Harim's $4.9 billion bid to acquire HMM is met with uncertainty

HMM's Hamburg container ship [YONHAP]

Red flags are flying over the ongoing 6.4 trillion won ($4.9 billion) sale of Korea's largest shipping company HMM as credit rating agencies issued warnings about the financial capability of Harim, the preferred bidder of the deal.

Harim is relying on Pan Ocean, a shipping company 54.72 percent owned by the poultry processor, as a source of funding for the acquisition, but financial advisors project that doing so would place severe financial distress on Pan Ocean and its shareholders.

"It's important to monitor the level of how it's handling the financial burden throughout the acquisition fund-securing process," Korea Ratings said in a report released Thursday.

As of the end of September, Harim Holdings' cash assets amounted to 1.46 trillion won, according to the Korea Ratings, though it reportedly offered 6.4 trillion won to acquire HMM. Analysts anticipate it will need to rely considerably on external borrowing, raising the likelihood of increased financial costs for Pan Ocean.

"As a self-funding option, there is a plan to liquidate a portion of Pan Ocean's assets, primarily composed of vessels, amounting to 6 trillion won, or utilize financial products amounting to 372.8 billion won," Korea Ratings said. "Given the challenge of securing a large amount of funds […] Pan Ocean's rights offering is expected to be a primary funding avenue."

Another analysis by NICE Investors Service also highlighted that Pan Ocean's cash assets fall significantly below the expected acquisition amount, making external funding, such as rights offerings, loans or acquisition financing, inevitable.

"The weak cash flow, hit by increased financial costs, will likely erode financial stability to a certain degree," it noted, adding, "This will translate into lowering the creditworthiness of Pan Ocean and Harim."

Despite concerns, Harim remains confident in the acquisition funding plan, citing 3-trillion-won-worth of letters of commitment (LOC) received from four commercial banks in Korea.

"We have received LOCs from four banks, including Kookmin, Woori, Shinhan, and Nonghyup," Harim Chairman Kim Hong-kook said in a recent phone call with the JoongAng Ilbo, an affiliate of the Korea JoongAng Daily. "It exceeds 3 trillion won, while we only plan to utilize around 2 trillion won.

"We cannot embark on the acquisition without having the funds prepared," Kim added.

Pan Ocean had disposed of all of its shares in Hanjin KAL for 162.8 billion won, while Harim is pushing for the issuance of approximately 500 billion won worth of perpetual bonds for Pan Ocean with Hoban Construction.

Meanwhile, local rating agencies provided a positive evaluation of Pan Ocean's post-acquisition business prospects.

"Diversified business portfolio and stronger revenue streams are considered positive," Korea Investment & Securities said, while adding, "the effects of business diversification may take time, especially given the current challenging outlook on the container market."

Amid the need to secure trillions of won in acquisition funds, Harim's stock closed at 4,265 won on Friday, a drop by 13.14 percent from the previous trading day. Pan Ocean closed at 3,730 won, a 3.37 percent decrease.

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