By Mike Wackett

Following the bankruptcy of Hanjin, Taiwan’s Yang Ming is now the container line in the greatest financial danger, according to a research paper published today. Drewry Financial Research Services (DFRS) says the line has the industry’s most leveraged balance sheet, with a net gearing of a massive 437 per cent at the end of Q3. The figure soars above the industry average of 124 per cent and is nearly five times that of its closest regional peer, Evergreen.

The report says: “Yang Ming’s high debt is a great cause for concern for us, given the heightened financial risks. Even with recovery in the underlying freight market, the debt burden without a restructuring is a red flag and a clear sell signal for us.”

DFRS noted that Yang Ming had accumulated NTD38.4 billion ($1.2 billion) in losses since 2009, with its net loss for 2016 at around $400,000 by the end of the third quarter.

The analyst believes the carrier’s high cost structure, combined with its debt mountain, will “keep Yang Ming in the red in 2017”, despite an improved outlook for freight rates. In November, Yang Ming’s Board announced it would slash executives’ pay by 50 per cent and the salaries of senior line managers by 30 per cent, among a raft of measures to stop the rush of red ink. The Taiwan government owns a 33 per cent stake in Yang Ming and will need to support the debt-ridden carrier, suggests DFRS.

It noted that talk of a merger between Yang Ming and compatriot carrier Evergreen was unlikely, given that the latter is privately owned. However, there had, it said, been talk in government circles of a merger with state-owned Taiwan International Port Corp (TIPC).

According to Alphaliner data, Yang Ming is currently the ninth-largest ocean carrier, operating a fleet of 101 ships for 579,048 TEUs, giving it a 2.8 per cent global market share. Fifty-five of its vessels are chartered, including eight 14,000 TEU ultra-large vessels on fixed-rate long-term lease from Seaspan.

It is possible that, to reduce its vessel operating costs, it may endeavour to renegotiate the terms and daily hire rates of its chartered-in tonnage, along similar lines to Hyundai Merchant Marine and Hanjin.

Yang Ming, founded in 1972, is a member of the CKYE east-west vessel alliance, but in April it will join with Hapag-Lloyd and the soon-to-be-merged container businesses of K Line, MOL and NYK in THE Alliance. Its dire financial health will be of great concern to the other members.

THE Alliance is the first vessel-sharing agreement to include safeguards for shippers in case of a failure by one of the partners. According to US Federal Maritime Commissioner William P. Doyle, THE Alliance’s filing with the FMC includes “framework language” to allow other members to take over the operation of the affected party to avoid a repetition of the supply chain chaos caused by the sudden collapse of Hanjin, which left some $12 billion of cargo stranded on 100 containerships around the world. Shippers are understandably nervous about the financial health of ocean carriers.

That said, Yang Ming sought to reassure customers and suppliers on its solvency as a global container carrier by stating that “Yang Ming is not in default of any obligations and suggestions otherwise are patently false. As we head into the new year, Yang Ming assures its customers that it will remain absolutely committed to stay competitive in the industry.”

Following the sudden collapse of Hanjin last August, shippers have been increasingly concerned about the financial stability of the carriers they use. Moreover, claims from Hanjin’s creditors have reportedly reached some $26 billion, making it by far the biggest container line bankruptcy in the industry’s 60-year history. Suppliers worried that about getting caught out again are reviewing the credit terms of weaker carrier customers.

DFRS welcomed Yang Ming’s statement and said: “We believe the company has been forthcoming and transparent and are appreciative of the company’s quick and clear response. This should likely soothe both the customers and investors’ nerves. However, we await further actions to review our stock recommendation on Yang Ming, expecting a highly dilutive and large equity injection.”

Yang Ming explained the details of its financial recovery plan in a customer advisory released January 23. The first stage of its recapitalization was an injection of fresh capital, designed to “pare down accumulated loss” via a stock consolidation plan, which had been approved at a shareholders’ meeting held on 22 December, and an injection of fresh funds from new investors. It said the funds would come from “various government and private entities, including banks and financial institutions” and would take the stake owned by the Ministry of Transportation and Communications (MOTC) “well beyond the current 33.3 per cent”. In November, MOTC announced it was creating a $1.9 billion fund for the country’s shipping groups to access in the event of them entering the sort of financial difficulties that spelt the end of Hanjin.

“Yang Ming will continue to take a conservative approach in its actions, but Yang Ming is fully aware of and prepared to exercise on its option to draw on the $1.9 billion in government-backed funding should circumstances in the market arise requiring for such assistance,” the line said.

“Yang Ming has never approached its creditors with any demands to restructure any part of its debt, and has no intention to do so going forward. Yang Ming has never failed to deliver in difficult times, even in the wake of the largest carrier bankruptcy,” it added.

Reprinted courtesy of The Loadstar (