How Shippers Can Protect Themselves Against Another Carrier Bankruptcy
It wasn't as if it was a huge surprise. Rumors that Hanjin was financially imperiled extended back to 2013. The Korean line sought to restructure its debt in April of last year, then submitted a last-ditch liquidity plan in August for raising an additional $450m. At the time, Hanjin expressed optimism that it could come to terms with creditors while remaining in business. But the Korean government refused to bail out the carrier, the plan was rejected, and Hanjin went into receivership on Sept. 1. Then, on Feb. 17 of this year, a South Korean court declared Hanjin bankrupt, ordering liquidation of its assets.
Hanjin left a huge mess to be sorted out. It had 89 ships in service and was involved in some two dozen alliances or vessel-sharing arrangements (VSAs) with carrier partners. Huge amounts of money were owed to terminals, crewmembers and supporting vendors, with total outstanding debt of approximately $6bn. It could take years for them to recover even a fraction of that amount.
The Hanjin debacle took place in full view of shippers and carriers, with all the speed of a mega-containership. But the attention of some observers was focused elsewhere — specifically, on another Korean carrier. David J. Arsenault was president of Hyundai Merchant Marine America when that line fell into severe financial distress. The situation “overshadowed what was going on with Hanjin,” he said at the recent Trans-Pacific Maritime (TPM) conference in Long Beach, Calif., presented by JOC and its parent, IHS Markit. Hanjin, for its part, “was banking that Hyundai would fail,” an event that supposedly would have caused the Korean government to back its sole surviving national carrier.
But Hyundai had no intention of sinking. Even before Hanjin sought similar relief, it was engaged in a complex financial restructuring, looking to sell assets, renegotiate maturing bonds and vessel charter rates, and hook up with a space-sharing group (the 2M Alliance, with which it inked a cooperative arrangement instead of full-fledged membership). As a result, while Hyundai’s financial burden hasn’t gone away, the carrier has managed to stay afloat.
Hanjin, by contrast, “was unable to go through the same criteria with a much shorter runway,” bringing operations to a halt, Arsenault said. He called the line’s actions “a classic story of what not to do.”
At the time, China’s Cosco Shipping Lines shared membership with Hanjin in the CKYHE Alliance, along with three other carriers. Howard Finkel, executive vice president of Cosco Shipping Lines (North America) Inc., said his company scrambled to deal with the fallout from the disaster. Hanjin-booked containers were stuck on many ships operated by its alliance partners, raising the possibility that any one of them could be seized by creditors.
Finkel called the Hanjin debacle an unprecedented occurrence within a major vessel-sharing alliance. “It took months and months to clean out the system,” he said.
Surviving carriers are acutely aware that another failure among their ranks could happen at any time. They’re looking to head it off through a number of strategies, including a wholesale reshuffling of vessel alliances in the major oceangoing trades into three big entities: the 2M, THE and Ocean Alliances. Through those combinations, the lines say, they’ll be able to cut costs by rationalizing assets, harmonizing business practices and consolidating calls at a fewer number of marine terminals. That, at least, is the theory.
Before moving ahead, though, it would be wise for the carriers to look back, to understand how they could have avoided being caught out by the Hanjin bankruptcy. Finkel said there are a number of ways to detect the warning signs, including paying attention to intelligence from non-vessel operating common carriers, who “have a better handle on it than anyone.” They retain a measure of pricing flexibility by playing in the spot market, he explained, while cargo owners tend to be locked into annual contracts. As a result, NVOs are closer to actual conditions in the trades.
Shippers should carefully read financial reports and stay close to their counterparts on the carrier side, Finkel said. They should also spread their business around. “Get to know the guys who are in charge of the VSAs,” he said. “They’ve got information that the sales guys never have, or won’t give you.”
Obtaining current and accurate financial data from carriers isn’t always possible, though, especially from privately held entities. “That’s a new and difficult conversation that shippers and carriers are going to have,” said attorney Karyn A. Booth of Thompson Hine. “You might think about wanting to build that type of requirement into contracts.” Consent might rest on the shipper signing a non-disclosure agreement, but the purchaser of shipping services needs to protect itself against the possibility of its cargo being stranded aboard a seized ship, she said.
NVOs, agreed Booth, “have great market intelligence. Don’t be shy about asking them for information.”
Arsenault believes another carrier failure is possible, even if it doesn’t follow the precise pattern of the Hanjin bankruptcy. What’s likely is that shippers will have even less warning the next time, because creditors won’t be as patient as they were with Hanjin. “That’s one of the critical lessons learned,” he said. “There will be a much shorter fuse in the future.”
William P. Doyle, commissioner with the Federal Maritime Commission, said shippers, carriers, third parties and insurers must work together to install safeguards against another failure. “It is so important,” he said, “that this not happen again.”
