Tuesday, September 6, 2016

Hanjin collapses into bankruptcy and receivership: Sursum Corda!

I have been predicting this sort  of high profile bankruptcy of a major liner company as inevitable for years now.  There are just too many loss making liner companies and sooner or later state support would reach its limits.  The whole matter of counterparty risk for the vessel provider companies has been misconstrued for years now on the false assumption that the liner companies were just too big to fail. 

Seaspan's Gerry Wang calls the Hanjin bankruptcy a nuclear bomb and mixing his metaphors a 'Lehman moment', but did not Wang see this coming?  For years, he was ordering aggressively and chartering out to loss makers like Hanjin.  His policies contributed to this!

This industry suffers from chronic overcapacity and low margins.  Further their business model based on China and head haul routes is in risk of becoming outdated with the slowing of Chinese growth and trade rebalancing as well as technologically obsolescent with the robotics, 3-D printing, etc.  I have always been in agreement with my friend Christopher Rex of Danish Ship Fund on this industry and its prospects. 

I have argued this time and again with my Wall Street investment bank friends. Hopefully, with this Hanjin case, they will start to wake up and understand better the container industry dynamics.  See some of my  blog articles on this subject over the years.  For example, I was very early to point out the large exposure of Danaos (NYSE: DAC) to financially weak liner companies. 

Danaos was somewhat fortunate with the HMM charters receiving shares in restructured HMM in return for reduced charter rates.  In the case of Hanjin, DAC has estimated exposure of US$ 560 million on Hanjin.  First estimates are creditor returns of 35% for secured claims. But only 5% for unsecured claims and zero on liquidation.  That is quite a mark down!

Over the years, Wall Street has made some bad shipping calls like the earlier reckless, irresponsible dry bulk speculative asset plays.  Investors in shipping stocks have frequently lost their shirts. 

Of course, the great thing about shipping markets as opposed to politics in the US and EU - where the usual reaction is to double up on failed policies, buy time and hide the truth from the public - is that you cannot hide financial losses, financial resources are limited and there are natural market corrections, asset write downs and consolidation.  Raw Schumpeter capitalism always prevails keeping the industry lean and mean over the long run, but not without significant volatility and market swings. 

It is not a good idea to get lost in the noise and ignore supply chain logistics that generates the underlying cargo demand for marine transport.

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