Hanjin Philippines shipbuilding bankruptcy

The Philippine business community was rocked on Jan. 8 by the announcement of the
bankruptcy of Hanjin Heavy Industries and Construction Philippines – the Korean shipbuilding
company based in the country.

The biggest corporate bankruptcy. This is the biggest corporate bankruptcy to ever hit the
Philippines. Hanjin is the biggest foreign investor in the Subic Bay Freeport Zone.

According to news reports, the firm has sought, in a court filing before the regional court in
Subic, voluntary rehabilitation under Republic Act 10142. This law, only recently passed in
2010, provides the appropriate mechanisms for the rehabilitation or liquidation of financially
distressed companies.

Hanjin Philippines has become financially distressed due to its heavy debt. With revenues falling
behind, it cannot support its operations anymore under the burden of its current debt.

According to the same reports, Hanjin owes $412 million to Philippine banks. Another $900
million is owed to Korean banks. So far, little is known about these debts and how the actual
value of the assets of the company relate to its capacity to repay.

It is widely believed that the assets of the company, only so recently constructed, are more
valuable compared to the debts owed.

What caused the problems for Hanjin Philippines? An unexpected glut in shipbuilding
demand caused by continued uncertainties in world trade is the reason. Perhaps too, its
company culture.

Although they are separate companies, Hanjin Heavy Industries and Construction, the
shipbuilding company, might have suffered reputational damage with the bankruptcy of Hanjin
Shipping Co. in 2017.

This latter company, the shipping and logistics company of the Hanjin Group, the 7th largest in
the world, was the flagship company of the Hanjin Group.

A financial drama of decline and mismanagement/and corruption played out in South Korea
during 2016. Eventually in February 2017, the Korean courts declared the company bankrupt
and to be liquidated.

This event set off a worldwide ripple effect in the world container industry that caused worldwide
supply chain and shipping disruption. Loaded cargo ships were stuck in ports and at sea.

According to industry watchers, Hanjin Shipping’s bankruptcy was, to the world’s shipping, the
equivalent of the Lehman Brothers collapse of recent memory.

Philippine bank exposure. Five of the country’s biggest banks have lent to the Korean
shipbuilder: Rizal Commercial Banking Corp., the Land Bank of the Philippines, Metropolitan
Bank and Trust Corp., the Bank of the Philippine Islands, and Banco de Oro Universal Bank. .

Collectively, Hanjin owes them $412 million. The Philippine banks have reportedly moved
together to improve the chances of collecting against the reformed company.

The Philippine central bank, speaking through its deputy governor Chuchi Fonacier, stated that
Hanjin’s debts only account for 0.24 percent of total gross loans of the Philippine banking
system and 2.48 percent of foreign currency loans made by local banks. From this standpoint,
the situation is less alarming.

The modern Subic shipbuilding yard. Hanjin’s history as an industrial enterprise in the
Philippines is fairly recent. It began constructing its shipyard in 2006 on raw land of nearly 300
hectares in Zambales province as a foreign investment locator within the Subic Freeport area.
Two years later, it made its first ship delivery.

It is a subsidiary of Hanjin Heavy Industries and Construction Co. Ltd., a multinational company
based in Busan, Korea. The parent company is part of the large Hanjin Group that has grown
rapidly with the rapid swift industrialization of Korea.

The company undertakes the construction of big merchant vessels used in international
commerce. According to the Subic Bay Metropolitan Authority (SBMA), the shipyard investment
is $2.3 billion.

This has enabled the shipyard to manufacture big cargo and container ships, bulk carriers,
liquefied petroleum gas carriers of crude oil and mineral ores. According to SBMA, Hanjin
Philippines has built 123 merchant vessels for international customers.

The company is one of the big employers in the country. It has reached an employment of
around 20,000 workers. The shipbuilding workforce is mainly dominated by skilled welders.

Along with the other big shipbuilding company, Tsuneishi, the Japanese shipbuilder located in
Cebu, the Philippines has become a major shipbuilding nation. The government through the
Department of Industry states that based on gross tonnage built, the Philippines has become
the fourth largest shipbuilder in the world today.

This status could be threatened by the bankruptcy and potential demise of Hanjin Philippines.

Prospects for rehabilitation. Any time a company suffers from financial distress, its value as a
going enterprise deteriorates. Also, the value of the debts that creditors hope to collect falls.

