Hanjin’s History Lessons

‘Time is the longest distance between two places’ concludes the Tennessee Williams’ character at the end of the play The Glass Menagerie. For a large number of creditors, vendors, tonnage providers, and predominantly shippers – with $14 billion worth of merchandise packed in containers onboard Hanjin ships, this philological expression was a very hard lesson to put to practice when the company filed for receivership at the end of August.  At present, and with everything going well, the best estimate is that Hanjin’s vessels will be unloaded by the end of October. A very long time indeed for shipping containers ‘lost’ between ports at today’s age.

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In better days… Image credit: Karatzas Images

The developments with Hanjin are still work-in-progress that may take several months, if not years, to settle permanently. For now, it’s a logistical nightmare bordering a legal saga that, in turn, stands on the periphery of the self-feeding financial crisis. Each one of these three parallel worlds will have to run their own course and trajectory, but again, not too far apart from each other. Definitely many lessons beg be learned once all is said and done, and the containers get delivered and the bills get paid, eventually. The fact that Hanjin Shipping has been the largest containership liner company bankruptcy ever (the second biggest was that of the United States Lines in 1986, when the boxship world was still in its infancy) will provide plenty of lessons on where the ‘stress points’ are in the system and the supply chain, and would provide some insight on whether the containership liner industry is a ‘systemic’ industry to the world’s trade.  There have been numerous financial restructurings and bankruptcies in shipping since the crisis ensued in 2008, but almost all of them were in the dry bulk and tanker sectors, where the logistical head-scratchers were much easier to address: usually there is one charterer or cargo owner per vessel per voyage in the dry bulk and tanker markets and not the plethora of cargoes and shippers and vendors with their boxes onboard a containership.

While it will take time to know the fine detail of the numerous parts interacting together in the liner business, a perfunctory view of the case, based on info available so far, indicates that all the factors one would expect to see in the cause of a default in the shipping industry were present in the Hanjin case.

The company, going after market and trying to keep up with the main players in the market, had effectively became a house of cards in terms of over-leverage, financially and operationally. Almost one hundred vessels (out of the 140 vessels under management) were chartered in, effectively with off-balance sheet, non-recourse financing. When the banks and lenders stop lending when one’s balance sheet gets stretched, an ambitious shipowner can just turn to the charter market and can pile up abundantly on tonnage based on their ‘signature’ and their (unsecured) promise to pay. No more than that is needed. Just a ‘sterling’ name and a ‘first class client’, as the saying goes, can be of enough assurance for charter payments and place a tall house a cards in short order. This was once a big deal even back then in 2008, for those who recall.

And, there were plenty of companies and shipowners who had been just happy to offer their tonnage on long term charters to Hanjin, just to show to their own shareholders and lenders that they had cash flow visibility and they were not speculators. Nice long charters with juicy cash-flows that paid until they stopped, that is. It may be worth asking whether such business practice was the result of poor risk management or just a case when no-one really questions whether the emperor may be naked. ‘If so many other tonnage providers had found Hanjin to be a quality charterer, who am I to stop chartering to them vessels’, one almost may be able to hear in a boardroom discussion.

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When days were great… Image credit: Karatzas Images

And, Hanjin was not just any charterer. They had real substance since they were a liner company and had access to the end user. If things turned bad for the market, as they did indeed, Hanjin would have cargoes to move and keep the ships busy and therefore keep making the lease and charter-hire payments. They had access to their own terminals (at least partially), and they had preferential access to S. Korea’s promising and export-oriented economy, and thus, they were supposed to have a backstop if things were to get ugly. As we learn now, a bad market is a bad market and it burns cash for stand-alone owners but also burns cash for strategic owners, like Hanjin, too. Notions of an end-user charterer are great, but again, a bad market can pinch sharply enough to make the pain felt on the bone of an end-user.

And, Hanjin was part of a substantial industrial conglomerate with strategic access to the ‘system’, that is the government and the state banks; it had to, as being a chaebol company, they had the implicit ‘put option’ of the government itself. And beautifully this was played until when the cash burn topped US$ 2 million per diem, and all the constituents had to look for alternative solutions. You can support a company-in-need for so long, but again, all love in this world has to have some limits.  And with Hyundai Merchant Marine (HMM), the local competitor, reaching the restructuring altar in the summer first, there were one too many brides afterwards. There are still many more containership and liner companies that could be considered to have a quasi-government guarantee worldwide. Caveat emptor.

