A debt default refers to the failure of a debtor to meet the legal obligations or conditions of a loan. That’s fairly easy to understand. In corporate finance, Chapter 11 means bankruptcy. To the uninitiated, these terms might conjure images of dire negativity that sound far worse than what these might actually be referring to once the smoke clears and their true definitions become apparent.

It is unfortunate that these terms have entered the public debate, spawned by what media have described as “the biggest corporate default in Philippine history” — a hyperbolic term that is itself alarming.

One other term that media use quite loosely is “credit negative.” Again, the term, when misunderstood, conjures negativity.

Our trade, finance and monetary authorities have collectively gone on a media offensive to reassure the public that the Philippine banking system remains intact and essentially unscathed by the recent collapse of a major investment that once fueled dreams of repurposing our economy as a major shipping hub.

Of the major investors in the Subic economic zone, Hanjin Heavy Industries and Construction Philippines (Hanjin), the shipbuilding subsidiary of the Korean Hanjin Group, was perhaps not only the largest in terms of capital but was likewise the most prolific, spawning major communities and downstream commercial enterprises.

Backstopping our economic managers in placing this seeming financial crisis in perspective to understand this financial hiccup allows us to both clarify the jargon and introduce certain specific aspects of Hanjin’s credit default.

The term Chapter 11 refers to chapters in the United States Bankruptcy Code. Chapter 11 generally deals with the bankruptcy filing of corporations that allows for a restructuring or reorganization of both assets and debts. Chapter 7 deals with debts of individuals. Chapter 13 sets limits on debts allowed a stay on foreclosures.

On that last phrase lies the technical definition of bankruptcy. Filing for bankruptcy simply means that an enterprise seeks court intervention to protect it from its creditors foreclosing on its assets. An enterprise may in fact be solvent and still be unable to pay its debts as they come where its assets are comprised of long-term accounts receivables plus illiquid shipyard property, plant and equipment (PPE).

In the case of Hanjin, with a $1.6 billion shipyard confronting a $412 million largely clean loan to five Philippine banks, it asked to be placed under receivership “to stop banks from collecting on its loans” while it operates and rehabilitates financially.

Hanjin’s debts mimic project financing to a limited extent. Hanjin incurs debt in relation to shipbuilding contracts and is thus granted loans tied to a specific ship-in-progress. While its receivables can be securitized, those ships cannot collateralize a loan as they technically belong to the party that commissioned Hanjin. While Hanjin’s PPE can be collateralized, the company already owes its South Korean creditors $900 million. That is twice its exposure to Philippine banks.

Analyzing the financials of the local bank with the largest exposure shows its Hanjin risk asset of over $140 million or approximately 33.98 percent of the total $412 million owed to five banks remains well within its single borrower’s limit. The hit would be in the bank’s non-performing loan ratio to total outstanding loans. If uncollected, this doubles to 4.3 percent from a previous 2.2 percent, thus reducing its capital adequacy ratio (CAR) — a critical benchmark that compares bank capital to risk assets.

Here is where the media’s reported “credit negative” status comes in. A reduced CAR increases the bank’s cost of money from its own creditor banks that charge higher interest. This increases the bank’s weighted average costs of capital and subsequently impairs net profits.

Thus, the bank pays the price. Arrayed against a backdrop of P9.7 trillion in systemwide outstanding debt, Hanjin’s is peanuts. Its impact on the local banking system is minimal.