For Decreasing Logistics Damage
The Hanjin Group decided to give emergency financial support to Hanjin Shipping put under court receivership for the company’s liquidity.
The Hanjin Group decided to do so as government authorities including the Ministry of Strategy and Finance and the Financial Supervisory Commission (FSC) put pressures on the Hanjin Group from all directions, citing the largest shareholder’s responsibility. The business group will give financial support to its affiliate highly likely to be liquidated after preparing to lose the money.
The unprecedented logistics disturbance seems to be over the hump as the Hanjin Group blitzed to make the decision for the support. It was confirmed on September 5 that the Hanjin Group decided to newly provide hundreds of billions of won in response to the massive logistics chaos ignited by Hanjin Shipping and was discussing the plan with the Korea Development Bank and will announce the plan in a day or two.
As of 2 pm on the day, a total of 79 Hanjin Shipping vessels (61 containerships and 18 bulk ships) were put into abnormal operation such as being refused to unload cargoes after failing to pay arrears around the world.
It was known that the plan did not clarify whether or not Cho Yang-ho, chairman of the Hanjin Group will inject his personal money into the ailing shipping company, a hot issue, but chairman Cho will show a responsible attitude anywise.
Prior to that, the court managing Hanjin Shipping said that at least 170 billion won in new financial support (DIP financing and a loan to the rehabilitated company) will be needed to address the great logistics commotion. This means that at least that amount of money will enable the company to avoid the worst paralysis by unloading cargoes off Hanjin Shipping vessels at ports among others.
But Hanjin Shipping’s creditors maintained their tough position not to give further support to Hanjin Shipping with regard to this analysis by the court, triggering some concerns that Korea’s largest shipping firm will finally collapse.
Analysis says that the Hanjin Group mapped out the emergency plan to normalize Hanjin Shipping despite the group’s unhealthy financial conditions in order to fulfill its social responsibilities by minimizing damages by a great logistics disturbance.
“The Hanjin Group and its largest shareholders have to actively address this problem with social responsibility,” said Lim Jong-ryong, chairman of the Financial Supervisory Commission in a meeting with reporters on the day.
“It is clear that the responsibility to safely transport cargoes belong to Hanjin Shipping and Hanjin Shipping is still an affiliate of the Hanjin Group,” chairman Lim said, urging the Hanjin Group to actively engage in the matter.
“It seems that the Hanjin Group judged that it will not be able to shirk its responsibility as the Hanjin Shipping Incident deteriorated to reach a level that affects the Korean economy beyond simply remaining a problem of a company,” said a high-ranking representative of the Korean business world. “Korea Air made a drastic decision despite its debt-to-equity ratio of over 1,000%.”
In fact, Korean air has played a financial backer’s role for Hanjin Shipping by giving the latter more than one trillion won since 2013. The Hanjin Group proposed Korean Air’s capital increase with consideration as the final resort to save Hanjin Shipping although the proposal was scorned later.
During this process, the Hanjin Group was hardly hit. First of all, the debt-to-equity ratio of Korean Air, the core affiliate of the Hanjin Group has been on the uptick every year. The ratio sat at 867% last year but soared to 1,100% in the second quarter of this year. Korean Air’s business report on the first half of this year says that its capital and debts stood at 1,931.8 billion won and 21,413.3 billion won in the first half.
Korean Air posted 2,817.7 billion won in sales and 250.8 billion won in net loss in the second quarter of this year. “Despite the slow season, even increases in all routes pushed up sales by 1.1% year on year. We also swung back to profitability in terms of operating profit,” said a representative of Korea Air. “However, loss on foreign exchange prompted by a rise in Korea won-US dollar exchange rates and loss related to Hanjin Shipping forced Korean Air to net loss.”
A growing burden from financial support for Hanjin Shipping sent down Korean Air’s credit rating to BBB+ at the end of March. A drop in a company’s credit rating raises the interest rate of financing, creating a vicious cycle which will have a negative impact on the company’s financial health.
Some people in the Korean business world analyze that the Hanjin Group’s display of its maximum sincerity expanded a possibility that Hanjin Shipping will pull through.
Shipping experts say that saving Hanjin Shipping is the cheapest and most infallible way to riding out the current crisis. “To save Hanjin Shipping by financing 500 billion won is the fastest way to solving the current situation,” claimed Kim Young-moo, vice chairman of the Korea Shipowners’ Association in a joint public-private emergency meeting on the Hanjin Shipping Incident presided over by Suh Byung-soo, mayor of Busan on the day.
“If the government plays a role, it is high time,” said Kim Woo-ho, head of the Marine Transport and Marine Affair Research Headquarters under the Korea Maritime Institute (KMI). “The liquidation of Hanjin Shipping will cost Korea’s GNP one trillion won. Thus, the most effective way is to put the shipping company into reoperation.”
“As the Hanjin side virtually made a concession, the government has to seek a compromise instead of a catastrophe,” said a high-ranking representative of the Korean shipping industry.