As much as we would like to believe that the Hanjin case will be an example to be held, one has to be doubtful. Time and again, defaults happen in shipping with almost metronomic frequency, and all the times, the same old factors drive those shipping companies to the ground, or the bottom of the sea for that matter: aggressiveness, over-leverage, poor risk management, over-reliance on fundamental assumptions that turn out to be fundamentally wrong, and wishful thinking.

But again, if it were not for all these surprises, shipping would be just any other boring industry. One-dimensional with ships floating beautifully over the ocean. Apparently, there is the dimension of time, at least until one gets their container delivered.


The article above was first published on Splash 247 under the heading ‘Hanjin’s Longest Voyage Yet’ on October 17, 2016.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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Moral Hazard and Hanjin Shipping

Not a week has passed since we posted an article on the Maritime Executive’s website about moral hazard in shipping, and the shipping world got a big-proportions, real-life case study of the risks in the industry. We argued that when shipowners are over their heads in debt and with little promise of ever recovering any equity, there is precious little they care about financing, operations, trade, safety and even the environment.

Hanjin Shipping, based in South Korea and world’s seventh biggest containership company, filed for protection in S. Korean courts in late August, and subsequently started filing for protection in several jurisdictions worldwide, including in the United States federal bankruptcy court (filing for Chapter 15 restructuring in Newark, NJ). As of the end of second quarter this year in June, the company had outstanding obligations close to US$ 5.5 billion, approximately US$ 900 million of which due by the end of 2017. There were approximately US$ 700 million in equity on the balance sheet. Hanjin stands as the manager of appr. 142 vessels, 98 of which are containerships and 44 are tankers and bulkers. Only one-fourth of Hanjin’s fleet is self-owned, 38 of them owned and the rest chartered in from leasing companies and other financially-minded shipowners. The ownership mix of the tonnage indicates more of a light-asset, trading company rather an asset-heavy, ship-owning balance sheet. The current value of the owned fleet stands at appr. US$ 1.7 billion.

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Shipping crossing a bridge… Image Credit: Karatzas Images

Many details are still too opaque and covered by bilateral non-disclosure agreements, but where several of the counterparties have been publicly listed companies, one can draw certain conclusions: Hanjin had chartered in two 2010-built capsize vessels from publicly listed Navios Maritime Partners (ticker: NNA) MV ‘Navios Luz’ and MV ‘Navios Buena Ventura’ at a daily rate of US$ 29,356 pd each; the average spot capesize market was barely $6,000 pd during the last year, and presuming that Hanjin was trading the vessels on the spot market, they were losing $23,000 every single day for the last year ; of each of the two vessels. That is $16 mil down the drain for the two vessels in just the last year alone; each of the vessels had more than four years of employment remaining with the shipowner, and presuming that the spot capesize market would remain at present levels, Hanjin would had to suffer another $90 mil in losses for just these two vessels. Eight containerships chartered in from Danaos (ticker: DAC) had charter payment obligations of appr. $565 million. Similarly, three neo-panamax containerships from Seaspan (ticker: SSW) had outstanding charter obligations of close to US$ 370 million. These charter obligations add up to close to US$ 900 million, and under present market conditions, reasonable estimates would be for losses of more than US$ 500 million. And these are the calculations based on publicly available information for only thirteen of the 100+ vessels chartered-in, with only three counterparties. There are un-accounted obligations for more than eighty vessels that have been chartered in from other owners.

$23,000 losses every single day in the last year for each of the two capes chartered from Navios. Talk about destruction of value!

What options such a ‘shipowner’ like Hanjin (effectively a structured house of cards) does have under the circumstances? As one would suspect, very few. There is little in matter of equity, there is little in matter of collateral, there is lots of debt, and mostly, most of the debt is in relatively unsecured position since it’s in the form of charter obligations for the vessels that have been contracted on charter arrangements.

