THE GEO-POLITICS OF BANKRUPTCY: THE HANJIN PHILIPPINES BANKRUPTCY MAY SIGNAL A NEW FRONT IN THE GREAT POWERS’ COMPETITION FOR SOUTHEAST ASIA HEGEMONY
By Martin Yupangco
Since 1884, when Spanish King Alfonso XII established Subic Bay as the principal naval base for the Spanish Fleet by decree, Subic Bay Philippines has been at the heart of foreign powers’ expression of influence and even hegemonic aspirations over Southeast Asia. For the Spanish, followed by the Americans, for a short period the Japanese, and finally back to the Americans – Subic Bay served as a classic assertion of foreign enforcement of military, economic, and even cultural aspirations of predominant influence in Southeast Asia.
In 1992, following a vote by the Philippine Senate to reject a treaty to continue hosting the American military bases at Clark and Subic Bay, the Philippine Government of then President Corazon Aquino formally ended foreign dominance and occupation of Subic Bay despite her personal preference to keep the American presence. In the years that followed, after an extraordinary post Mt. Pinatubo eruption and reconstruction, Subic Bay became the showpiece of Philippine efforts to steer a more independent economic and political future. In 1996, the APEC Leaders’ Summit in Subic Bay marked the beginning of the next phase of Subic’s centrality to the geo-politics of Southeast Asia – this time based as much on economics and investment as military strategic importance.
Federal Express used Subic as a hub for a while but fled to China as Chinese influence grew. However, conflicts arising from the environmental cleanup from the American years and the Asian Financial Crisis of 1997 slowed significant progress. The U.S. Navy still used some facilities, and port calls of American ships and submarines continued, but the powerful geo-political strategic positioning of Subic Bay remained largely dormant until Korean initiatives during the 21st century. Even port calls by the U.S. Navy were limited following the horrific murder of a Philippine transsexual by an American Marine on leave.
The Korean Era
In 2006 Hanjin Heavy Industries and Construction Korea established Hanjin Heavy Industries and Construction Philippines in Subic Bay. Hanjin Philippines was the crown jewel in an extraordinary Korean economic investment drive in the Philippines. At its peak, Hanjin Philippines eventually employed more than 30,000 Filipinos, built over 36 major vessels, and secured countless maintenance contracts; transforming the Philippines into a global ship-building power. Already the most respected global source of merchant marine crew, the Philippines seemed poised to become a maritime power with the economic and geo-political advantages that come with that designation.
In January of 2019, that all came to a crashing halt with the announcement of the Hanjin Philippines bankruptcy. Why and how the bankruptcy occurred is the subject of speculation. Some point to as yet unproven financial misdeeds or management failure by Hanjin Korea. Others point to a depressed market for the kind of ship production Hanjin Philippines was designed for. Regardless, the bankruptcy left a consortium of Philippine banks on the hook for over US$412 million. This consortium includes Rizal Commercial Banking Corporation, which is still reeling from its involvement in the Bangladesh Bank cyber heist; Metrobank Corporation; Bank of the Philippine Islands; Banco de Oro; and Land Bank of the Philippines. A further US$900 million is understood to be owed to various Korean parties including state-owned Korea Development Bank.
The specific guarantees for any of these loans is yet unclear. There is a general belief, however, that the Korean government will protect the interests of Land Bank of the Philippines (a Philippine State Bank) as part of its legal and/or political obligations. The other banks will likely engage collectively and individually, with Metrobank by reputation expected to be the most aggressive.
Security of Assets
It is worth noting that a key element in determining the ultimate resolution of Hanjin Philippines is security of the Hanjin Philippines assets. Like much of the Hanjin narrative, there is not much daylight on this issue; but reliable sources in the Philippine financial community believe that previously mentioned Metrobank has already staked out security control of at least one ship currently under construction and perhaps has a head start on this critical factor.
This key element of security of assets is playing out in different but equally critical ways across Southeast Asia.
For example, in Singapore, the Hanjin Shipping Bankruptcy (of 2016… which is different from the Hanjin Philippines Bankruptcy) led to the arrest of 2 Hanjin vessels and the decision in Re Taisoo Suk (as foreign representative of Hanjin Shipping Co Ltd) [2016] SGHC 195, in which the Singapore Court took bold and innovative steps to recognize and assist the restructuring of the Hanjin group by ordering a moratorium over all suits or court proceedings against Hanjin, its vessels and its Singapore subsidiary. The decision sets an important precedence in Singapore for various principles, one of which is that despite recognizing that there were differences between the restructuring and insolvency regimes between Singapore and South Korea, “such differences should not be a bar to recognition and assistance of proceedings under the foreign regime. Different regimes will have differences in requirements and details: to insist on equivalence or even near-equivalence would not serve the needs of universality and orderly disposition.” (at paragraph [27]).
