HMM’s Worsening Capital Erosion Puts KDB in a Dilemma

As Hyundai Merchant Marine Co. (HMM) has been struggling with losses for 15 quarters in a row, creditors, including Korea Development Bank (KDB), are paying keen attention to the firm’s Q1 earnings results to be announced in the middle of this month. The ailing shipping company is expected to post a net loss again and if its loss reaches 200 billion won (US$171.38 million) as it did in the previous quarter, it needs an additional financial support as its capital impairment ratio will surge to 50 percent.

HMM’s capital impairment ratio stood at 34 percent as of the end of last year, according to the creditors on May 1. The company's capital was expected to be fully impaired in the third quarter of last year but KDB and the Korea Ocean Business Corp. (KOBC) acquired 1 trillion won (US$856.90 million) worth of perpetual bonds issued by HMM in October last year to help it avoid a full capital erosion. KDB has a 13.05 percent stake in HMM, while the KOBC has a 4.42 percent stake.

If HMM records a large loss in the first quarter of this year, its capital impairment ratio can reach 50 percent. The company will be designated as an administrative issue by Korea Exchange at the end of this year when market conditions fail to pick up and the current trend continues.

HMM is highly likely to keep posting a loss until it receives ultra large vessels in the second quarter of 2020 since the firm has no clear plans to improve its business capability. In fact, the company’s Shanghai Containerized Freight Index (SCFI), which relates to business performance, fell by 19.17 percent from 948.6 in January to 766.8 in March this year. Its fuel expenses (Singapore Bunker-C fuel oil), which accounted for 30 percent of the total operating costs, also increased by 10 percent from US$388.30 (453,150 won) per barrel to US$428.70 (500,290 won) over the same period. It is positive that freight rates on routes to the Americas, which take up half of its total container sales, are on the rise. However, the absolute value is still low.

Accordingly, the creditors, who have provided 3 trillion won (US$2.57 billion) of financial support until now, are facing the worst scenario of having to offer an additional support again. KDB injected 2 trillion won (US$1.71 billion) of public funds into HMM in 2017 after the bankruptcy of Hanjin Shipping Co. and jointly spent 1 trillion won (US$856.90 million) on acquiring the perpetual bonds with the KOBC in October last year. In particular, the state-run bank will also need to provide about 3 trillion won (US$2.57 billion) to help HMM finance the acquisition of 20 ultra-large ships ordered to strengthen its sales capacity until 2023.
 

The creditors are asking HMM to take highly intensive measures for survival. However, some point out that tension is falling off inside of HMM as the government’s five-year plan to revive the country's ailing shipping industry announced last year is interpreted as a sign of its intention to save HMM whatever it takes. An official from the financial industry said, “It seems difficult for HMM to improve performance until the first half of next year because of high charter costs and a growing burden from fuel expenses on higher oil prices.’ Especially, global leading shipping firms are playing a chicken game on freight rates as well. Therefore, some market experts say that HMM will not be able to survive without the creditors’ additional financial support as it is difficult for the company to recover in the short term.