The spectre of a repeat of the Hanjin Shipping bankruptcy, which caused ocean shipping and supply chain chaos in 2016 and 2017, continues to grow as coronavirus lockdowns stifle trade and economic activity and increase the financial pressure on all supply chain operators.
A number of shipper and forwarder sources have told Lloyd’s Loading List in recent days that they are increasingly concerned over counterparty risk. This takes multiple forms, from excessively late payments that threaten cashflow through to outright bankruptcies which could saddle operators with unsustainable debts or leave cargo stranded around the world, causing production and inventory disruption.
A new Alphaliner study sheds some light on the risk of a container line bankruptcy similar to the demise of Hanjin Shipping. It found that the deteriorating global economic outlook, which has pushed container shipping lines to withdraw an unprecedented amount of capacity in April and May, will hurt carriers’ operating cashflows and further weaken already fragile balance sheets.
Using the Altman Z-score method to measure the likelihood of bankruptcy across a selection of leading container lines at the end of 2019, Alphaliner found that seven out of the top eleven carriers had Z-Scores of less than 1.3, indicating a “very high” risk of potential insolvency.
“The other four carriers – Hapag-Lloyd, Maersk, OOIL and Wan Hai – had healthier Z-Scores of 1.72 to 1.92 points, but could also come under pressure if the demand contraction is stretched over a prolonged period,” said Alphaliner.
The analyst said that carriers with elevated leverage ratios were especially vulnerable, in particular those with high levels of short-term debt that are due this year.
Of the eleven carriers surveyed, at the end of 2019, six had negative working capital – defined as current liabilities exceeding current assets – including CMA CGM, Hapag-Lloyd, HMM, PIL, Yang Ming and Zim.
“Carriers with poor track records of negative earnings are also particularly at risk, with three carriers’ (HMM, Yang Ming and Zim) Z-scores lowered due to their negative retained earnings.
Since the end of March, credit rating agency Moody’s has changed the credit outlook for Hapag-Lloyd, Maersk, MOL and NYK from “stable” to “negative” and placed CMA CGM’s credit ratings under review for potential downgrades.
“Moody’s highlighted the high dependency that container carriers have on world trade, as well as industrial and consumer demand, which would all be negatively impacted by the lockdowns and quarantine measures being implemented around the world,” added Alphaliner.
Hanjin Shipping was finally declared bankrupt in February 2017, five months after the Korean shipping line entered receivership and sent global supply chains into convulsions, ending the carrier’s 40-year history. The collapse of Hanjin in August 2016 stranded the cargo of thousands of customers of Hanjin and its alliance partners, leading to huge supply-chain disruptions for many companies and rising ocean freight rates for several months, particularly on Hanjin’s strongest market, the transpacific.
Among the many implications of the shipping line’s collapse has been that cargo owners subsequently began demanding more financial transparency from carriers before entrusting them with their cargo.
Credit: Lloyds Loading List