Daiichi Chuo Kisen Kaisha files for Chapter 11 bankruptcy protection

On Sept. 28, Japanese shipping giant Daiichi Chuo Kisen Kaisha announced that it had filed for Chapter 11 bankruptcy protection in Tokyo, according to a Bloomberg report. Following four consecutive years of losses, the company had accrued close to $1.5 billion in liabilities. In a corresponding move, Daiichi Chuo’s subsidiary Star Bulk Carrier Co. also filed for Chapter 11 bankruptcy protection after accumulating close to $474 million in liabilities.

Daiichi Chuo falls on hard times through economic depression

After a four-year decline, with expected losses close to $209 million for 2015, Daiichi Chuo became insolvent, according to a World Maritime News report. In court papers, the company cited its decision to over-expand at a time when freight rates were plummeting as the primary reason it sought bankruptcy protection. Daiichi Chuo officials explained in the bankruptcy documents that following its peak profits in 2007, the company decided to expand right as the 2008 global financial crisis hit. The shipper never recovered financially as its contracts were canceled for chartered-in ships.

Furthermore, the company noted that the prolonged economic slowdown in China combined with a large amount of lower-cost global competition forced the bulk shipping industry into long-term stagnation. In fact, according to the Wall Street Journal, the 92 percent drop in the Baltic Dry Index after the recession was a key factor behind Daiichi Chuo’s losses. As a result, the demand for iron ore and coal commodities weakened in China, leading the company’s liabilities to swell to $1.5 billion, with only $894 million in assets. The company’s subsidiary also sought bankruptcy protection with approximately $474 million in liabilities.

In its bankruptcy petition, Daiichi Chuo stated that its market value had dipped down to $96 million after its share prices dropped 44 percent for the year. Then following its recent 3.4 percent drop to .23 cents per share, the Tokyo Stock Exchange reported that Daiichi Chuo was suspended from trading and that the company was set to be de-listed on Oct. 30.

Daiichi Chuo’s fleet comprised of 240 vessels at its peak in 2007, but after the collapse of Lehman Brothers Holdings Inc., that number dropped to 170 ships by 2015. The crippling fees it paid for charter vessels were more than the company’s shipping revenues for four consecutive years.

Daiichi Chuo has no financing in its restructuring plan yet

In court papers, the company stated that it plans to maintain operations in the bulk shipping market and hopes to emerge from the bankruptcy period after the Chinese demand for iron ore and coal commodities rebounds. However, the company did state that it has not received any offers for fresh capital financing.

Daiichi Chuo also filed for Chapter 15 bankruptcy protection in U.S. Bankruptcy Court in New York for its international insolvency. Chapter 15 is a part of the United States Bankruptcy Code that enables a bankrupt in a foreign insolvency proceeding to receive similar protection in the U.S. Its use is especially common among international shipping companies. Even though they are restructuring overseas, they want to protect their assets – such as their ships, docked in U.S. ports – from seizure by American creditors.

Upon approval by the court, Chapter 15 bankruptcy protection would shield Daiichi Chuo from further lawsuits and pursuits from creditors while it develops a restructuring plan in its Japanese insolvency proceeding.

The significance of the filing

This bankruptcy filing is the latest in a disturbing downward trend for the dry-bulk carrier market, according to a Splash 24/7 report. In 2012, Sanko Steamship, the largest Japanese shipping company, announced that it filed for Chapter 11 bankruptcy protection. Like Daiichi Chuo, Sanko Steamship was saddled with crippling debt in the fallout of the 2008 financial crisis.

Are you a creditor in a bankruptcy?  Have you been sued by a bankrupt?  If you have any questions about your rights, please contact me, Joel Glucksman, at 201-806-3364.