Ripple Effect
Hanjin Group Chairman Cho Yang-ho is in a quandary over Hanjin Shipping. In a bid to carry on the group's late founder Cho Joong-hoon who established a total logistics firm connecting land, sea and air, he took over Hanjin Shipping, which was in financial difficulties. However, the situation is getting deteriorated and it is adversely affecting the group’s major affiliate, Korean Air.
The government also changed its position and put pressure on the group to liquidate Hanjin Shipping quickly. Accordingly, Chairman Cho is seriously troubled over it.
On March 31, Korea Investors Service Inc., a credit rating agency in the nation, had lowered the credit ratings of Korean Air to “BBB+” from “A-.“ It also revised its outlook on the company to negative. The movement is contrary to the fact that Korean Air doubled its operating profits last year despite unfavorable conditions, including the outbreak of MERS. This is due to Hanjin Shipping whose largest shareholder is Korean Air.
As the shipping market situation got worse, Hanjin Group, including Korean Air, offered more than 1 trillion won (US$881.06 million) of financial support to Hanjin Shipping directly and indirectly from 2013. The group also bought 220 billion won (US$193.83) of Hanjin Shipping’s consol bonds at the end of Feb. this year, injecting 650 billion won (US$572.69 million). But, it has become more and more difficult to repay loans with 5.6 trillion won (US$4.93 billion) of liabilities and 847 percent of debt rates.
Korean Air seems to be adversely affected by Hanjin Shipping’s precarious financial conditions. Earlier this month, Korean Air issued corporate bonds worth 250 billion won (US$220.26 million). At that time, there were concerns over additional financial support to Hanjin Shipping, and Korean Air announced, “The company has no plans to provide additional financial support to Hanjin Shipping.”
Financial authorities and creditors concluded that Hanjin Shipping will not be able to survive independently, and they asked Chairman Cho to make a decision. So, he should decide whether to receive support from the group or additional support from creditors in order to normalize the business. Authorities and creditors will come up with restructuring measures for Hyundai Merchant Marine and Hajin Shipping as soon as Hanjin Shipping makes the decision. A senior official from creditors said on the 21st, “Hanjin Shipping is expected to unveil its plan for the management normalization to creditors next week at the latest.”
Creditors are concerned that Hanjin Shipping can follow the suit of Hyundai Merchant Marine. Since the company’s debts amount to a whopping 5.6 trillion won (US$4.93 billion), financial support from the group alone is not enough. They believe that there is no solution unless creditors extend the debt repayment and reduce debts through a debt-for-equity swap.
Chairman Cho will make a final decision but he agrees that Hanjin Group’s additional support to Hanjin Shipping can lead to the crisis of its major subsidiary. In the process, however, the management rights of Hanjin Shipping can pass to creditors. This is why Chairman Cho needs to decide how to deal with it.
A senior official from creditors said, “Although Chairman Cho haven’t made a final decision yet, it is said to bring a voluntary agreement with conditions. Hanjin is also considering self-help measures that can be accepted by creditors.”
Meanwhile, Hanjin Shipping announced on the 21st that Eusu Holdings Chairwoman Choi Eun-young and her children sold 967,927 shares, or 0.39 percent, in Hanjin Shipping. It is worth 3 billion won (US$2.64 million) based on the closing price on the 21st. As Chairwoman Choi and her family, who have special relationship with Korean Air, the largest shareholder of Hanjin Shipping, sold the entire share in Hanjin Shipping, there are various opinions about the company’s direction in the future.