Hanjin bankruptcy: No, things are not going to be okay

BY BEN KRITZ, TMT, Manila Times, Jan 15, 2019

THE unexpected bankruptcy of Hanjin Heavy Industries and Construction Philippines (HHIC) late last week has been characterized as a disappointing but manageable situation by government and banking officials. This is an altogether predictable response, and one that they are perhaps duty-bound to offer the public.

Making statements intended to meet the reasonable immediate objective of preventing a panic does not, however, necessarily make those statements valid. HHIC’s collapse is going to inflict significant damage to the Philippine economy; certainly enough to dampen growth prospects, and maybe even worse.

In hindsight, there is nothing particularly mysterious about HHIC’s demise, but it is also difficult to argue that anyone outside the company should “have seen it coming.” As recently as November last year, HHIC was still upbeat, highlighting a number of orders from Asian shipping companies and pointing out that its order slots for 2019 were already completely filled.

From there, however, things deteriorated rapidly. Last month, HHIC furloughed 7,000 of the estimated 11,500 workers it had at the time (nearly all of them working for subcontractors), and planned to dispose of another 3,000 more this month. Additional cuts would have reduced the workforce to about 300 people by March of this year, just enough to maintain the shipyard.

Very little notice was taken of the job reduction plans, however, even though HHIC’s parent company was clearly already angling to rid itself of the Subic facility. HHIC had begun preparing for the sale in February of last year, and by June was reportedly in discussions with Duterte crony Dennis Uy’s Udenna Corp. to sell at least 85 percent of the Subic yard.

Those talks came to nothing, but the significance of their even having taken place was lost on local observers: HHIC had already transferred the bulk of its shipbuilding work from its main shipyard in Busan to the Subic facility, and so the offer to sell it represented a virtual exit from the business for what at the time was Korea’s biggest shipbuilder.

The first inkling anyone outside Korea had of the financial troubles besetting the Hanjin Group was the sudden collapse of Hanjin Shipping in 2016. At the time, the concerned government agencies here — the Subic Bay Metropolitan Authority and the Department of Trade and Industry – were quick to reassure the public and HHIC Philippines’ workforce that the demise of the shipping concern would have no impact on the shipyard, a completely separate company. Revelations in the past few days, however, have indicated that is not exactly the case, although to what degree HHIC Philippines is entwined in Hanjin’s mess in its home country has not yet been explained.

Even if HHIC exists completely within its own silo, it has suffered the same direct negative impact as the rest of the shipbuilding industry from the Hanjin Shipping collapse. The bankruptcy of Hanjin Shipping suddenly freed several dozen serviceable ships to a market already in grossly overcapacity. This drastically reduced the number of new ship orders from builders, and put at risk many ongoing shipbuilding jobs due to the way many shipbuilding orders are structured.

Because of the time it takes to build a new ship, orders from carriers have to anticipate market conditions several years in advance. To reduce the risk, most orders for new ships have a “heavy tail” financial arrangement, wherein the customer does not make a substantial payment for the new ship until relatively late in the build process. This means that the shipbuilders very often must borrow heavily to finance construction in its earlier phases. As long as the shipping industry and the customer’s business remain healthy this is not a problem, but if demand dries up between initial order and final delivery, the shipbuilder risks recovering only a fraction of its costs.

This is apparently what has happened to HHIC. Even though its order book is full through 2020, most of those orders are now superfluous and the company is not being paid for them, nor will be.

And despite optimism from the government, there is virtually no chance another investor group will step in to take over after HHIC’s exit; if there were, HHIC would have been able to sell out already. As another illustration of how the overcapacity problem will dampen shipbuilding demand for years to come, on the very same day HHIC was filing for court relief here in the Philippines. It was reported that Zhejiang Haizhou Shipyard, one of the largest ship repair yards in China, had also filed for bankruptcy. The Chinese are very likely not coming to Subic’s rescue.

The BSP and the concerned banks here to which HHIC owes a total of more than $400 million have downplayed the risk the default poses to the financial sector, and they are correct in narrow objective terms. What no one is talking about, however, is the vast ecosystem of businesses in and around Subic Bay and elsewhere in the Philippines that exists solely because of the shipyard, and will have little chance of surviving without it. Adapting to the new reality will take years under the best of circumstances; for a country that chronically suffers from short-termism, the prospects of it being done well or quickly are not too good.

ben.kritz@manilatimes.net