Hyundai Merchant Marine (HMM) is one of the largest world’s container shipping company, with a fleet of 160 vessels. Its headquarters are located in South Korea, and has formed a global network with 28 subsidiaries, 76 branches, six overseas offices and 10 liaison offices. Since the end of 2013 the revenue of Hyundai Merchant Marine, which is part of the Hyundai Group, has been sinking down from KRW 6.9 trillion to KRW 520 billion.
The main reasons for this, are a combination of slowing global trade and a massive glut of shipping capacity have pushed cargo rates to historic, and sometimes absurd, lows. Carrier profits have been devastated worldwide, and the company’s stock price has dropped more than 90% since 2010, its debts are now nearly eight times its market value, and its cash on hand is meager. Additionally, the arrival in recent years of the next generation of supersized cargo ships is a huge factor. Thanks to economies of fuel and crewing, these megaships are cheaper to operate per unit of volume shipped, and all major shippers have adopted them to stay competitive, but HMM couldn’t adopt them on time.
This wave of bigger ships has produced massive overcapacity, slashing profits and, leading to the mothballing (preservation of a production facility without using it to produce. Machinery in a mothballed facility is kept in working order so that production may be restored quickly if needed) of some of the very same ships, and shippers are starting to falter under the pressure, inducing some large mergers.
“The prolonged downturn in the global shipping market and the depressed freight environment has prevented the company from overcoming the crisis, and we have to dilute the shareholding to cover our loss,” said Hyundai Merchant Marine’s CEO Lee Paik Hoon. Without further government support, bankruptcy is growing closer for HMM after the company’s bondholders rejected the company’s proposed debt rescheduling plan, and negotiations for charter rate reductions from ship owners over the past month have failed. In the latest of calls for the government support of South Korea’s carriers, they urged the country’s government and politicians to provide more support for local shipping firms in order to stabilize employment for local seafarers. They state that the current downturn in the shipping industry is not the problem of just one shipping company, but a structural problem afflicting the entire industry.
“The potential bankruptcy of the financially troubled South Korean carrier would be the largest ever in container shipping”. Said the news from Alphaliner.
Ha Sung Min, chairman of the Federation of Korean Seafarers’ Union, went on to request that the government adopt a protectionist attitude in regard to the import of iron ore, coking coal and thermal coal, noting that such shipments should be carried out only by South Korean shipping firms. And some say that the South Korean government is not doing enough to support ship owners’ liquidity during the current challenging market, adding that support with the struggling of HMM could mean the company overcoming of the current crisis.
Hyundai Merchant Marine’s efforts for business stabilization are expected to bear fruit. The negotiations seemed to go well in their early stage in early February as most ship owners expressed their intentions to cut the rate. However, the talks went awry in April as Zodiac Maritime refused to do so and the others decided to follow suit. Still, the atmosphere has changed again, fortunately for Hyundai Merchant Marine, since the South Korean government clarified that it would resort to drastic measures such as court receivership in the event of failed negotiations. At present, the negotiations with Zodiac Maritime are almost completed and final talks are underway.
Now the plan of the creditors is to convert half of their receivables into stocks at the end of the negotiations, which will reduce Hyundai Merchant Marine’s debt ratio from 1,565% to 367.7%. The actual percentage is likely to be even lower than that because half of the charter rate reduction is turned into stocks as well. This debt ratio will allow the company to be eligible for a US$1.2 billion shipping fundraise, from public and private sectors, which is to be provided for those with a debt ratio of 400% or less. So there is still hope for Hyundai Merchant Marine.
HMM is not alone in this crisis. In fact, the shipping industry has been experiencing one of the worst moments of its history. Actually, several shipping companies have been through restructuring processes because of the crisis: Genco Shipping & Trading, General Maritime, Overseas Shipholding Group, Nautilus Holdings, ZIM Integrated Shipping Services, STX Pan Ocean, Excel Maritime Carriers, B&H Ocean Carriers and Ermis Maritime Shipping, among others. If you are interested in more information regarding this crisis, Suzzanne Uhland invites you to continue in the blog by reading Shipping bankruptcy: What happens worldwide?