Accidental pain or harbinger of crisis?

‘Hanjin case has been mishandled with poor planning’

By Kim Jae-kyoung

The “Too big to fail” myth has been dominating Korea’s business circles and government policy whenever a large company has been in trouble. Hanjin Shipping’s fiasco is a classic case and its filing for court receivership has broken the myth. The Korea Times had interviews with market experts to listen to their views on the government’s decision and how the Hanjin issue should be addressed. ― ED.

Q: What do you think of the government’s decision to let Hanjin fall under court control? Do you think the government should bail out the debt-ridden firm?

Sonh Sung-won

: In principle, the government’s decision was the correct one. This is a classic case of “too big to fail.” In hindsight, the Korea Development Bank should have cut off funds much earlier, forcing the holding company to take preventive measures sooner. Before letting Hanjin file for bankruptcy, the government should have worked with or forced Hanjin’s holding company, which included Korean Air, to make financial contributions to the shipping company.

Alicia Garcia Herrero:

I consider it a good decision. I think this should have happened earlier than now, avoiding the central bank setting a restructuring fund for the ailing shipping sector. This gave the market the impression the government would support this industry and it turns out it will not. If the process would have been clearer, the cost would have been lower.

Mauro Guillen

: Government bailouts are only justifiable when systemic risks or very large employment shocks can happen. This is normally the case with financial institutions, and in some instances with industrial firms ― as was the case with GM and Chrysler. Hanjin is a large company, and its reorganization will be disruptive. But I am not sure it rises to the level of a systemic risk.

James Rooney

: It is one thing to decide on undertaking a restructuring or a bankruptcy reorganization or liquidation, but it is quite another to execute it properly.

Execution of these kinds of complex undertakings requires deep knowledge and experience, and when that undertaking has to be executed globally the depth and breadth of experience required are even greater by several orders of magnitude. For Hanjin Shipping I think it is already too late and this case has been mishandled with poor planning for the current outcome.

Q: Do you think the Hanjin case can be the trigger that can put Korea’s economy into another crisis? How do you think this episode will affect the Korean economy down the road?

Han Sang-yun

: The Hanjin fiasco may disrupt global supply chains and send a negative ripple effect through the economy in the short term. I think the noise could last several months, still Hanjin’s global competitors are likely to absorb their shipping quickly, given the oversupply in global shipping. Also, both exporters and importers have already started diversifying their shipping sources, which might further normalize the situation after a few months.

Given that logistics is different from finance, concerns over Hanjin and its ripple effects to the overall economy are exaggerated. A case in point is the limited financial damages especially for large exporters in Korea such as Samsung Electronics.

Garcia Herrero

:

It will not be the Lehman Brothers of Korea for the simple fact that a shipping company cannot be as intertwined with the rest of the economy as a bank can be.

However, it does show that Korea also has an overcapacity problem in some key sectors.

Sohn

: No, I don’t think so. The Korean economy is big and complex. One company won’t affect the entire economy. Eventually, it will be viewed as the right move showing that Korean policymakers are sophisticated.

Emily Dabbs:

Korean exports may face downward pressure in the near term due to supply-chain disruptions caused by Hanjin Shipping’s receivership filings. And unemployment will likely tick up if the company enters bankruptcy, but given the small workforce this should be minimal. We do not expect this development to send Korea into a recession. However, the high level of private debt ― especially in the shipping industry ― does pose a downside risk to economic growth.

Guillen

: The main issue is that global trade is not growing and there is excess transportation capacity. Is this going to affect other Korean firms? Possibly. One cannot bail all of them out.

Dabbs

: A downturn in global trade volumes and increased competition from cheaper rivals in the region has hurt Korea’s shipping industry and sent debt soaring. The government is working with the central bank to restructure the industry. The closure or consolidation of unprofitable businesses in the industry should support long-run growth through improved productivity, but there will be short-term pain.

Rooney:

The potential for the collapse of one major logistics entity to massively disrupt the global supply chains all the way from source to destination in today's highly-connected world is certainly a risk to be taken seriously, and once these actions are first taken it is very difficult to turn back the clock. So pre-planning is the essential requirement to “avoid disturbing the neighborhood.”

Q: How should Korea handle this problem? Can you make some suggestions?

Rooney

: I think Hanjin needs expert law firms that specialize in protective bankruptcy and insolvency actions for global companies that can still be restructured through legal processes. Hanjin is obviously a case where the experts have to be very global, so as to structure and arrange things ahead of time for protective conditions in every legal jurisdiction that Hanjin and its vessels may be exposed to.

: It would be better to keep Hanjin separate from Hyundai in order to encourage competition. Another firm should be sought to acquire the assets of Hanjin. In the U.S. Chrysler went bankrupt, but remains an independent entity after the merger with Fiat.

Andy Xie

: I'm not sure that the government has the responsibility to control the bankruptcy process. It is a big mess, of course. A global shipping company is everywhere in the global supply chain. When its ships are being seized, it will cause a big mess. I would say that Hanjin had the responsibility to ensure a smooth exit.

: Clearly to have a successful restructuring through the bankruptcy process, immediately after filing there needs to be a clear source of immediate operating cash and instant access to be able to use it to be able to pay new bills for ongoing operations on a current and immediate basis.

Han

: This will be viewed as a case showing that the government sticks to the rules. In this regard, I think that it will have a positive effect from the perspective of credit culture and market functioning. Still, the government’s consistency and sustainability of its commitment to stick to the rules will be the keys for future credit culture improvement.