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LONDON: March 07, 2016. A recent research paper by Drewry Maritime Equity Research said that a merger with fellow South Korean carrier Hanjin Shipping was a distinct possibility. What would that merged company look like?

Hyundai Merchant Marine (HMM) is fighting for its life as it seeks to restructure its debt obligations and raise money through asset sales. Last month Drewry Maritime Equity Research outlined the embattled carrier’s predicament and various attempts to stay afloat and concluded that the company will likely survive - but that a merger with compatriot Hanjin Shipping is a very real possibility.

HMM is on course to report five consecutive years of operating losses when it releases its full-year 2015 financial results. The accumulated losses in its container division alone from 2008 to the first nine months of 2015 amount to US$352 million.

As the company sells off other non-core assets, the container division is growing in importance; container sales now account for approximately three-quarters of HMM revenue, up from two-thirds in 2008.

Hanjin is no model of financial well being itself but it has at least managed to turn profits in the container market in the last two years.

The increasing reliance on the container sector puts HMM in a tough spot as the near-term outlook for the industry is negative – we expect the industry to lose in the region of US$5 billion in 2016 – meaning that the company will have to consider all options, including a merger with Hanjin.

HMM has thus far raised around US$3 billion in new capital and is looking to reduce its financial costs by renegotiating its debt and asking vessel charter parties to reduce their daily fees, many of which were agreed when shipping was booming. It is thought that creditors have tasked HMM with securing 20-30 percent cuts in charter costs as a condition for further assistance.

Despite of all of its efforts, HMM remains in a liquidity crisis that threatens its ability to meet its operational and debt commitments. The company has loans of US$334 million maturing in 2016 and US$530 million in 2017 and investors and creditors are turning skeptical about its ability to pay them back.

Previous merger talks between HMM and Hanjin were put to rest by the Korean government last year, but the debt situation in both companies is causing serious concern in local circles and could well bring them back to the table.

Both carriers sit at the bottom of Drewry’s Z-score freight operators’ financial stress index designed to give a quick reference to the financial fitness of selected service providers. While the rest of the industry has gradually improved its Z-score rating HMM has been on a long and slow decline. This, and HMM’s share performance versus other container companies makes it pretty clear that something needs to change.

A merger would propel both carriers from being on the peripheries of the Top 20 to the become the fourth largest operator in the world (before the merger of Cosco and CSCL into China Lines) with combined worldwide volumes of eight million TEU from a fleet capacity of just over 1 million TEU, giving a market share of 5.0 percent based on the current fleet.

The far larger order books of the carriers above them would see HMM/Hanjin lose some ground, but a financially stronger company might have a better chance of convincing lenders to fund a new order spree, something that HMM will struggle to do on its own.

The pairing would have a much stronger position in the key East-West trades as well as the Intra-Asia market. Based on the ships deployed in February 2016, HMM/Hanjin would have an 11.0 percent share of the Transpacific and 8.0 percent of Asia-Europe.

Such a combination could also help drive Busan, Korea’s main port, to grow quicker, which might appeal to local interests.

As we have cautioned previously, consolidation between liner operators is not a panacea to the industry’s woes because it doesn’t remove the excess number of ships, but notwithstanding that it does seem that HMM and Hanjin would stand a better chance of surviving together than they do on their own.

- Drewry is a specialist research and advisory organization providing analysis and reports for the global maritime industry.

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