CASE STUDY – STX Pan Ocean
Advisory and financing support to creditors’ group
Last year witnessed the final chapter in the recovery from bankruptcy of South Korea’s largest commodities shipping line. SC Lowy is pleased to have played a leading role in STX Pan Ocean Company’s re-emergence as a viable and robust company.
The path to recovery was not an easy or simple one and offers an illuminating case study on how working co-operatively with creditors to provide specialized lending in a distressed situation can bring about a highly effective solution. It can also provide a roadmap of how reasonable and fair outcomes can be reached should more distressed shipping situations emerge in the future.
Pan Ocean’s problems came to a head in June 2013 when it filed for Korean bankruptcy protection after facing a protracted liquidity crisis. The company’s business was no longer viable as it faced steep falls in traffic volume and ocean freight fares due to a worldwide recession, at a time when it had chartered-in a significant portion of its fleet at elevated rates when markets were booming.
Following bankruptcy, Pan Ocean’s creditor group led by Korea Development Bank and SC Lowy acted quickly to hammer together a restructuring plan, which was approved by creditors in November 2013. Just over a year later, Pan Ocean’s creditors agreed to a Won1tr ($910m) purchase by South Korea’s Harim Group and private equity firm JKL Partners, along with a debt restructuring proposal that finally closed last June.
These facts alone, however, do not explain the exceptional outcome of this bankruptcy and restructuring.
The acquisition by Harim and JLK Partners was one of the biggest in the shipping world in 2015. It first required an agreement to be reached between various, disparate creditors to keep the group intact to facilitate the transaction. This was by no means certain, as experience with, other major shipping bankruptcies in Asia – such as from Japan’s Sanko and Indonesia’s Berlian Laju Tanker – have been protracted and contentious.
SC Lowy played the leading role to keep creditors aligned both through persuasion and by providing advice to counterparties. SC Lowy’s established presence in Korea helped create confidence and co-operation due to its track record of successful advisory and financing with Korea Line in 2011 and its possession of a banking license following its purchase of Choeun Savings Bank in 2014.
Hence, through its strong balance sheet and deep understanding of the sector, SC Lowy was able to price risk and provide liquidity. After initially purchasing a portion of Pan Ocean’s debt, SC Lowy eventually became the biggest holder of the company’s debt, surpassing the original main creditor, policy institution Korea Development Bank.
Through its position as a major creditor, SC Lowy was able to understand the positions of not just creditors but shipowners and convince them that maintaining unity of the creditors’ group was the most beneficial outcome. This was followed by leading a court-assisted process where damage claims were converted into debt and immediately tradable equity.
This proved to be the breakthrough that allowed the Harim M&A transaction to go forward and ensured that Pan Ocean’s restructuring and eventual sale avoided being blocked by a series of private creditor claims. Beyond being a superior solution for creditors, the rescue led by SC Lowy was also highly favorable for Korean shipping, the economy and wider society as hundreds of jobs were saved. Pan Ocean currently has a fleet of about 90 ships and under its new owner a creditable growth plan.
Regarding the process, Soo Cheon Lee, co-founder and chief investment officer of SC Lowy, says, “You have to have a constant dialogue with all parties – not like talking to strangers, but building trust. The company was able to trust us. Eventually, the buyer trusted us. And we were able to talk to the shipowning counterparties in ways they understand, because of our experience in this business. They are not just financial investors, but operating business people with a tremendous amount at stake with businesses they’ve built themselves. Understanding this is the key.”