Playing the devil’ advocate and ask surreal but economically oriented questions: How much vested interest the shipowner has in the assets and the business? Precious little, at this stage. What are the odds that they will recover any equity? Probably better than hitting the jackpot in a national lottery, which we all know is not a fair proposition. What would any rational economic being would do? Briefly, either ask for the mercy of their creditors, or, having little to lose, just stop paying the creditors and pass the buck to the other side. What we called moral hazard in the previous posting.

Hanjin had been rumored (along with their co-patriot Hyundai Merchant Marine (HMM)) to be facing financial problems and was an accident waiting to happen. HMM, being slicker, and faster, and part of a big chaebol (traditional corporate conglomerate structure in S. Korea, strongly affiliated with family management style and running businesses deemed strategically important to the State, in exchange of the State’s preferential treatment), managed in August to find their way out of their financial ‘pickle’. When Hanjin tried to secure the consent and more financing from their lenders (mostly Korean banks and the state-owned Korean Development Bank), there was little empathy. This would make perfect sense, as their lenders were in relatively preferred senior position, and any new financing would be considered either ‘throwing good money after bad money’ or diluting their position and getting lower on the seniority scale of claimants. It would make economic sense to refuse any new financing and let the un-secured creditors (that is the shipowners of the hundred vessels on charter to Hanjin, like Navios, Diana, Seaspan) accept a less demanding solution. Again, Hanjin and their prime financiers decided to drop the moral hazard bomb to the parties with a lower legal claim, the shipowners of the vessels.

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The good times left behind… Image Credit: Karatzas Images

Hanjin Shipping is the seventh containership company in the world but with only appr. 3% market, thus, belonging in the lower tier of containership companies as compared to behemoths like Moeller Maersk, Cosco, MSC and CMA CGM. A default by Hanjin cannot be expected to have a major domino effect on the overall shipping or containership world markets. The majority of Hanjin’s lenders were Korean banks, including the Korean Development Bank (KDB), and the Korean banking system (and the Korean taxpayer, if so required) can absorb the losses without posing a systemic risk to the Korean economy, at least at this stage. Hanjin had been a major carrier for LG electronics, but again, even Hanjin’s demise could not be detrimental to LG and the Korean electronics and manufacturing industries; not to mention, since HMM’s successful restructuring in the summer, now there has been an alternative, an alternative based in Korea itself (subsequent reports state the LG has already been shifting their shipment contracts to HMM). Thus, once the situation was ‘ring fenced’ and a fall-out was determined to be contained, Hanjin and its main creditors stopped paying to the lower standing creditors (other shipowners with charter-in tonnage). An example of moral hazard in all its glory.

Hanjin has filed for restructuring (and not for liquidation) expecting to find a way to save the company as a going concern over the long term. However, owners of vessels on charter to Hanjin, companies like Danaos, Seaspan, Navios and many other smaller, private owners, stand to lose the most. In an oversupplied market of low freight rates, it will be difficult to withdraw their vessels from Hanjin and seek equally profitable charter rates elsewhere in the present market; likely, they will have to accept lower and extended rates that Hanjin will offer them, and possibly some equity upside if and when the company recovers. Otherwise, the shipowners will have to seek legal remedies which are costly and time consuming, and always risky on whether there will be a chance to ever collect. After all, the events of last week have shown that Hanjin is not a systemically important company to the Korean economy, there is little the Korean constituents that can lose, there is little left for Hanjin’s management and shareholders to lose. Heads I win, tail you lose.

A case of moral hazard of the highest caliber.


A better edited version of this article was originally published on The Maritime Executive website on September 6th, 2016 under the title ‘Moral Hazard Case Study: Hanjin Shipping’.  This article builds on our essay on the dangers of the moral hazard in a weak freight market posted in early September in this post, when market participants were left with few options and little to lose, so much so that they care little for the outcome or the interests other constituents of the shipping industry.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Lexis Nexis – Hanjin Receivership Free Webinar

Hanjin Shipping‘s filings in early September 2016, for receivership in South Korean court and subsequent filing for Chapter 15 protection in US federal bankruptcy court, have been making front-pages news even in general interest newspapers and media. The case revolves around logistical, legal and financial considerations interweaved perilously together and can potentially affect everyday life with peak shopping season soon upon us.

LexisNexis Legal & Professional is hosting a Free Webinar on the matter of Hanjin’s receivership addressing both legal and commercial issues of the case. The Webinar is held on Wednesday October 5th, 2016 at 15:00 hrs EDT.

