Local banks grapple with biggest default in PH corporate history

Five of the country’s largest banks are rushing to cover a combined loan exposure of $412 million, most of it lent without the benefit of collateral protection, after the local shipbuilding unit of Korean conglomerate Hanjin declared bankruptcy earlier this week—the biggest corporate default in Philippine history.

More importantly, however, the involved financial institutions—Rizal Commercial Banking Corp.; Land Bank of the Philippines; Metropolitan Bank and Trust Co.;  Bank of the Philippine Islands, and Banco de Oro Universal Bank—have decided to move as one to take control of Hanjin Heavy Industries and Construction Philippines’ $1.6-billion shipyard in Subic Bay, Zambales, which employs about 23,000 workers.

“We agreed to work together to protect the interests not only of the banking industry but of the Philippine economy, as well, given a large number of people Hanjin employs in Subic,” the president of one of the creditor banks told the Inquirer in an interview.

Speaking on condition of anonymity, the bank president said his peers from other creditor banks had agreed that “no one will jump the gun” to seize collateral ahead of other creditors, an act that would trigger a free-for-all on Hanjin’s Philippine assets and jeopardize the rehabilitation plan that had been filed in the local courts.

Eventually, the provisional agreement among members of the loose consortium of Philippine banks may call for the forced sale of the Hanjin shipyard to a strategic investor as a way for the creditors to recoup their loans.

Assets greater than loans

“The Philippine assets are worth a lot more than the loans,” the bank chief said. “If those are sold, even at a discounted value, they will still be able to cover all the loans (extended) by the local banks.”

The Inquirer learned that RCBC has a loan exposure of $140 million to Hanjin. It was followed by Land Bank with an estimated $80 million; Metrobank, $72 million; BPI, about $60 million and BDO, $60 million.

RCBC president Gil Buenaventura told the Inquirer in a separate interview that there was a long history of successful creditor-led loan restructuring or corporate rehabilitation programs in the country where lenders were able to recoup their initial loan losses a few years later. These include the reorganization of National Steel Corp. in the 1990s and the restructuring of the debts of Skyway building Citra MMTC after the collapse of its Indonesian parent firm in the way of the 1997 East Asian financial crisis.

At the same time, however, there have been instances where one creditor moved ahead of others to seize collateral unilaterally causing the rehabilitation plan to collapse, most notably in the case of Victorias Milling Corp.’s bankruptcy two decades ago.

Bankers confident

“This is not the first time this has happened and our banks have experience in this,” RCBC president Gil Buenaventura said in an interview with the Inquirer. “I’m very confident that no one will jump the gun in this case.”

Hanjin is the largest investor in the Subic Bay Freeport Zone through the Subic Shipyard, which employs thousands of Filipino workers. Hanjin Heavy Industries developed the 227-hectare site, which includes a steel structure plant, from 2006 to 2016.

On Jan. 8 this year, it filed a petition to enter corporate rehabilitation.

In a statement, Subic Bay Metropolitan Authority chair Wilma Eisma said that apart from domestic lenders, Hanjin Heavy Industries owes some $900 million to lenders in South Korea.

Working together

The local banks’ exposure to Hanjin is more significant than the $386 million in Lehman Brothers-related losses they had to declare in the wake of the 2008 global financial crisis, which was previously the biggest that the Philippine financial system had to absorb.

Metrobank president Fabian Dee told the Inquirer that the country’s second-largest financial institution’s exposure had already been reduced substantially and that the impact on the bank would be minimal, thanks to protective measures taken early on in its dealings with Hanjin.

“The banking system is working together on this to protect the interests of the country,” he said.