Along with debt restructuring with its bondholders and creditor banks, charter renegotiation is the third of the “three main pillars” of the South Korean company’s self-rescue plan, it said last week.
HMM said it was “fully focusing” on renegotiating the terms of its charter parties “by the end of April, or early May”, and it is understood to be seeking reductions of up to 25% on daily hire rates.
In a letter to shipowners on 1 February, its chief executive said that HMM could not “continue to operate much longer without substantial relief from the shipowners”, but after weeks of discussion, owners do not appear to be budging.
The company entered into a voluntary agreement with its main creditor bank, the state-run Korea Development Bank (KDB), and other creditor banks, on 29 March, allowing the shipping group to roll over maturing debt and interest for three-months, but it was conditional on HMM cutting the amount paid in charters.
At the time, HMM said it had “made some significant progress”, but the only concession so far offered to the Korean negotiating team has been the possibility of a compensation agreement for the early termination of charters.
The source, who has “an ear to the negotiations”, said the three main owners were unified to “play hardball” with HMM to protect the integrity of their charter agreements with other container lines.
Even if they were minded to reduce daily hire rates to reflect today’s depressed market conditions, the owners would most likely be in breach of the covenants of the mortgages secured on the ships, which were underpinned by the fixed-rate, long-term charters.
For example, Greek shipowner Danaos ordered five 13,100 teu ships, which were delivered in 2012 and backed by 12-year charters with HMM. Danaos reportedly paid around $130m each for the ULCVs, but according to vesselsvalue.com, their value has slumped significantly since they were received. For example, it records the 13,100 Hyundai Ambition, due in Southampton next weekend on the G6’s Loop 5 service, as worth $82m, or as scrap $12m.
So any reduction in charter hire would oblige Danaos to take a further impairment hit on the value of its fleet, and thereby affect its creditworthiness.
If HMM does not get the charter rate cuts it needs to survive, the next stage of this saga could see creditors arbitrarily reducing the daily hire rate paid to the owners. This could trigger a breach of the charter parties and the further possibility of the ships being withdrawn from service.