Deal focus: A repeat prescription for Korean shipping

Since its inception in 2010, Hahn & Company has been tracking Korea's shipping industry. This period has been characterized by a slump in demand so prolonged that several companies cracked. Korea Line, STX Pan Ocean, Hanjin Shipping – one by one, they filed for bankruptcy. Whereas some investors turned these casualties into lessons about the dangers of cyclical industries, Hahn & Co. saw opportunities.

The private equity firm considered a move for STX, came close to buying Korea Line, and eventually closed a deal in 2014 with a KRW1.6 billion ($1.4 billion) carve-out of Hanjin's bulk commodity assets. This was positioned as a structural rather than a cyclical play: H-Line carries the iron ore, coal and liquefied natural gas (LNG) required to fuel Korea's economy.

Hahn & Co. is taking a similar approach with SK Shipping, having led a $3.7 billion acquisition described as one of the country's first successful non-government led corporate restructurings. Korea imports more than 80% of its energy, including 143 million tons of crude oil last year, which ranks it number five globally. While H-Line brings in dry bulk commodities, SK Shipping's 92 vessels handle wet bulk business.

"We are trying to run the same play we've run on H-Line in terms of the value-added, the operational improvements, the risk management," says Scott Hahn, the private equity firm's CEO. "It's the same industry, just a different product." Different enough that H-Line and SK Shipping will not be merging.

Hahn & Co. will take a 79% stake in the company, with majority shareholder SK Holdings retaining 21%. The transaction includes the assumption of debt and a new capital injection of $1.4 billion. Of this, $1 billion will be an equity contribution from Hahn & Co – the first deal from the firm's third fund – and $400 million will be leveraged financing. 

SK Shipping's core function is importing crude and exporting refined petroleum products on behalf of SK Holdings, one of the world's largest refiners. It also has a sizeable bunkering business. The company came unstuck investing heavily in new vessels as it tried to develop third-party customers in other segments. The entire proceeds of Hahn & Co's investment will be used to pay down debt, reducing the gearing ratio from 2,400% to 300%. Like Korea Line, STX and Hanjin, it misjudged the cycle.

"Certain people are great at speculative asset plays, where they take cash generated by long-duration transportation logistics contracts and use it to buy assets before the upturn. However, a lot of them called the cycle wrong," says Hahn. "We take a different approach to risk management and balance sheet leverage."

The connections to SK Holdings remain and any new third-party business will be long-term in nature, featuring strategic counterparties. As with H-Line, the plan is to combine Korean operational excellence in shipping with an economic discipline that delivers consistent results correlated to actual demand.   

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Buyouts
• Industrials
• Support services
• South Korea
• Hahn & Co
• Commodities
• Logistics
• energy