Korean Hanjin Shipping's filing for receivership reflects an unsustainable supply-demand imbalance in container shipping, Fitch Ratings says.
The ratings agency expects more defaults and M&A activity in the short and medium term but these will only restore equilibrium and boost freight rates if they prompt capacity reduction.
Bankruptcies in shipping are not unusual, especially in the current dire industry conditions, but Hanjin is the seventh largest container shipping company in the world and its filing for receivership may therefore have far-reaching ramifications.
In particular, creditors' withdrawal of support may indicate a re-assessment of the financing landscape, where secured bank funding for new vessels has remained relatively accessible even as market conditions have deteriorated. Such a change would pave the way for more restructurings.
The impact on the sector will depend on the share of Hanjin's capacity being redeployed in the market following receivership proceedings.
Bankruptcies or consolidation will reduce the number of competitors and may have a short-term positive impact on freight rates and capacity utilisation. However, significant overcapacity and slow demand growth mean fundamentals will not improve unless capacity is withdrawn from the market.
In the case of Hanjin, Korea's Financial Services Commission has reportedly indicated it will encourage the country's second-largest container shipping company, Hyundai Merchant Marine, to acquire some assets.
“We expect some interruptions to the delivery chain, including Hanjin's current and future alliance partners and slot sharing partners, but these are likely to be short term,” says Fitch.
Fitch says Hanjin Shipping's liquidity is very tight with short-term debt of USD2.7bn against cash of USD205m at end-2015. Its total debt stood at USD4.8bn at end-2015 with operating profit of USD33m in 2015 and an operating loss of USD96m in 1Q16.
Most of the company's fleet (60% in 2015) is chartered. Before court receivership, the company was implementing a voluntary restructuring arrangement, including sale of assets, charter rates negotiation and corporate bond and bank debt renegotiation.
Hyundai Merchant Marine is also progressing with creditor-led restructuring, albeit more successfully so far, according to Fitch.
“We expect the container shipping companies' financial results to deteriorate in 2016 from 2015 due to weak freight rates, which often do not cover operating costs,” says Fitch.
Fitch notes that even the largest container shipping company Maersk Line reported an operating loss of USD117m in 1H16 compared to an operating profit of USD1.3bn in 1H15. This prompted AP Moeller-Maersk to initiate a strategic review of the group operations and the current structure.
Hapag-Lloyd and United Arab Shipping Company plan to improve their financial and operational profiles through increased scale and cost savings following their planned merger.