Hanjin Philippines represents the largest bankruptcy in Philippine history. Only the Lehman Brothers’ default of 2008 is even close at US$386 million.
One would think that an economic failure of this magnitude, involving the Philippines’ largest financial institutions, and a number of its most powerful business families, would cause a level of economic despair or even panic. But something quite different seems to be emerging.
A New Factor in the South China Sea Geo-Political Great Game
Quietly, the Hanjin Philippines bankruptcy and the opportunity to assert presence, authority and influence over a geo-politically strategic major port facility may be the catalyst for a renewed investment competition between the great powers vying for dominance in Southeast Asia.
Influence through investment is much more acceptable on the world stage than military gestures, and certainly will be more productive and win more popular support than running ships through contested waters, testing weapons systems, or failed summit meetings in Hanoi.
There are indications that the Hanjin Philippines bankruptcy is becoming just that catalyst. In the few weeks since the announcement of the bankruptcy, it appears that high-level private sector and diplomatic interests from the United States, China, Japan, Russia, The EU and even Taipei have started to focus on influencing the future of this world class ship building facility in historically strategic Subic Bay.
Of course, the United States and China are clearly the two lead players in this competition. China has already fundamentally changed the geo-political relationship through their Belt and Road Initiative and nowhere has this been more obvious than in the Philippines. A world class strategic shipyard in Subic Bay would be the crown jewel in its breathtaking strategic positioning.
In the case of Hanjin, the United States has moved faster and with more authority to attempt to re-assert additional strategic influence in the Philippines and provide some balance to Chinese successes in the region. Local and national officials confirm very specific American private sector interest in the bankruptcy. There does not appear to be a specific favored investor nation as of yet. The bankruptcy has a long way to go as it plays out. There are investigations ongoing in both South Korea and the Philippines, and litigation specialists representing injured stakeholders are already looking at potential avenues of compensation and responsibilities.
The administration of Philippine President Rodrigo Duterte has certainly had its controversies, but its assertive push to a more independent foreign relations strategy that asserts its historical, cultural and geographic positioning between East and West must be given credit for creating this opportunity for the Philippine economy. However, it should also be noted that the balancing act between China and the United States does not come without Philippine domestic tensions. Public opinion research consistently indicates a significantly higher trust rating by the Philippine electorate for the United States comparatively to China, and former Philippine Secretary of Foreign Affairs Albert del Rosario has recently filed a complaint against Chinese President Xi Jinping before the International Criminal Court (ICC) to "check impunity" in the disputed South China Sea.
The coming months will be critical in determining if this bankruptcy will actually create a significant, tangible race for strategic geo-political investment by the global superpowers.
But there is no question that this bankruptcy and its resulting effects points to an ever increasing geo-politically strategic role for the Filipino people.
The geo-politics is not just a military game. Water…the subject many believe to be an even bigger geo-political conflict area is already a bankruptcy fueled geo-political engagement.
In Singapore, again for example, this is taking place in the restructuring of the Hyflux Group. One of the primary business operations of the Hyflux Group is providing water treatment solutions for the Singaporean national water supply and given Singapore’s limited water resources and the historical significance of the issue, this has been ranked as a matter of national security. As a result, the restructuring of the Hyflux Group, whether in the sale of assets or engagement with potential white knight investors, has been severely restricted by the parties that the Hyflux Group will be allowed to sell to or cooperate with. In the latest news, the government’s Public Utilities Board has threatened to step in, take control and possibly nationalize the Tuaspring desalination plant, a major asset of the Hyflux Group.
The Hanjin Philippines Workout May All Come Back to South Korea
It is a good bet that the road to engagement and success will pass through Seoul
As the region’s financial, restructuring and diplomatic communities scramble to understand and engage with the Hanjin Philippines bankruptcy, the most insightful speculation about “point of entry” is focusing on South Korea.
They have the most at stake:
South Korea has an enormous economic and investment relationship with the Philippines. Economic and business leadership will want to do anything possible to maintain a stable and financially healthy relationship with the Philippine government.
The Korean parent of Hanjin Philippines is understood to have guaranteed all of the US$412 million owed to the Philippine banks, placing it at the heart of any solution to the Philippines bankruptcy.
Furthermore, the Government of South Korea itself may have some financial exposure in the bankruptcy in the shape of a sovereign guarantee of at least some of the Philippine banks’ debt, and directly through Korea Development Bank’s exposure.
The financial exposure of lenders in South Korea to Hanjin Philippines appears to be more than twice the exposure of Philippine financial institutions.
The South Korean corporate and financial community is anxious to express its responsible and ethically sound corporate culture against the background of the Chairman Cho Yang-ho family / Korean Air mess.
