is responsible for 6% of freight between Asia and Europe and 8% of Asia-North America bilateral freight.
As companies gear up for the holiday spending season, fears have been mounting about how much stocks have been holed up on Hanjin ships. The complex supply chain has meant that banks that are not directly exposed to Hanjin’s default have needed to be in constant contact with their own customers to make sure they are aware of the situation and that they have the requisite working capital to ride out the storm.
Mark Evans, head of transaction banking at ANZ, likens it to the Qingdao fraud case in China, where multiple loans were used to secure a single cargo. A host of financial institutions were caught up in the scandal, but almost everyone in the market was scrambling to find out what their indirect exposures were.
“These sorts of runs happen from time to time. A few years ago, there was an issue with the multiple financing of the same shipments in Qingdao, and it’s a similar drill you go through,” he tells GTR.
“We’re not necessarily a financier of Hanjin, but the whole supply chain is so vast. As the news started to break we got a note out to say: if a company has any shipping that’s being presented with Hanjin bills of lading, if there are invoices or LCs involved, you better talk to the customer, make sure they’re comfortable with that, have all the risk mitigation in place, all their t’s crossed and i’s dotted to make sure that can be captured.”
While the macroeconomic conditions and decline in global trade have hit the shipping sector hard, the over-investment in assets has led to a huge surplus in vessels on the sea. However, consolidation in the industry might help to alleviate further collapses of this scale.
“Hanjin is certainly a prime example of the severe overcapacity that has plagued the shipping market,” says Zvi Schreiber, CEO and founder of Freightos, an online freight marketplace.
He adds: “The 50% increase in rates following the bankruptcy is likely to be transient; spare capacity from other shipping lines is already being diverted from other trade lanes or idle ships to alleviate demand. As Hanjin was responsible for nearly 8% of Trans-Pacific shipping, the influx in pricing will continue for some time. A new Korean alliance is also being created, which should reduce any impact on shippers.”
This story is set to roll: the uncertainty will continue and it is as yet unclear what will emerge from this crisis, one of the largest to face the industry in Asia since the financial crisis of the late 1990s.