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Restructuring is the only option for many carriers​

By Soo Cheon Lee, Co-Founder & Chief Investment Officer – SC Lowy

SC Lowy Co-Founder & CIO Soo Cheon Lee

THE sudden collapse of South Korea’s largest carrier, Hanjin Shipping, and its entry into court rehabilitation has brought the precarious financial situation of the shipping industry into sharp relief.

Most of the carriers are not even covering their operating expenses. It is a very uncomfortable predicament for shipowners to be in, and while the business will recover, it will take time, which is not a commodity on a cash-strapped carrier’s side.

As Hanjin found out, even state-owned banks with deep pockets can run out of patience when the debts hit stratospheric levels. Hanjin’s total debt had reached USD5.4 billion when Korea Development Bank pulled the plug.

How long until the shipping industry turns around will depend on the global economy and the supply and demand balance, and that uncertain timeline has left struggling shipowners with only two options:

1.  They can try to ride it out, deferring the problem with one eye closed and wait to see what happens in a couple of years, or
2.  They can look at the sustainable liability of their company and try to restructure it.

The shipping market has been bad for the last five years. When people ask me about the market turnaround, or when I ask others in the business when it will pick up, the answer I give and hear from others most often is “not this year but maybe next year.”

This year has been particularly poor and I don’t see the market recovering anytime soon, so for many companies restructuring is the only option. Three or four years ago a lot of private equity came into the sector but they lost heavily and there is nothing coming in now. No investor wants to talk about shipping at the moment.

The fact is that every year since 2011 the industry has been getting worse.
Shipowners have been hoping for the best for the past five years and expecting the market to turn around, instead of sitting down and looking for a proper way to address the inadequate capital structure of their companies.

Today, there are multiple shipping companies struggling for cash flow. First tier container shipping companies such as Maersk Line, MSC, OOCL and some others should be okay, but several tier 2 and 3 carriers are already going through the restructuring process. Hanjin lost the support of its banks and was forced into receivership, while Hyundai Merchant Marine is being restructured, as are the Japanese shipping lines.

It really depends on how strong the shareholders are. Some shareholders are prepared to support companies through the rough patches and wait for the operating environment to improve, while other shareholders are saying enough is enough.

However, if a shipowner decides to walk through the restructuring door, he must understand that although it will be an expensive and painful process, it will also be a crucial one that will have a positive impact in the medium to long term. He will be resolving a problem that is threatening the very survival of his company.

For instance, as part of a restructuring deal a few years ago, Korea Lines agreed to pay 20% interest on an $80 million loan and everyone was shocked. But even with the heavy interest, the loan allowed the company to restructure its entire capital structure and the carrier repaid the loan within a year. The company is now worth at least $450 million.

Dry bulk has been in bad shape for the last four years and a lot of bulk operators have been restructuring their capital debt or, if they have been unable to cut a deal with creditors, filing for bankruptcy.

What we have seen in the past six months is container lines looking for a similar restructuring process. Before the Korean lines it was ZIM. Container lines are trying to reduce their capital cost and have some breathing room to amortise their loans or interest to survive this difficult time. Once the cycle turns they will be able to normalise their finances.

But as I mentioned earlier, there is no clear indication of when the cycle will turn. So in the face of that uncertainty, the only real option is to restructure and take the pain rather than deferring the decision and holding thumbs that a market recovery will arrive before bankruptcy.

That is easy to say in hindsight, but some shipping companies have done it and those that restructured three years ago are still making a positive cash flow. It wasn’t their choice, but they were flirting with collapse and were forced to make some hard decisions, and they did it.

It is expensive to restructure, yes, but if a company can get it done and well prepared for working capital throughout restructuring process, the value creation it will generate from this process is huge.

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