Stranded Hanjin Fleet Delivers Japan Shippers Brief Reprieve

(Bloomberg) -- Vessels stranded in the ocean belonging to a South Korean shipping company that filed for court protection spell higher profits and lower bond risk for troubled Japanese competitors -- at least for a while.

The Shanghai Shipping Exchange index has climbed to the highest this year since Seoul-based Hanjin Shipping Co. filed for court protection on Aug. 31. The cost to protect against non-payment by Kawasaki Kisen Kaisha Ltd. has fallen 11 basis points this month to 139 on Tuesday, the lowest since November, according to CMA data. Credit-default swaps of Mitsui OSK Lines Ltd. were at 129, an 11-month low.

Woes at South Korea’s biggest container shipping line may offer a temporary boost to Tokyo-based Mitsui OSK, which cut its full-year profit forecast in July, and Kawasaki Kisen, which predicted a wider loss. A $1,000 increase in freight rates in a single month could boost annual profits at major Japanese shippers by as much as 4 billion yen ($39 million), and shipping fees to the U.S. East Coast from Shanghai jumped $757 in the week to Sept. 2, according to Mitsubishi UFJ Morgan Stanley Securities Co.

“September is the peak season” for shipping before seasonal holidays, said Seigo Ando, a senior analyst at Mitsubishi UFJ Morgan Stanley Securities. While “Japanese shippers’ earnings are extremely sensitive to moves in freight rates,” Hanjin’s troubles probably won’t be a positive for the companies in the longer term because the South Korean ships are likely to resume operating in about a month, he said.

The extra yield over sovereign notes on Tokyo-based Kawasaki Kisen’s 0.69 percent bonds due in 2020 dropped to 72.8 basis points on Tuesday, the lowest since June 27, according to Bloomberg-compiled prices.

Freight rates will probably rise as Hanjin Shipping’s filing for receivership may lead to more mergers and acquisitions in the sector, Fitch Ratings said in an e-mailed statement.

A spokesman at Kawasaki Kisen, who asked not to be identified, said Hanjin Shipping’s filing for court protection could reduce excessive supply in the shipping sector, and that may lead to a market recovery. A Mitsui OSK spokesman, who asked not to be identified, declined to comment.

The Hanjin Shipping news probably won’t help Japanese shippers much in the longer run, and their debt spreads are shrinking more as a result of the Bank of Japan pushing interest rates below zero, according to Hidetoshi Ohashi, the chief credit strategist at Mizuho Securities Co. in Tokyo.

For a Bloomberg Intelligence report on the aftermath of Hanjin, click here.

SMBC Nikko Securities Inc. is somewhat bearish toward the credit quality of Kawasaki Kisen and Mitsui OSK because of the weakness of the shipping market, their trouble creating cash flow and the worsening of their balance sheets, according to a report released on Sept. 2.

Competition in the sector will eventually heat up again even after Hanjin’s court receivership, because “it’s not as if their ships will turn into scrap metal,” said Muneharu Hashimoto, a credit analyst at SMBC Nikko.

Hanjin shares jumped 30 percent on Tuesday after its group company and the government sought to provide additional funding to limit disruptions. Given Hanjin’s relatively young fleet, its capacity will likely find opportunistic buyers looking for discounted assets, Lee Klaskow, a senior analyst at Bloomberg Intelligence, wrote in a report dated Aug. 31.

Such purchases at low prices will probably cause freight fees to drop again, according to Ando at Mitsubishi UFJ Morgan Stanley.

“In the long term, it’s a negative for the shipping sector,” Ando said.

To contact the reporter on this story: Tesun Oh in Tokyo at toh15@bloomberg.net. To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net, Andrew Monahan at amonahan@bloomberg.net, Ken McCallum