Drewry: Merger with Hanjin Would Boost HMM’s Chances of Survival

Financially-troubled South Korean carrier Hyundai Merchant Marine (HMM) which is exploring various options to stay afloat will likely survive, Drewry believes, adding that a merger with compatriot Hanjin Shipping is a very real possibility that would help that happen.

HMM is on course to report five consecutive years of operating losses when it releases its full-year 2015 financial results, with accumulated losses in its container division alone since 2008 to 9 months of 2015 worth USD 352 million.

As the company sells off other non-core assets the container division is growing in importance, however, the increasing reliance on the container sector puts HMM in a tough spot as the near-term outlook for the industry is negative with industry losses projected to reach USD 5 billion in 2016.

HMM has thus far raised around USD 3 billion in new capital and is looking to reduce its financial costs by renegotiating its debt and asking vessel charter parties to reduce their daily fees, many of which were agreed when shipping was booming, Drewry says. It is thought that creditors have tasked HMM with securing 20-30% cuts in charter costs as a condition for further assistance.

Despite of all of its efforts, HMM remains in a liquidity crisis that threatens its ability to meet its operational and debt commitments. The company has loans of KRW 382 billion (USD 334 million) maturing in 2016 and KRW 606bn (USD 530m) in 2017 and investors and creditors are turning skeptical about its ability to pay them back, Drewry’s data shows.

According to Drewry a merger with Hanjin would create a stronger entity and increases the companies’ chances of surviving in a very tough market.

Previous merger talks between HMM and Hanjin were put to rest by the Korean government last year, but the debt situation in both companies is causing serious concern in local circles and could well bring them back to the table.

“A merger would propel both carriers from being on the peripheries of the Top 20 to the become the fourth largest operator in the world (before the merger of Cosco and CSCL into China Lines) with combined worldwide volumes of 8 million teu from a fleet capacity of just over 1 million teu, giving a market share of 5% based on the current fleet,” Drewry says.

The far larger orderbooks of the carriers above them would see HMM/Hanjin lose some ground, but a financially stronger company might have a better chance of convincing lenders to fund a new order spree, something that HMM will struggle to do on its own.