Rapid Ratings Blog

Hanjin Default: Global Supply Chains Stuck in a Sea of Uncertainty

Posted by Rapid Ratings on September 26, 2016

Hanjin_Bankruptcy_-_Image.jpgWhen Hanjin Shipping Co. Ltd filed for bankruptcy protection in South Korea and the U.S. last month, it was the first big container shipping line to do so in 30 years. Hanjin was responsible for shipping over 100 million tons of cargo annually with its fleet of 98 cellular ships and 44 bulk carriers and tankers, many of which remained stranded at sea or seized by creditors following the bankruptcy filing.

As a result of the bankruptcy, as much as $14 billion worth of cargo including that of Wal-Mart, Target, and JCPenney was left at sea with Hanjin crewmembers and diminishing supplies. With the holiday season around the corner and no clear resolution in sight, retailers worldwide are left stuck in a sea of uncertainty. Even those that don’t deal with Hanjin directly are feeling the pain. Tier 2 suppliers have exposed them to Hanjin’s shortcomings, a risk they could have seen coming with better visibility on their supply chain.

Although this bankruptcy might come as a shock to some, Rapid Ratings has been following Hanjin since 2010 and our FHR® (Financial Health Rating) shows that Hanjin has been treading water for quite some time. While most focus their efforts on retrieving their cargo or repairing their supply chains, others who managed to dodge the Hanjin bullet, including several of our clients, are able to proceed with business as usual. Our forward-looking analysis of Hanjin’s financial condition helped our clients see the writing on the wall, using the FHR in their decision to cut ties with the company to protect themselves, potentially saving them millions. Others have not been as fortunate.

Financial Health foreshadowing

For the past several years, our FHR has painted a telling picture of Hanjin’s financial trajectory that set the stage for the shipping giant’s bankruptcy. By the end of 2010, Hanjin had an FHR of 61, Low Risk. However, by mid-2015, the shipping company had fallen to an FHR of 30 and into our High Risk category. This downturn signaled our clients to diminish their relationships with Hanjin, and by the beginning of 2016 when the shipping company fell even further to our Very High Risk category at an FHR of 18, they had cut ties completely. As a result, some of our clients were free of business disruption at the time of Hanjin’s bankruptcy. Comparing Hanjin to peers was also a helpful benchmark for evaluating the average financial health of the Transportation industry. At the time of bankruptcy, Hanjin was rated at an FHR of 17, Very High Risk, while its South Korean and World industry peers were rated at an FHR of 57, Medium Risk, and 61, Low Risk, respectively.

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Supply chain disruption implications from Hanjin

For those who still have a hand in Hanjin, the true size and scope of this bankruptcy remains unclear. With each new development, though, there appear to be more problems than solutions arising.

  1. Bankruptcy Protection Complications
    Hanjin was granted bankruptcy protection in both South Korea and the U.S. However, the South Korean government has taken a tough stance against the company, refusing to bail them out. Hanjin is technically permitted to move in and out of certain terminals in both countries without fear of creditors seizing its cargo, but the company is still struggling to dock its ships. When Hanjin ships do arrive, there’s confusion over who is responsible for paying docking fees, container-storage and unloading bills, leading many ports to simply turn them away.
  2. Potential Liquidation
    Although Hanjin will continue to seek court protection in 43 other countries, the company recently parted ways with three of its bulk carriers in a sale of over $20 million. Moreover, a South Korean bankruptcy court ordered that Hanjin sell as many of its ships as possible and to return all charter ships back to their owners. In other words, it seems as though all roads point to liquidation for Hanjin.
  3. Business Disruption Surprises Continue
    Whereas companies directly linked to Hanjin have been dealing with the consequences of the company’s bankruptcy since its onset last month, others are just now discovering that their business could be affected. This is largely due to low visibility on Tier 2 suppliers and fourth parties - companies unaware that their third-parties work with Hanjin are starting to feel the bankruptcy’s aftershocks.

You didn’t need a crystal ball to see it coming

The effects of Hanjin’s bankruptcy are undoubtedly being felt worldwide, particularly for manufacturers and retailers gearing up for holiday shoppers. Financial statements aren’t always easy to digest, yet understanding financial health is essential to mitigating risk and avoiding costly business disruptions. You don’t need to be a credit professional to engage in thoughtful and productive financial health conversations with your suppliers, though. Our Financial Dialogue report, for instance, identifies and prioritizes areas of concerns, while also acknowledging strengths to produce the most relevant financial questions to help guide your counterparty conversations. Using these questions help you understand the relationship’s level of risk, enabling you to make appropriate risk management decisions.

The Financial Dialogue turns the FHR® and underlying analytics into a scripted conversational guide for evaluating the Financial Health of suppliers.   For example, the questions you should have asked if Hanjin were your supplier addressed their high leverage and low cash ratios:  

  1. The company has a significant level of debt at ₩4,866,702 M, which is 73% of total assets. Do you expect to maintain this leverage for the next 12 months? Who are the debtholders?
  2. The company’s cash balance is very low given its current liabilities. Are you comfortable with this cash availability?
  3. Do you have access to additional cash if the need arises?

Want the complete list of questions? Download the Hanjin Financial Dialogue.

Topics: Supplier Risk Management, Bankruptcies & Default Studies