This is equally true with the value of its investment assets. Financial needs could lead to neglect
of maintenance or the separation through sale of redundant assets.

If it is an important and viable economic activity, opportunities for reorganization and

rehabilitation are always present either through new investments to rebuild the productive
assets or through the fall in the value of the debt owed, or both.

The actors – debtors and creditors and interested parties – are many. Debtors and creditors
have in general opposing interests, but the demise of the company and the liquidation of assets
among the creditors may not always be in their best interest. In such cases, they could open
opportunities for new investors to bring life to the distressed company.

The government has an interest in seeing to it that the enterprise could be saved. That route is
often likely to improve the chance of creditors getting paid a higher fraction of the original loans.

Creditors could also have a strong interest in getting their act together by forcing a sale of the
company to a viable investor that could bring it back to life.

Quo vadis? Hanjin Philippines has sought the help of the government to find a buyer that could
take over the shipbuilding operations.
It is reported that Chinese foreign investors with shipbuilding interests are looking over the
possibility of buying into the Hanjin investment. The Chinese investors could see this as a major
opportunity in locating in a recently constructed major facility which has a rich supply of skilled
labor resource.

Read more at https://www.philstar.com/business/2019/01/16/1885352/hanjin-philippines-

shipbuilding-bankruptcy#mDcO6zMHyOokHLsK.99

The mysterious death of Hanjin

In January last year, Hanjin Heavy Industries and Construction Philippines (HHIC) delivered to
the French Maritime Freighting Company, CMA CGM S.A., fourth-largest container company in
the world, its flagship Antoine de Saint Exupery, its largest container ship (with a deck of three
football fields combined) and the largest Europe-based ship in the world (World Maritime News,
Jan. 5, 2018). Made in the Philippines, at the 326-hectare HHIC shipyard in Redondo peninsula,
north of Subic Bay, Zambales.

This new vessel, the first of three ordered by CMA CGM S.A., represented a breakthrough in
global shipbuilding, according to HHIC-Phil President Gwang Suk Chung. He said “the intensive
support of the Philippine government gave the Korean shipbuilding company a robust head start
in the shipbuilding industry” (portcalls.com, Jan. 27, 2018). Present at the completion ceremony
and keynote speaker was former President and now Pampanga Representative, House
Speaker Gloria Arroyo, in whose presidential term the Hanjin shipyard was inaugurated in 2007.
In her speech, Arroyo cited the “$2.3-billion investment of HHIC in the Subic Bay Freeport” and
thanked the Korean firm for the “massive training facility for workers” (Ibid.). Subic Bay
Metropolitan Authority (SBMA) Chair Atty. Wilma T. Eisma read the message of President
Rodrigo Duterte (who was then in India for the ASEAN meeting), thanking Hanjin for “its vital
role in national economic growth, and “expect(ing) HHIC Phils. to remain a pillar and partner in
the growth of the Philippine maritime industry” (Ibid.). Hanjin has delivered 123 ships from the
shipyard in the past 11 years, or about 12 ships a year.

But just short of a fortnight a year after the launch of Antoine de Saint Exupery, the Korean
shipbuilder HHIC Phils. filed for bankruptcy on Jan. 8, 2019, after it suffered liquidity problems to
repay its debts. Hanjin is reported to have incurred around $400 million in outstanding loans
from local banks and another $900 million owed to South Korea lenders (Sunstar, Jan. 14,
2019).

What happened? Why did not all see that HHIC Phils. was going to die?
In September 2016, Subic Bay Metropolitan Authority (SBMA) Chairman Roberto Garcia
assured workers at the Subic shipyard that HHIC Phils. was not going to be affected, that Hanjin
Shipping Co. Ltd., the world’s seventh-largest shipping line, had filed for bankruptcy protection
in the United States. “HHIC Phils. is not related to Hanjin Shipping (it is a subsidiary of Hanjin
Heavy Industries and Construction Co. Ltd.), so there is no need to worry,” he said, pointing out
that the Subic shipbuilder has separated from the Hanjin Group in 2005 (sbma.com, Sept. 08,
2016). Management assured the workers that orders for container ships were still coming, and
additional workers to the 35,000 direct and indirect employees already working on various
operations will be needed for these (sbma.com, Sept. 8, 2016).

