By Joyce Lee and Se Young Lee
SEOUL (Reuters) - Hanjin Shipping Co's (KS:117930) banks are halting support for the South Korean company, its lead creditor said, making it likely the nation's largest shipper is headed for bankruptcy as it is dragged down by a deep global industry downturn.
South Korea's shipbuilders and shipping firms, which underpinned decades of economic growth, are reeling under debt after racking up losses amid a downturn caused by overcapacity and sluggish trade, forcing state banks to pick winners.
Hanjin's lead creditor, state-run Korea Development Bank (KDB), said on Tuesday inadequate financial support from parent Hanjin Group to an ongoing debt restructuring plan forced creditor banks to pull the plug.
A bankruptcy for Hanjin Shipping, the world's seventh-largest container carrier, would be the largest ever for a container shipper in terms of capacity, according to consultancy Alphaline, exceeding the 1986 collapse of United States Lines.
"Hanjin's plans are inadequate given the total amount of funds needed, and considering the proposed timing of Hanjin's infusion of funds, they lack conviction to normalize the company," Korea Development Bank Chairman Lee Dong-geol told a press conference.
Shares in the shipping line plunged, ending down 24 percent.
Hanjin Group, the country's 11th-largest conglomerate and parent of Korean Air Lines Co (KS:003490), said it was disappointed in the banks' decision and would support the shipping industry even if Hanjin Shipping enters receivership.
Unlike South Korea's shipbuilding industry, which includes the world's three-largest manufacturers, shipping liners are not huge employers, giving them less political clout.
Creditors of troubled Daewoo Shipbuilding & Marine Engineering Co (KS:042660), including KDB, last year pledged 4.2 trillion won ($3.77 billion) for the firm. Daewoo Shipbuilding is already controlled by KDB after an earlier bailout.
"It seems creditors are harsher on Hanjin than they were on Daewoo after loans that went to Daewoo ended up in a fiasco," said Lee Sang-jae, an economist at Eugene Investment & Securities Co.
Daewoo employs roughly 40,000 people in South Korea, while Hanjin had 1,428 South Korean employees at the end of June.
"KDB can no longer be seen as wasting taxpayer money after their previous bailout failed," Lee said, referring to Daewoo.
"Also, the number of jobs at stake isn't that big compared with Daewoo," he said.
INADEQUATE PLAN?
Globally, the shipping industry has slashed costs and tried to build scale to weather its downturn. In May, Germany's Hapag-Lloyd (DE:HLAG) formed an alliance with five Asian rivals including Hanjin, seeking to save on expenses by pooling runs to various destinations.
The Baltic Dry Index (BADI), which measures changes in sea transport cost, fell to an all-time low of 290 in early February from more than 1,000 in mid-2015. It rebounded to 720 by Friday.
Hanjin Shipping had debt of 5.6 trillion won at the end of 2015. Earlier this month, Hanjin Group submitted a plan to Hanjin Shipping's creditors pledging to raise up to 500 billion won for the troubled shipper.
But Hanjin Shipping was not expected to be able to pay up to roughly 1.3 trillion won in obligations such as charter fees and terminal use fees through next year, even if it succeeded in renegotiating loss-making charter contracts and rolling over bank debt, KDB had said.
South Korean officials on Tuesday ruled out a merger of Hanjin and rival Korean shipping line Hyundai Merchant Marine Co (KS:011200), which is also under a debt restructuring program.
KDB officials, declining to be named, said they expected Hanjin to seek court receivership, which was likely to result in bankruptcy proceedings. The creditor-led debt restructuring period ends on Sept. 4.
In June, South Korea announced an 11 trillion won fund to support two state-run banks, KDB and the Export-Import Bank of Korea (KEXIM), that were heavily exposed to shipping and shipbuilding firms.
Lee said banks exposed to Hanjin Shipping had been preparing loan-loss provisions.
"The risk of the company destabilizing the financial market is quite low," he said.