Multi-creditor bankruptcies shouldn’t happen

"The five banks could have helped avert their common debtor's financial debacle if they had exchanged information about the financial position of Hanjin Philippines-more specifically, the movement of its debt."

The reaction of most knowledgeable Filipinos to the news regarding the bankruptcy of the shipbuilder of Hanjin Heavy Industries and Construction Philippines Inc.—the largest bankruptcy in this country’s history—must have been the question “How could that have happened?” It was a perfectly reasonable question because the parent company of Hanjin Philippines is a South Korean company and South Korea has some of the world’s most successful shipyards.

The follow-up to that question was “Couldn’t the South Korean mother-company not have extended financial assistance and thereby prevented the bankruptcy?” The answer to that is that Hanjin Heavy Industries and Construction Philippines Inc. is a separate and independent corporate entity that had access—thanks to its powerful parentage—to ample financial resources in its host country. “Ample” accurately describes the magnitude of the financial resources available to Hanjin Philippines: at the time that it declared its bankruptcy, Hanjin Philippines owes a total $412 million to five of the largest commercial banks in this country (RCBC $140 million, Landbank $80 million, Metrobank $72 million, BPI $60 million, BDO $60 million). The peso equivalent of $412 million is far greater than the amount owed to a consortium of domestic banks by what until then had been the biggest corporate bankruptcy in this country, to wit, that of Victorias Milling Co. in the 1990s.

Hanjin Philippines’ debacle very probably would not have happened if its South Korean mother company had been more financially supportive and its Philippine affiliate did not have to heavily rely on borrowed resources. Hanjin’s headquarters should have kept itself abreast of the circumstances of additional equity to help Hanjin Philippines solve its liquidity problems, and Hanjin Philippines should have sought such equity from its mother company instead of piling on more and more debt. Why didn’t that happen?

On their part, Hanjin Philippines’ creditors could have helped avert their common debtor’s financial debacle if they had exchanged information about the financial position of Hanjin Philippines—more specifically, the movement of its debt—and thereby placed themselves in the position of being able to judge whether their common client’s borrowing activity had reached a precarious level. Would RCBC, for instance, have allowed its lending to Hanjin Philippines to reach $140 million if it had learned that four other major Philippine commercial banks already had a combined exposure of around $272 million to Hanjin Philippines? I’m sure it wouldn’t. Yet good sleuthing—particularly with the BSP (Bangko Sentral ng Pilipinas), the credit information agencies and the external-auditor community —would surely have yielded the information that Hanjin Philippines’ borrowing activity had reached dangerous levels.

The trouble is that for a variety of reasons—a desire for a bigger credit market share, arrogance and a misplaced obsession with secrecy, among others—financial institutions are loath to exchange information. Commercial banks are no exception. The results of this disinclination to share information are situations like the Hanjin Philippines bankruptcy. Not willing to share information, creditors fall together.

This brings me back to the title of this column. Multi-creditor bankruptcies should not happen. But they happen, and it’s because creditors don’t want to talk to one another.

Topics: Hanjin Heavy Industries and Construction Philippines Inc , Hanjin Philippines bankruptcy , South Korea , Hanjin Heavy Industries and Construction Philippines
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