Due to the deterioration of container freight rates and the subsequent drop in carrier financial results, analysts with Drewry Maritime Equity Research foresee a possible combination of Korean and Japanese carriers.
Drewry Maritime Equity Research (DMER) is speculating that the container shipping industry may see further mergers and acquisitions in the near future.
“With lower revenues becoming the new norm, carriers need to attain a higher scale of operational efficiency to be profitable,” DMER said in a recent report. “Those who are slow or fail to achieve this, are either becoming acquisition targets like NOL or becoming marginalized like Korean operators – HMM (Hyundai Merchant Marine) and Hanjin.”
Drewry said it “expects liner financial results to deteriorate materially in 2016-17, while diminishing carrier profitability will enhance chances of further consolidation in the industry. CMA-CGM’s acquisition of APL/NOL, the merger of Cosco and CSCL, a probable merger of Hapag Lloyd and UASC will reshape the liner industry. In addition, there are possibilities of other mergers such as HMM and Hanjin coming together and merger of three Japanese lines’ container divisions.”
Just this week, the chairman of Korea’s Financial Services Commission Yim Jong-yong was reported by the Korea Times as saying once the normalization program for Hanjin and HMM is concluded “the government will consider various plans including the merger of the companies.“
Contacted by American Shipper, Hanjin said it had no comment on Yim’s statement, adding that the company is “focusing on our financial stability and normalization of our business.”
Drewry said that HMM’s financial woes seem to have subsided “after its bondholders and financial lenders have agreed to debt rescheduling terms. As it stands, the company has successfully met two of the three conditions creditors laid out for the debt relief program and a bargain for holding off a court receivership while the third condition to join an alliance should just be a matter of time.”
HMM is seeking to join fellow Korean carrier Hanjin, the three Japanese carriers (NYK, MOL and “K” Line), Hapag-Lloyd and Yang Ming in THE Alliance, a new vessel sharing agreement in the major east-west trades slated to start up next April.
Owners of container and bulk ships that charter vessels to HMM have agreed to reduce charter rates by 20-25 percent, and the company has plans to raise 2.5 trillion won in a stock issue in addition to securing approval from its bond holders for restructuring.
Drewry said it believes Hanjin still has an “uphill task” to improve its balance sheet significantly and outperform stronger liner competitors.
“Interest burden remains high and the risk of court receivership looms large considering its debt woes are similar to HMM,” it said. “As it stands, the company is undergoing a creditor led restructuring exercise for which it needs to maintain certain pre-set conditions, such as the deferment of debt payments, charter rate reduction from shipowners and inclusion in a global shipping alliance.
“While a membership in ‘THE alliance’ may happen, meeting other conditions are proving difficult,” the consulting firm added. “At the same time, we note that Hanjin has gained some headway in getting some of its bondholders to extend maturity on debts in May. However, a failure to meet charter payments to ship owners can spell trouble for any discussion related to reduction in charter rates.”
In a prospectus supplement for a $100 million public offering of preferred stock dated June 9, the containership owner Seaspan, which charters three 10,000-TEU ships to Hanjin, said the Korean company “currently is making monthly payments under its charters with us, but, as of the date of this prospectus supplement, we have a total of approximately $9.9 million of accounts receivable relating to the charters, all of which is past due.”
“Hanjin has made a request to us and other owners of containership vessels that Hanjin charters for a reduction in existing charter rates for a period of three and one half years, in exchange for securities in a restructured Hanjin,” said Seaspan. “We rejected this request, and neither Hanjin nor Korea Development Bank can change the charter rates in the voluntary restructuring without our consent.”
Seaspan, which also manages four ships on charter to Hanjin for GCI, said it was uncertain it will be affected by Hanjin’s restructuring.
Drewry warned of the “fast changing dynamics of global merchandised trade and its detrimental effect on the container shipping industry fundamentals.”
“Faltering manufacturing sector globally points to weaker global trade and we don’t foresee a significant pick-up either,” the firm said. “We are concerned by changing relationship between trade and income and factors like consumption and investments which have been the drivers of world trade seeing pronounced structural changes.”
Commenting on industry leader A.P. Molller-Maersk, Drewry said, “Our premise for earnings being low for longer is based on the lower contract rates on key East-West trade routes, which are yet to be captured in the underlying earnings, as well as our belief that incremental cost savings will be much harder to achieve. The demand expectations will likely be lowered through the curve. Peak Season cargo rush has been effectively dead for the past few years barring few weeks of surge. Even as spot earnings are recovering and some data points have turned positive, the evidence isn’t big and broad enough to suggest industry will be out of woods anytime soon. APMM is significantly exposed to the global trade and looking beyond short term volatility, the structural change will be negative for earnings.”
On the other hand, Drewry was upbeat on the prospects for Hapag-Lloyd, even though the company reported a loss of $47 million in the first quarter of 2016.
Following the 2014 merger with CSAV and “expected merger with UASC” it said Hapag-Lloyd “presents a compelling combination of scale of operations, increasing diversification and seasoned management. DMER believes HL is one of the most attractive plays in a difficult container shipping market.”
Drewry: More container mergers may be in the cards
