Confronted with the recent recourse of our largest shipbuilder in seeking debt relief and protection from the courts to virtually stay loan repayments owed to at least five major banks in the country, in what has been labeled as the “largest corporate default” in local banking history, some sectors have raised fears and questions on our economy’s capacity to both attract and retain foreign direct investments.

That we are resilient and our banking sector systemically steadfast, we are certain. The economy under the Duterte administration bears the right fundamentals despite the challenges in the latter half of 2018 created in no small way by gross stupidity in agricultural management on one end and uncontrollable global geopolitical forces on another. In the larger universe of corporate finance, this hyperbolic labelling is nothing more than a hiccup representing less than a fourth of one percent of total debt within the domestic system.

The unanswered question is whether the shipbuilder’s failures were a result of any domestic macroeconomic weakness. Specifically, were there negative factors present within the Philippine economy that might be detrimental given the shipbuilder in default should have been rigidly capitalized?

Hanjin Heavy Industries and Construction Philippines (Hanjin), the shipbuilding subsidiary of the Korean Hanjin Group, was not simply our largest shipbuilder and one of Subic Freeport’s most prolific employer, but the company, in a way, symbolized that the Philippine economy had come of age as an industrialized country, globalized and serving the millennial brick-and-mortar needs of international markets.

Another shipbuilder that has set up shop, but unlike Hanjin is doing very well under our economy, is Tsuneishi Heavy Industries (Cebu) Inc. (Tsuneishi), located in Balamban, Cebu. Save for seniority, Tsuneishi, a Japanese company, enjoys pretty much the same perks and faces the same domestic challenges within the local economy as does Hanjin.

If one can make it while another can’t, then what happened? And is it related in any way to the regulations, incentives and governance of foreign direct investments in the economy?

Allow us to backtrack a bit and review the pressures exerted on Hanjin, not so much from the domestic economy but from overseas where its parent company is domiciled. This is important because the humongous loans granted Hanjin from Philippine banks were extended on a “clean” and collateral-free basis.

Such conditions, had more prudent and conservative local banks been their creditor, would have compelled us to demand that the debt contract contain direct recourse provisions to Hanjin’s parent company, where the latter acts as a sort of guarantor able to step in should the domestic subsidiary fail to make payments. The absence of such recourse or any condition that waters down the value of the repayment recourse should have been a matter immediately subjected to automatic liquidated damages where the courts cannot intervene.

After all, the warning signs had gone off as early as 2016, a good two years prior to Hanjin’s desperate act of seeking bankruptcy relief from the courts.

On the domestic front, Hanjin had started scaling down its workforce, relying heavily on labor subcontracting and was reportedly underpaying its workers. The austerity strategy was obvious and should have raised red flags had its creditors been able to divine the signals. The company had very visible cash flow problems.

On the overseas front, from the Hanjin Group, Hanjin Shipping Line Co. Ltd. had filed for court receivership in South Korea in August 2016. While Hanjin had technically spun off in 2005, financial recourse umbilicals should have kept its domestic debts moored to its parent company. Unfortunately, the 2016 bankruptcy was labeled “the largest bankruptcy ever to take place in container shipping.”

Once more the red flags had billowed. While Hanjin’s woes are relatively hiccups on the scale of Philippine banking, try telling that to the displaced workers now out of job.