HHIC then confidently accepted big orders from Singapore and France, among other smaller
orders from other countries who were coincidentally refreshing their fleets. But perhaps cash
planning was not efficient enough to address the shipping industry practice of progress billing to
the buyer starting late in the building process (called the “heavy-tail” contracts) — which ate up
production cash flows that then had to be advanced by HHIC. And so the local Hanjin, 100%
foreign-owned (Korean) as allowed for non-utility companies under Philippine laws, borrowed
heavily: $412 million from Philippine banks and another $900 million from Korean banks —
which it cannot now pay back. It has been reported by some sources that the Subic shipbuilder
has incurred at least $100 million in losses because of stiff global competition, the lower prices
of ships because of decreased demand from uncertainties in the world economy, and slow
production at the local shipyard due to technical limitations and the lack of skilled manpower.

How did the financial mess happen, when there are the generous subsidies from the Philippine
government to make sure HHIC Phils. stays at Subic and generates revenues for the economy
and for itself? Support was provided by the Philippine government under R.A. No. 9295 and the
Investments Priorities Plan (IPP).

HHIC Phils. and all manufacturing investors at special economic zones enjoy a wide array of tax
holidays, including full exemption from paying corporate income tax for a minimum of its four
years of operations; a five percent preferential tax rate on gross income earned in lieu of all
national and local taxes, tax and duty-free importation of raw materials, capital equipment,
machineries and spare parts; exemption from wharfage dues and export tax, impost or fees;
VAT exempt on local purchases; exemption from payment of any and all local government
imposts, fees, licenses or taxes; and an exemption from expanded withholding tax. Besides
taxes, HHIC Phils. also received subsidized power rates from the Arroyo administration,
amounting to more or less P4 billion over a 10-year period (Sunstar, Jan. 14, 2019). The last
$30 million of this was payable this month (January 2019). Note that SBMA, who pays for HHIC
power usage, has reflected losses in its own financial statements citing this heavy expense for
the HHIC power subsidy (SBMA 2016 f/s).

“This is the biggest corporate bankruptcy to ever hit the Philippines,” economist Gerardo P.
Sicat said (The Philippine Star, Jan 16, 2019). Bangko Sentral ng Pilipinas (BSP) Deputy
Governor Chuchi G. Fonacier immediately said that “[i]f the creditor-bank is proactive in
monitoring the developments in Hanjin, then the bank should have already provided for an
allowance for credit losses… the bank would be able to cushion the impact of this default on its
profit” (BusinessWorld,Jan. 16, 2019). And the four leading lenders in the country who all lent to
HHIC said, yes, they did provide for the losses, and their capital adequacy ratio would be far
from compromised: Rizal Commercial Banking Corp. (RCBC) lent the most at $145 million;
Metropolitan Bank & Trust Co. (Metrobank), $70 million; BDO Unibank, Inc., $60 million; and
Bank of the Philippine Islands (BPI), $52 million (BusinessWorld, Jan. 16, 2019). State-owned
Land Bank of the Philippines (LANDBANK) is estimated to have lent $85 million to HHIC Phils.,
for which the government bank is now being questioned that loans should have been prioritized
for the agricultural sector (The Philippine Star, Jan. 15, 2019).

Has HHIC Phils. “borrowed to complacency” and availed of government subsidies and
incentives likewise “to complacency,” that so nonchalantly, it could up and file for the biggest
corporate bankruptcy ever to hit the Philippines? The banks and other lenders can shrug off the
bad loans, but the Filipino people cannot, because it is their money that pampered HHIC’s
apparent opportunism for the exuberant offerings of subsidies and incentives by some
hopefully-not personally motivated government leaders.

The Department of Finance’s Train Two program that proposes tighter time limits for subsidies
and incentives to certain foreign business locators and the phase-out of the older subsidies is
good, as in the negative example of abuse of welcome and favor, in the HHIC Phils. bankruptcy
case.

