[ANALYSIS] Korea's HMM share sale has a big bond problem

HMM Hamburg container ship [HMM]

HMM's main creditor and other state-owned companies are selling their shares in the shipping company as freight rates fall and interest rates rise.

The deal could be a challenge due to the size of its existence of convertible bonds that could make the asset less attractive.

State-run KDB, HMM's largest shareholder, announced Thursday that it is selecting advisors for the sale of its HMM shares together with Korea Ocean Business Corporation (KOBC), the second largest shareholder.

In total, 45.7 percent of HMM — worth 4.5 trillion won ($3.5 billion) — is being unloaded.

KDB has 20.7 percent of the company, KOBC 20 percent and the Korea Credit Guarantee Fund (KCGF) 5 percent.

The stake sale comes more than six years after HMM, formerly known as Hyundai Merchant Marine, was taken over by KDB amid an industry slump. The bank swapped debt for equity to save the troubled company from bankruptcy.

“HMM has reached a normalization stage as its financial structure improved and its business base expanded,” KDB said in a press release on Thursday.

According to a tender posted on the Public Procurement Service on Thursday, applications will be taken through March 20 and preferred bidders for the advisory position will be announced on March 22.

“A detailed schedule will be set after consultations with relevant institutions and the advisory group,” a spokesperson for KDB told the Korea JoongAng Daily.

The possibility of an HMM sell-off has been mention since 2020, when HMM’s performance improved during the pandemic boom. In the second half of 2022, the Ministry of Oceans and Fisheries said that the government plans to sell is stakes “in phases” as part of efforts for privatization.

In 2022, HMM reported revenue of 18.59 trillion won and operating profit of 9.94 trillion won, both record highs. But the situation got worse coming into the year end, as the fourth quarter operating plunged 53.4 percent on-year to 1.26 trillion won and the revenue dropped 20.6 percent on-year to 3.53 trillion won.

Falling global ocean freight prices add to a darkening outlook for HMM, as 90 percent of its sales come from container shipping business. The Shanghai Containerized Freight Index (SCFI), one of the most widely used indices for ocean freight rates, hit 931.08 as of Friday. The SCFI reached a record-high 5,109.6 on Jan. 7 last year.

"We believe the current plunge is a natural process bringing back the abnormally high freight rates during the pandemic to a relatively normal level," a source from the shipping industry said.

HMM projects demand for container shipping will inevitably slow this year due to weak consumer sentiment caused by high inflation, interest rate hikes and energy crisis.

The high price tag is also an obstacle, as is the financial structure.

HMM issued 2.68 trillion won of convertible perpetual bonds in six tranches from 2018 to 2020, with KDB and KOBC purchasing them.

If the perpetual bonds are kept, HMM's interest costs will increase. From October, rates will increase for 1 trillion won of the bonds from 3 percent to 6 percent.

If the bonds with warrants and perpetual bonds held by KDB and KOBC are all converted into shares, their combined stake in the country’s largest shipper will reach up to 74 percent.

"For the successful stake sale in HMM, clear guidelines on convertible bonds and bonds with warrant are needed,” noted Yang Ji-hwan, an analyst at Daishin Securities. “It will be difficult to find a buyer without resolving the perpetual bonds."

Possible acquirers include HMM Posco Holdings and Hyundai Glovis, which operates vehicle carrier.

Posco Holdings, which had been in the shipping business before selling its operation to Hanjin, dismissed the takeover talk during a conference call in late January.

Hyundai Glovis also expressed it is not reviewing the purchase of HMM due to its “high price tag”, a company official told the Korea JoongAng Daily.

Other possible candidates being cited by the media include two Korean logistic companies, CJ Logistics and LX Holdings, which operates an express cargo business. SM Merchant Marine is also a possibility.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]