Registration is fee and open to the general public. Entities interested in the case and its repercussions, whether they have immediate outstanding claims in the case or looking for general information on the case and the overall shipping markets are encouraged to register to attend.

We are delighted that Basil M Karatzas, CEO of Karatzas Marine Advisors & Co., has been invited to participate at the Webinar and address questions of commercial nature on the case and the overall shipping markets.

Mr Daniel Saval, partner with Brown Rudnick LLP, and holding substantial experience with Chapter 15 law, will be addressing legal questions during the session.

The Webinar will expertly be moderated by Ms. Danielle Bennett, Esq., Subject Matter Advisor on Banking, Finance and Restructuring with Lexis Nexis.

LexisNexis Legal & Professional is a leading global provider of content and technology solutions that enable professionals in legal, corporate, tax, government, academic and non-profit organizations to make informed decisions and achieve better business outcomes. As a digital pioneer, the company was the first to bring legal and business information online with its Lexis® and Nexis® services. Today, LexisNexis Legal & Professional harnesses leading-edge technology and world-class content to help professionals work in faster, easier and more effective ways. Through close collaboration with its customers, the company ensures organizations can leverage its solutions to reduce risk, improve productivity, increase profitability and grow their business. LexisNexis Legal & Professional, which serves customers in more than 175 countries with 10,000 employees worldwide, is part of RELX Group, a world-leading provider of information and analytics for professional and business customers across industries.

To Register for the Free Webinar, please click on the brochure herebelow and follow the instructions! We are looking forward to receiving the benefit of your participation at the event, on Wed October 5th, 2016, at 15:00 hrs EDT!

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© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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Hanjin Shipping in Receivership

On August 31st, 2016, Hanjin Shipping filed a receivership petition with Seoul’s Central District Court, and on September 6th, for Chapter 15 protection at US Federal Bankruptcy Court in Newark, NJ. Filings in approximately 45 jurisdictions worldwide, where Hanjin vessels trade, are expected to be filed in the very near term.

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Containership MV ‘Hanjin Monaco’ against the downtown Manhattan skyline in better days. Image credit: Karatzas Images.

With approximately 140 vessels under management, only 40 of which are self-owned and 100 chartered-in or leased, there have been serious implications for the market, at least in the short term. With only US$ 700 mil in equity, US$ 1.7 billion value of its fleet and $5.4 billion in outstanding obligations, the capital structure resembles a house of cards. The value of the cargo on-board of Hanjin’s vessels at the time of filing for receivership was estimated at $14.5 billion. The ensuing result has been a logistical nightmare, given all such cargo had contractual obligations to be delivered on time, but Hanjin’s vendors would not render any services unless they were getting paid in advance. Receivership and Chapter 15 can stop creditors from knocking on the door, but vendors would now perform only on cash basis payments. Hanjin’s financial nightmare has been compounded by the legal complexity of the business which is further compounded by the logistical complexity of the containership liner business. Only the fact that the containership market has appr. 25% capacity (which has caused Hanjin’s financial troubles in the first place) can alleviate concerns that Hanjin’s potential demise will no be a threat to the supply chain and international trade.

Hanjin’s filing has been front page news for the whole last week. Here’s a list of articles in the print, TV and radio coverage where Basil M Karatzas and Karatzas Marine Advisors & Co were quoted:

Moral Hazard Case Study: Hanjin Shipping                                                          Maritime Executive, September 6th 2016

Containers Stranded at Sea After South Korean Company Goes Bankrupt         NPR, All Things Considered, September 8th, 2016                                                    To Listen to the Audio Clip, Please Click here!  

Retailers Seek U.S Help With Shipping Crisis                                                            The Wall Street Journal, September 1st, 2016

Hanjin Shipping Bankruptcy Unlikely to Ease Gluts of Vessels                                    The Wall Street Journal, September 2nd, 2016

Shipping Chaos                                                                                                              The Exchange CBC News Canadian Broadcasting Corporation                                TV Interview, September 2nd, 2016

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Basil Karatzas on CBC News – The Exchange about Hanjin Shipping’s Receivership. Image credit: CBC

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

 

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