"Now that's a game changer."
At P21.42 Billion, Hanjin’s is the biggest loan default in the history of Philippine banking. And yet the central bank and the five local creditor banks involved—RCBC, BDO, Metrobank, LandBank, and Bank of PI—do not seem a bit worried—or so it seems.
Local banking is one of the oldest in Asia. Bank of the Philippine Islands, founded in 1851, initially acted as the central bank, until the Central Bank of the Philippines was established in 1949.
Late afternoon of Tuesday, Jan. 8, 2019, Hanjin Heavy Industries and Construction Philippines, filed for voluntary rehabilitation with the Regional Trial Court of Olongapo City.
HHICP or Hanjin could no longer service its debts, $412 million (P21.424 billion at P52 to $1) owed local banks, and another $900 million owed suppliers and other creditors in South Korea, Hanjin’s home base.
Quickly, the central bank, the Bangko Sentral ng Pilipinas (itself the product of bankruptcy) moved to stem any possible damage from the Hanjin fiasco.
The BSP governor, the usually tough Nestor Espenilla Jr., who is ailing (he has tongue cancer and is on leave), issued a statement through a spokesman. He said:
“With its robust capitalization, the Philippine banking system is well positioned to manage about $400 million in loan exposure to Hanjin Heavy Industries and Construction Philippines, which recently filed for voluntary rehabilitation before the Regional Trial Court in Olongapo City. The loan exposure represents only 0.24 percent of total loans of the banking system and 2.49 percent of the foreign currency loans of Foreign Currency Deposit Units. The BSP is confident about the local banks’ ability to handle negotiations on this corporate restructuring while remaining compliant with prudential regulations.” Espenilla added.
“The Philippine banking system is strong and stable. Over the past 20 years, the Bangko Sentral ng Pilipinas [BSP] has been implementing strategic reforms that strengthened the industry’s risk management capabilities and improved capitalization.”
BSP tooted numbers. It said: “Latest data show that the local banking industry is well-capitalized with a Capital Adequacy Ratio [CAR] of 15.35 percent as of June 2018, well above international standards of 8 percent, and the Philippines’ 10 percent.”
“Total assets of the banking system continued to grow with an 11 percent year-on-year rise in 2018, while non-performing loans [NPLs] remained low at 1.83 percent of its total loans as of October 2018.”
“Domestic banks’ loan loss reserves also represented 109.9 percent of their NPLs during the same period. The industry, furthermore, remains very liquid and profitable.”
Assuring? A bit of history may provide wisdom.
The Dewey Dee caper
In 1981, a textile tycoon ran away with $85 million in debts and $4 million in bad post-dated checks. The $89 million was equivalent to P3.56 billion in peso obligations (at P40 to $1). At that time, the Central Bank governor, Jaime Laya, quipped: “Some banks get held up. Some banks get flooded. Those things happen.”
You know what happened? At least 16 commercial banks, 12 investment houses, and 17 financial institutions went under because of Dewey Dee’s mostly unsecured loans of P3.56 billion. Three conglomerates, identified with strongman Ferdinand Marcos, also disappeared from the face of the earth—Herminio Disini, Rodolfo Cuenca, and Ricardo Silverio. Today, Dewey Dee is still alive living in exile in Canada. The banks he borrowed from are gone.
The 2008 crisis
A more recent experience is the 2008 global financial crisis, the worst in 80 years. It was triggered by the closure of Lehman Brothers in September of 2008.
This time the Philippine financial system seems to have escaped the worst of the crisis. Only 13 rural banks had to be taken over. The peso depreciated against the dollar by 14.7 percent, the stock market collapsed by 48 percent, foreign direct investments fell 46.6 percent, capital flew to the tune of $1.4 billion (from $3.5 billion net inflow in 2007), and unemployment rose to 7.4 percent. Notably, inflation rose as its highest, to 9.3 percent in 2008 (with a peak of 12.5 percent in August 2008).
Incidentally, in 2018, the inflation rate rose to its highest in ten years, at 6 percent in November 2018, with a peak of 6.7 percent in September and October). Inflation was only 3.2 percent in 2017 and 1.8 percent in 2016.
HHICP (Hanjin) is operator of the Hanjin shipyard on a 300 hectares of leased government property on Redondo Peninsula overlooking Subic Bay, the former United States naval base and until today, considered the best and most strategic bay in Asia, in military and geopolitical terms.
Hanjin leased its Subic site in 2006, flattened virgin forests, and began operations in 2008 with generous tax and other incentives from the Philippine government. It paid only 5 percent of gross, in lieu of all other taxes, and was allowed to import tax free, raw materials, machinery and equipment. It was estimated to have invested $1.6 billion and proceeded to build 123 boats of all kinds, mostly oil tankers longer than megamalls and containers.
The Hanjin operation, along with the Tsuneishi shipyard established in 1994 in Balamban, Cebu with capital of only P450 million with capacity for 30 ships per year, made the Philippines the fourth largest shipbuilder in the world.
Hanjin is estimated to have generated more than $7 billion in revenues and at its peak, employed as many as 31,000. Then the downturn came in 2016 as demand for ships fell to only a third of total supply. Hanjin’s employment is down to about 3,000 today, now at risk with the bankruptcy.
Hanjin’s business and Subic facilities have been offered to a number of tycoons, including Ramon S. Ang of San Miguel Corp. and Dennis Uy of Udenna, Phoenix Petroleum, Chelsea Logistics, etc.. They all declined the offer. Dennis Uy himself seems overborrowed. His debts tripled to P85.85 billion in one year, in 2017 alone, up 200 percent from P28.48 billion.
Awash with cash (China has $3 trillion foreign reserves), the Chinese are reported interested, with two Chinese companies, one of them state-owned, looking at Hanjin Subic shipyard’s enormous commercial and strategic value.
Think of the Chinese Navy, with more than 500 ships and 255,000 personnel and a combat system similar to the US Aegis, taking over the best naval base in Asia—for small change. Now, that’s a game changer.
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