Sep 1, 2016

Hanjin Shipping goes under, files for court protection

Hanjin Shipping announced at the board of directors' meeting held on Aug. 31 that it has decided that day to file for court receivership. The company presented a proposal for business normalization at the end of last week that included additional funding amounting to 500 billion won, but Korea Development Bank (KDB) and the rest of its creditors rejected such proposal on Aug. 30, so it was forced to abort its business reconstruction program under a self-directed agreement. With the de facto bankruptcy, the company will be targeting restructuring under the control of the court henceforth, but some of its operational vessels are already being seized right now. Further, Hanjin has a much bigger scale than those that have gone under in the past and this is the first time that an operator has filed for bankruptcy amid the penetration of the alliance system in the industry, so it is possible that the effects of its bankruptcy will have a wider reach. The business failure of Hanjin involves other operators, shipyards in South Korea and hub ports such as Pusan port, so it is projected to leave significant aftershocks in the industry.

Hanjin Shipping presented a 500 billion won business normalization proposal to its creditors on Aug. 25, and whether or not it would be accepted by KDB and the rest of its creditors attracted a lot of attention from the concerned sectors then. However, there was big gap between Hanjin and the creditors who asked for additional support amounting to 1 trillion won, from 700 billion won, from Hanjin, so the creditors' group rejected the said proposal on Aug. 30 and decided to refrain from giving additional funding support to the company. In light of this, Hanjin announced on Aug. 31 that, "We will abort our actions toward business normalization under self-directed agreement, and then map out the return to normal of our business by filing for rehabilitation procedures." It disclosed that it intended to apply for court receivership. The specific start of the procedures is not immediately available.
According to the French maritime consultant Alphaliner, Hanjin currently has the seventh largest containership fleet in the world with 98 vessels under its operation. Other containership operators have gone under in the past, including Cho Yang Shipping, US Lines and Grand China Logistics, but compared to these operators, Hanjin has an overwhelmingly vast operation scale. Further, its bankruptcy is unprecedented in the sense that this is the first that a major operator has filed for bankruptcy after building close partnerships with other major operators through alliances.
In light of the refusal of its creditors to offer support, the effects have already started to be felt in its service system. According to operators and multiple other related entities, it seems that there are now moves to seize the containerships operated by Hanjin at overseas ports. Shipowners and bunker suppliers are believed to be seizing its ships before the court releases the order to freeze its assets, putting a pressure on other operators that jointly operate services with Hanjin to make a move. Other operators that use space in Hanjin's services are now halting the transfer of their cargoes to Hanjin's vessels and switching to other services. Hanjin belongs to the CKYHE Alliance in the East-West trade, so the effects of its bankruptcy are spreading over a wide area. As for the services to/from Japan, Hanjin offers Japan-South Korea feeder services, as well as its own services or joint services with other operators in the North America, Australia and South America West Coast trade routes, among others, and it looks like these services will be affected as well. Further, the fleet supply in the market will shrink, so there will probably be a certain degree of effect on the freight rates market.
It is unclear what process Hanjin will go through after the court receivership procedures begin, but it is highly probable that the court will order the freezing of its assets in light of its application for court protection. When that happens, its assets cannot be liquidated and charterage payments will be prohibited without the permission of the court. Hanjin charters containerships from Seaspan, Danaos and even from several Japanese shipowners, and there is concern that charter payments for the vessels leased from these owners will be delayed due to the court receivership. Further, there will be negotiations among the concerned sectors concerning the calculation of the remaining bunker oil on ships, but there will apparently be a risk of ship operation ceasing during the period of negotiations.
And even if the reconstruction process progresses, the alliance problem will become a major issue in the medium to long term. Hanjin will establish 6-member group, The Alliance, with three Japanese operators and Hapag-Lloyd, Yang Ming Marine Transport in April next year in a bid to foster partnerships in the East-West trade and other lanes. But if a member operator in the alliance goes under court control or becomes bankrupt, the rule is that the bankrupt operator can be removed from the alliance upon the consent of all operators concerned. It is not certain what will really happen henceforth, but The Alliance is currently in the middle of building a service system in preparation for the start of their services next spring. A prompt decision has to be made on whether Hanjin will be kept in the alliance or expelled from it. Assuming that it were removed from The Alliance, then there is danger that even if its rehabilitation procedures were to progress, it still will not be able to join any alliance in the future anymore. The alliance strategy is essential in the current shipping market, and even if the court receivership of Hanjin advances, its future remains very uncertain.

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