Liquidity Relief
As cash-strapped shipping company Hyundai Merchant Marine (HMM) has received the approval of its creditors for self-rescue measures and is about to choose the preferred bidder for the sell-off of its brokerage arm Hyundai Securities, all eyes are on whether Hyundai Group can normalize management.
According to industry sources, EY Han Young, an accounting firm that manages the sale of Hyundai Securities, and Hyundai Group was supposed to select the preferred bidder for the sale on March 29 but they decided to postpone it to the 30th. On the 25th, Korea Investment Holdings, KB Financial Group and Hong Kong-based private equity fund AKTIS submitted the bid for Hyundai Securities.
The sale of Hyundai Securities went to pieces in 2013. However, market analyst said that the much-delayed sale will likely go through this time because Hyundai Group is currently facing a liquidity crunch, and Hyundai Group Chairwoman Hyun Jeong-eun stepped down from the board of troubled HMM, showing a strong will for revival. Once the sell-off deal of Hyundai Securities is closed as planned, it will be the third sale of its assets, including its bulk cargo unit Bulk Liner Division and its container terminal Hyundai Pusan New-Port Terminal in the southern coastal city of Busan.
Moreover, HMM has introduced the self-rescue measures. At the meeting on the day, creditors of HMM, led by state-run Korea Development Bank, gave a nod to HMM’s self-rescue plan. A self-rescue program is often called a low-intensity workout because it has no legal basis, unlike workout programs under the Corporate Restructuring Promotion Act. Accordingly, Hyundai Group is now able to roll over 1.2 trillion won (US$1.03 billion) worth of debt, having some breathing room of liquidity. However, there are still problems to be solved before providing a full-scale support.
First, Hyundai Group needs to cut rates paid to the owners of chartered ships and extend its corporate bond maturity. Unless these two problems are solved first, the support will be useless, said creditors. When creditors provides financial aid without restructuring corporate bonds, the company is highly likely to use up all the money to pay back interest on its corporate bonds. HMM now has more debts to corporate bonds than on bank. Its total debt is estimated to be around 4.8 trillion won (US$4.12 billion) and only 1.2 trillion won (US$1.03 billion) came from creditors.
The negotiations with overseas ship owners over charter rates is also another variable. Last year, HMM spent 1.88 trillion won (US$1.61 billion) on charter costs alone out of 5.77 trillion won (US$4.95 billion) of its sales. Due to the long-term contract signed when the shipping business was booming, the company has been paying higher charter rates than the market value. Eventually, HMM began negotiations with ship owner in order to lower the current charter rate by 20 to 30 percent. When HMM fails to bring off the negotiations and go into receivership, the company is less likely to pay charter costs to ship owners. Thus, there is good chance of making a deal. HMM’s negotiation team has been visiting overseas ship owners from last month. The team finished the first round of negotiations and is arranging the schedule of renegotiation to determine specific pricing terms.