Read the article on Hanjin Group together with “Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups” (Link), “Tunneling through intercorporate loans: The China experience” (Link) and “Expropriation through loan guarantees to related parties: Evidence from China” (Link)
Updated : 2015-01-12 17:58
Increase in Hanjin Group debt raising liquidity concerns
By Lee Hyo-sik
Hanjin Group, a logistics-centered, family-controlled conglomerate, has seen its debt soar over the past few years as Korean Air and other group units borrowed money to prop up their sagging businesses.
Hanjin’s debt has grown at the fastest pace among the nation’s top 10 business groups since the 2008 global financial crisis, and has the highest debt-to-equity ratio, raising the possibility that it may face a liquidity crunch.Analysts say that Korea’s 10th largest chaebol should take radical steps to reduce its debt in order to avert a full-blown liquidity crisis. They say Hanjin needs to dispose of its hotel and other non-core businesses to raise fresh cash, as well as take drastic restructuring steps to cut costs.
According to Chaebul.com, a corporate research information provider, Monday, Hanjin’s debt-to-equity ratio stood at 452.4 percent as of December 2013, the highest among the country’s 10 largest business groups. The ratio surged from 381.9 percent in 2011 and 248.3 percent in 2010 as it borrowed money from financial institutions, and issued corporate bonds.
The ratio has likely gone up further over 2014 as its logistics businesses have been struggling amid the continued economic slump.
In 2013, Hanjin’s outstanding liabilities totaled 32.4 trillion won, up from 29.7 trillion won in 2011 and 23.9 trillion won in 2010. In particular, the group’s flagship unit Korean Air was saddled with the 837 percent debt-to-equity ratio in 2013 as it had to borrow money to buy new airplanes, to cover operating losses and to extend financial aid to struggling affiliates.
“In 2009, Hanjin Group signed an agreement with its main creditor Korea Development Bank to raise 5 trillion won and spend the money to reduce its debts,” said a spokesman at Hanjin KAL, the group’s holding company. “Korean Air, which seeks to raise 3.5 trillion won in fresh funds, has disposed of its stakes in S-Oil and sold surplus airplanes, raising a total of 2.4 trillion won.”
However, such efforts came up short in securing the necessary funds as Korea’s largest flagship carrier extended 250 billion loans to Hanjin shipping in October 2013 and took part in the shipping firm’s rights offering last year. This has substantially hiked the company’s debt levels.
Early this month, Korean Air decided to issue new shares to raise 500 billion won as it became harder for the carrier to issue corporate bonds or borrow money from banks, due to its high debt ratio.
“I think Hanjin Group should have begun taking drastic restructuring measures to improve its financial health after the U.S. subprime mortgage debacle hit the global economy in 2008,” Chaebul.com CEO Chung Sun-sup said. “However, the conglomerate has been focusing only on changing its ownership structure to facilitate the third-generation succession. It didn’t do anything for the past six years to enhance its financial soundness.”
Chung said Korean Air and other Hanjin units will likely see their debts continue to head upward for the foreseeable future as it becomes hard for them to generate profits.
“The group won’t be able to reduce its debt levels unless it disposes of hotel and other non-core businesses, and raises fresh cash,” the CEO said. “Given the continued unfavorable business environment at home and abroad, Korean Air and other group affiliates will face a hard time in making money. So an outright restructuring is a matter of life or death to Hanjin if it doesn’t want to fall into a liquidity crisis.”