South Korea is anxious to show its geo-political stakeholders (including China) that its geo-political engagement extends beyond the 38th parallel and the Donald Trump – Kim Jung Un soap opera.
Elite Korean law firms, accounting firms, and workout specialists will be best positioned to peel back financial and management responsibility and mitigation.
In fact, the workout has reportedly already been started in South Korea
A Business Korea February 20, 2019 article reports that Hanjin Heavy Industries & Construction Co. Ltd. (주식회사 한진중공업, “HHIC”) creditors held a meeting at the Korea Development Bank (KDB) headquarters building on February 18, 2019 to share the proposal agreed by HHIC and its creditor banks in the Philippines, according to investment banking (IB) industry sources on February 19.
Under the agreement, Philippine banks will swap KRW166.6 billion (US$147.63 million) of their KRW460 billion (US$407.62 million) loans to Hanjin Heavy Industries & Construction Co. Philippines (“HHIC-Phil”) for a 20 % equity stake in HHIC. The banks’ remaining loans will be converted into an equity stake in HHIC-Phil. The book value of HHIC’s 99.99% stake in the Subic shipyard stood at KRW631.6 billion (US$559.68 million) as of the third quarter of last year.
Domestic creditor banks of HHIC will also convert 70% of their loans into equity. The KDB gave notice to the Korean creditors that they must complete the conversion of their loans into equity by February 28, except for KRW200 billion (US$177.23 million), or 30 % of their loans.
To the best of our understanding the proposed status of creditors will look something like this:
Of course, Debt for Equity Swaps are Highly Speculative in Bankruptcies and the new Philippine Central Bank Governor will certainly take some interest in this reported workout.
Local Political Implications at Olongapo City, the Municipal Jurisdiction of Subic Bay and the Hanjin Philippines Corporate Registration
We would be remiss not to comment on the significant local political implications on the final resolution of the Hanjin Philippines bankruptcy.
During the time of the U. S. Naval base, Olongapo was a rough and tumble city of tattoo parlors, bars, and a very specific expatriate community of retired U.S. military whose family in retirement was the U.S. military and the Filipino stakeholders of that American base.
In the post-WWII, post-Mt. Pinatubo volcano eruption, and post-American forces withdrawal period, a true Olongapo hero emerged in the face of now Philippine Senator Richard Gordon whose vision, political will and management skills led the literal rise from the ashes to an evolution of economic possibilities for Subic Bay.
Democracy being what it is, the Gordon family’s historic political leadership in Olongapo diminished to the point where today other political factions control the office of the mayor and city council. However, Senator Gordon remains a popular and influential national leader, who undoubtedly will have a significant influence on the Hanjin Philippines resolution.
So why should this local political history be of any interest to the region’s financial, restructuring and diplomatic communities as they scramble to understand and engage the Hanjin Philippines bankruptcy?
Very simply…The Olongapo Regional Trial Court appoints the rehabilitation receiver for the Hanjin bankruptcy. The original receiver (appointed at the petition of Hanjin Philippines itself) resigned after only one month on the job citing pressure from some of the Philippine lenders who had expressed doubts as to his independence. His replacement presumably carries the support of at least some of those same lenders, who will look to her to maximize their recoveries. So, while offshore debt dwarfs’ local debt by a factor of more than 2:1, it is not clear at this point how united the Korean lenders are and to what extent they are willing or able to exert influence over the Olongapo Court process.
On May 13, 2019 the City of Olongapo will elect a mayor and council. That new Mayor and Council will be extremely influential on the behavior of the receiver. If you understand the impact of local elections in a vibrant democracy…Enough said.
If the Hanjin Philippines bankruptcy is on your radar screen, make sure you can navigate:
The law, politics, and business culture of South Korea;
The demands and influencers of the Philippine financial community and international relations; and
The Subic Bay electoral, political, and judicial environment.
Like financially and politically charged bankruptcies anywhere in the world, the Hanjin Philippines bankruptcy will move through the usual fog of accounting, regulatory, and legal complexities. But it is rare that such a bankruptcy is fraught with the global geo-political implications that underlie the Hanjin Philippines bankruptcy at Subic Bay. The multiple international and Philippine entities that are positioning to engage this bankruptcy are already deploying knowledgeable, ground level intelligence and analysis of these factors in guiding their strategic engagement. The quality of the Philippine and geo-political insight and analysis will likely be the determining factor in the resolution of the Hanjin Philippines bankruptcy.
Martin Yupangco is the Founder & Managing Director of Optima Strategies Limited, an international strategy, government & public affairs, and stakeholder relations firm. Mr. Yupangco is also the Asia Director of Bench Walk Advisors, a litigation funder and legal capital solutions provider.
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