When geopolitics underlies a bankruptcy story

The geographically strategic former American naval base at Subic Bay in the Philippines is once again at the centre of a great powers face-off for influence over Southeast Asia geopolitics and Pacific Ocean maritime passage.

This time, a Korean industrial bankruptcy is the opening.

In 2006, Hanjin Heavy Industries and Construction Korea established Hanjin Heavy Industries and Construction Philippines, based in Subic Bay. It eventually employed more than 30,000 Filipinos at one point, and transformed the Philippines into a leading ship-building and regional maritime power with the attendant economic and geo-political advantages.

In January 2019, all that came to a crashing halt with the announcement of Hanjin Philippines' bankruptcy. Why and how the company went bust is the subject of speculation.

The bankruptcy has left a consortium of Philippine banks on the hook for more than 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, if any, for these loans are yet unclear and a closely-guarded competitive advantage.

There is a general belief that the Korean government will protect the interests of Land Bank of the Philippines (a Philippine state bank) as part of a legal and/or political obligation.

The other banks will likely engage collectively and individually, with Metrobank known to be the most aggressive.

Like much of the Hanjin bankruptcy narrative, there is not much daylight on this issue, but reliable sources in the Philippine financial community believe that Metrobank has already staked out security control of at least one ship currently under construction.

Little is known of security control of other Hanjin Philippines assets.

NEW FACTOR IN GEOPOLITICAL GAME

The opportunity to exploit and influence the bankruptcy proceedings to assert presence, authority and influence over a geopolitically strategic major port and naval facility is already underway between the great powers vying for geopolitical dominance in South-east Asia.

Of course, the United States and China are clearly the two lead players in this competition. China has already fundamentally changed the geopolitical relationship through its Belt and Road Initiative and nowhere has this been more apparent than in the Philippines. A world-class strategic shipyard in Subic Bay would be the crown jewel in its breathtaking strategic positioning.

In the Hanjin Philippines case, the United States has moved faster and with more authority to regain some of its diminished strategic influence in the Philippines and provide some balance to Chinese successes in the region.

Local and national officials confirm specific American private sector interest in the bankruptcy.

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. But 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.

The South Koreans have the most at stake:

Especially in this case, elite Korean law, accounting firms and workout specialists will be best positioned to peel back financial and management responsibility and mitigation.

The Olongapo Regional Trial Court (the municipal home of Subic Bay) appoints the rehabilitation receiver for the Hanjin bankruptcy.

The original receiver, appointed at the petition of Hanjin Philippines itself, resigned after only a month on the job, citing pressure from some of the Philippine lenders, who had voiced doubts about his independence.

His replacement presumably carries the support of at least some of those lenders, who will be looking to maximise their recoveries.

DEGREE OF UNITY

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, the City of Olongapo will elect a mayor and council, who will be extremely influential on the behaviour of the receiver.

The Hanjin Philippines bankruptcy will move through the usual fog of accounting, regulatory and legal complexities.

But it is rare that this bankruptcy - fraught with the global, geopolitical implications that underlie it at Subic Bay - might be determined by the local politics of a small Philippine city.