P.S.: Defense Secretary Delfin Lorenzana broached the proposal for the government to take
over Hanjin’s facility, so it could have access to a strategically located naval and maritime asset.
Presidential spokesman Salvador Panelo said President Duterte said he will study this (The
Philippine Star, Jan. 18, 2019). Indeed, this must be studied very well, and honestly, for
conspiracy theories are rising that some beneficial partnerships might be formed with
reportedly-favored individuals and government (Ibid.). But even disregarding such probably-
unfounded anxieties, the more urgent focus should be that the government should not go into
“reverse privatization,” a one-step-forward, two-steps-back action that will re-entrench
government in private business, and deter goals of fair competition and free enterprise.

How George Soros Made the Perfect Speculation

On September 16, 1992, George Soros made over $1 billion in profit in a single day.

It was a legendary trade that would go down in financial history… not unlike the day Nathan
Rothschild made a fortune speculating on the Battle of Waterloo in 1815.

Soros did this by making a massive bet against the British pound.

(I expect another opportunity to make enormous profits betting against a major currency very
soon. More on this shortly.)

At the time, the pound was tied to the German currency through a fixed exchange rate known as
the European Exchange Rate Mechanism (ERM). It was a precursor to the euro currency.

With the ERM, exchange rates between participating European currencies were not set by
supply and demand. Instead, governments bought or sold their respective currencies to keep
them within acceptable limits.

By 1991, it was clear to everyone that the pound was overvalued at its fixed rate within the
ERM. The Bank of England’s ongoing intervention was the only thing propping it up.

Despite that, the market believed the Bank of England could continue the charade indefinitely.

Soros saw things differently. If he could break the Bank of England’s will, it would force them to
abandon the pound’s fixed exchange rate… and Soros would make an enormous profit.

Soros planned to do this by shorting the pound. In other words, he’d bet that the pound would
weaken.

It was a chance to make the trade of the century.

This is how it worked…

Soros borrowed as many pounds as he could. Then he sold those pounds to the Bank of
England for German Deutsche marks at the fixed rate.
If the pound weakened, he could convert his Deutsche marks back into pounds at a much more
favorable rate, cover the amount he had borrowed, and pocket the huge difference.

At the same time, his downside was limited because the pound was obviously overvalued. The
Bank of England’s willingness to intervene was the only thing holding it up. There was very little
chance the pound would strengthen on its own.

It was a low-risk, high-reward play. In many ways it was the perfect speculation.

(Acknowledging Soros’s skill as a speculator is in no way an endorsement of his toxic political

views.)

On the morning of September 15, 1992, Soros’s hedge fund began to massively short the
pound…

By the end of the day, the Bank of England had already bought over 600 million pounds in a
fruitless effort to defend the currency. But Soros was selling pounds faster than the Bank of
England could buy them.

By the next morning, the British government was in a total panic. It raised interest rates from
10% to 12%, hoping to cauterize the wound.

But Soros—smelling desperation—continued selling pounds and pressuring the fixed exchange
rate.

Other hedge funds caught wind of what was happening. They started to short the pound, too. It
was a financial feeding frenzy, like a pack of hyenas devouring a fallen antelope.

By 7 p.m. that evening, the pressure was too much for the Brits. The government announced
that the UK was leaving the ERM and abandoning the fixed exchange rate.

The pound collapsed.

Soros had shattered the UK’s monetary policy. He made over a billion dollars in profit in a single
day.

Today, we are fast approaching another chance to make enormous profits from the collapse of
another major currency.
Tulipmania

REVIEWED BY WILL KENTON

Updated May 10, 2018

DEFINITION of Tulipmania
Tulipmania is the story of the first major financial bubble which took place in the 17th century.
Investors began to madly purchase tulips, pushing their prices to unprecedented highs.
The average price of a single flower exceeded the annual income of a skilled worker and cost
more than some houses at the time. Tulips sold for over 4000 florins, the currency of the
Netherlands at the time. As prices drastically collapsed over the course of a week, many tulip
holders instantly went bankrupt.

BREAKING DOWN Tulipmania

Tulipmania reflects the general cycle of a bubble: investors lose track of rational expectations,
psychological biases lead to a massive upswing in the price of an asset or sector, a positive-
feedback cycle continues to inflate prices, investors realize that they are merely holding a tulip
that they sold their houses for, prices collapse due to a massive sell-off and many go bankrupt.

A similar cycle was witnessed during the dotcom bubble of the early 2000s and housing bubble
that preceded the global financial crisis of 2008. Some argue that the current age of
cryptocurrency and its high prices might be a similar bubble.