The three once-major Korean shipping and shipbuilding companies - Hanjin Shipping Co., Ltd. (Hanjin Shipping), STX Offshore & Shipbuilding Co., Ltd. (STX O&S), and Daewoo Shipbuilding & Marine Engineering Co., Ltd. (DSME) - today stand at crossroads of destiny between rehabilitation and bankruptcy. Given the global nature of the operations by the companies, their fate will have a substantial impact on the economy globally.
We (Yulchon) have thereby prepared a newsletter to alert you on their current status, and will be circulating a follow-up newsletter should we learn of any notable updates.
Hanjin Shipping’s Asia-U.S. route assets will be sold to Samla Midas Group (SM Group) which already owns two bulk ship companies i.e. Daehan Shipbuilding Co., Ltd. and Samsun Logix Co., Ltd., as Seoul Central District Court, or the Korean bankruptcy court handling Hanjin Shipping’s rehabilitation proceedings, announced on November 14, 2016 that it has selected SM Group as the preferred bidder for Hanjin Shipping’s Asia-U.S. route assets. The Asia-U.S. route assets, constituting substantial portion of Hanjin Shipping’s business assets, include 5 container vessels, sales and marketing network, workforce, and 7 overseas subsidiaries involved in handling the Asia-U.S. cargo. If the preferred bidder would like, Hanjin Shipping’s 54% stake in the Long Beach Terminal International LLC, which runs Long Beach Terminal in California may be sold together with the Asia-U.S. route assets, provided that Swiss shipping company Mediterranean Shipping Company S.A. (MSC) with remaining 46% stake approves of such acquisition by SM Group.
Meanwhile, last week Hanjin Shipping has expressed its intention to fire some 600 sea-based employees engaged in its 42 vessels by the 10th of next month. Hanjin Shipping will be terminating employment contracts with some 2000 land and sea-based employees by the end of this year. Questions on whether Hanjin Shipping may be able to rehabilitate after getting rid of such substantial number of employees have been raised, and Samil PriceWaterhouseCoopers Corporation (Samil PwC) as inspector for Hanjin Shipping’s rehabilitation proceedings will probably address the issue in its inspection report to be submitted by the end of this month. The rehabilitation proceedings will continue and rehabilitation plan will be prepared to change the rights of the creditors to Hanjin Shipping if Hanjin Shipping’s going concern value is greater than the liquidation value, but will come to a halt if vice versa. With that said, whether Hanjin Shipping will be rehabilitated or liquidated will be somewhat determined within the next month.
Seoul Central District Court approved of STX O&S’s rehabilitation plan on November 11, 2016, approximately five months after STX O&S, once Korea’s No. 4 shipbuilder, applied for rehabilitation last May 26 due to falling profit. The rehabilitation plan proposed with respect to debt, (i) in case of loan and reimbursement claims, 93% swaps of STX O&S’s debt for equity, with the rest 7% to be settled in cash, (ii) in case of commercial transaction claims, 92% swaps of STX O&S’s debt for equity, with the rest 8% to be settled in cash, and (iii) in case of secured rehabilitation claims, settlement at 48.02~79.86% in cash, and with respect to equity, (i) in case shares owned by lenders, consolidation of 10 shares into 1 share, (ii) in case of shares owned by persons having special relations with the former STX group, retirement without compensation, and (iii) in case of shares owned by others, consolidation of 2 shares into 1 share, and such consolidated shares together with shares issued through debt-equity swap are subject to further consolidation at a ratio of 50:1 such that the stake of the existing shareholders would be reduced to 4.09% and the stake of the new shareholders via debt-equity swap would be 95.91% (the total paid-in capital would be approximately 104 billion won). Further, in order to improve STX O&S’s financial conditions, Seoul Central District Court is pursuing sale of STX O&S’s 66.7% stake in STX France S.A., and the final bids the stake are due December 27, 2016.
Two main creditors to DSME, once Korea’s No. 1 shipbuilder, the Korea Development Bank (KDB) and the Export-Import Bank of Korea (KEXIM) are contemplating a raise of an additional 2.8 trillion won through debt-equity swap or purchase of perpetual bond issued by DSME, suffering from impaired capital. However, it is yet unclear whether the rescue measures will be realized as KDB and KEXIM proposed the measures as contingent upon submission of letter of commitment to perform the self-rescue plan by DSME’s labor union and the labor union is staunchly opposed to such submission. KDB and KEXIM are of the position that initiation of rehabilitation proceedings against DSME is inevitable if the condition for the rescue measures are not satisfied, that is, if compromise by DSME’s labor union cannot be drawn up.
Yet, it"s out of the flying pan and into the fire. Even if DSME succeeds in raising additional capital, DSME cannot avoid liquidity crisis without payment of 1 trillion won by Angola state oil firm Sonangol E.P. for two drill ship orders placed to DSME in 2013, but Sonangol has been struggling to raise the purchase amount due to drop in oil prices in recent years.