According to the country's central bank, the shipping loans on banks' balance sheets are posing a considerable risk to the German banking sector, but some German banks are reluctant to deleverage their portfolios at a loss.

At a speech in Hamburg in March 2013, Andres Dombret, executive board member at Germany's central bank, Deutsche Bundesbank, identified the €100bn-worth of shipping loans on German bank balance sheets as a substantial regional and sectoral risk in the country's banking system. Bankers are now reporting that their shipping loan portfolios are under a high level of scrutiny from both the Bundesbank and German markets regulator BaFin, which co-operate closely on bank supervision, and that there has been pressure behind the scenes for some banks to increase provisions.

"KPMG has been carrying out audits with a focus on shipping portfolios, and BaFin has received the data formatted in such a way that it can compare one bank's exposure with another, using various parameters," says Christian van Beek, director of financial institutions at Fitch Ratings in Frankfurt.

"It is a very deep crisis, and we may not see an improvement until the end of 2014 or early 2015, but currently German lenders don't have a problem on the funding side refinancing their shipping portfolios, and margins on new loans and prolongations are at increased levels," he adds. "Banks may still get a high level of write-backs on loan impairment charges once sectors such as dry bulk, containers and crude tankers recover."

Problem banks

Although BaFin has demanded more detailed data regarding shipping loans from all the major lenders, the problems are concentrated at three banks – HSH Nordbank, Nord/LB and Commerzbank – while DVB Bank and Deutsche Bank, both very active in this field, are not considered to be a cause for concern for the regulators.

Commerzbank, which received a government bailout during the financial crisis, has exited the shipping sector altogether. In June 2012, the bank announced that it was transferring its entire ship loan portfolio into its non-core assets segment. This negated all the effort put into several years of re-organisation, where the shipping activities of Commerzbank, Dresdner Bank (which it acquired in 2008) and Deutsche Schiffsbank were all concentrated in Schiffsbank, and many staff were relocated to Hamburg. The Deutsche Schiffsbank portfolio led to provisions of €700m for  Commerzbank in 2013.

As of the December 2011 balance sheet date, Schiffsbank had a $30bn shipping loan portfolio, ranking it second in the world to HSH Nordbank, and ahead of Norwegian DnB NOR in third place and Nord/LB in fourth place.

Since 2009, HSH Nordbank has been going through a severe deleveraging programme, also following a government bail out. Most of its difficulties came from its shipping division. In the decade before the financial crisis, HSH Nordbank grew rapidly to become the world's largest ship lender, with its loan portfolio eventually reaching €29bn. Most of its €654m-worth of loan loss provisions in 2011 came from shipping.

A restructuring unit commenced operations in December 2009, initially including about €9bn of ship loans. The bank exited the aviation lending business in mid-2011, but remains committed to ship finance. In 2012, it had a final take of about €1bn in new shipping loans, though analysts caution that distinguishing new business from replacement loans agreed with ship owners is difficult in the current environment.

Positive attitude

Hannover-based Nord/LB has also been deleveraging, and almost trebled its loan impairment charges for the 2012 financial year versus 2011 levels, to €598m, of which €498m came from shipping. The bank set aside another €152m of ship loan provisions in the first quarter of 2013. As of March, it had an €18bn ship portfolio measured by exposure at default.

"We significantly increased our loan loss provisions for shipping for 2012, and these provisions meant that for the first time ever the Nord/LB shipping division was not profitable," says Klaus Stoltenberg, global head of ship and aircraft finance at Nord/LB.

"We believe that most of the provisions will be able to be written back as the market recovers, but it is difficult to predict the timing of an upturn, especially since more eco-friendly new-generation vessels are being ordered from shipyards at low prices, which is adding to overcapacity," he adds.

Difficult times

BaFin is also monitoring UniCredit, which built up a €9bn shipping loan portfolio but has significantly pulled back from the industry. Much of the lending went through its German subsidiary HVB.

HSH Nordbank, Commerzbank and Nord/LB all had close business relationships with limited partnership business entities, known as kommanditgesellschaft (KG) houses, which had built up a thriving market in KG closed-end funds and enabled retail investors to buy €10,000 units in ships put out on lease to operators. The combination of easy access to German debt and equity was an important driver of massive over-ordering by ship owners, especially in the dry bulker and container ship categories.

Even worse than extending long-term loans to vessels, which had charter rates that were about to plunge as existing operators become insolvent, German banks also extended bridge loans to funds to acquire vessels, and then found that the fund equity was never placed as the ship KG market collapsed.

As one German banker comments: "I am glad the KG bubble has popped, because it was not good for the market."

The funding gap left by the deleveraging or exit of German banks from asset-based ship lending is proving hard to fill with commercial debt, and there is significantly increased export credit agency support from China and South Korea for vessels being built in their yards. In the offshore oil and gas sector, combined support from the Norwegian export credit agency Guarantee Institute for Export Credits and Korea's EximBank is quite common.

Proceeding cautiously

For the European banks with balance sheet capacity to spare, lending margins are now at attractive levels given the shortage of bank debt. But, not surprisingly, credit committees have been cautious in adding to exposure, given the troubled state of the industry.

Institutions such as Deutsche Bank, DVB Bank, Nordea and DnB NOR are conducting business cautiously, rather than growing their shipping loan books to take advantage of higher margins. Standard Chartered also remains active, though with more of a focus on Asian ship owners.

Deutsche Bank is well placed, and given its highly diversified business model shipping has historically been a relatively small part of its business mix. Its shipping loan portfolio totalled €5.8bn as of March 2012, and write-downs have been modest. In its most recent disclosures, Deutsche has not set out total shipping exposure or loan impairment charges for the sector.

Deutsche has a strong focus on the underlying asset, via its structured finance unit headed by Daniel Pietrzak, in addition to head of shipping Nick Roos. Shipping spans various divisions within the bank, including investment banking coverage for products such as bond offerings. And given its strong leveraged finance presence, Deutsche also has good relationships with private equity firms, some of which have been partnering with ship operators to pick up cheap assets in a distressed market.

Staying afloat

Former global co-head of shipping at Deutsche, Ralf Bedranowsky, left the bank in April and is about to join DVB Bank. By the end of 2013, he will take over as DVB's head of shipping from Dagfinn Lunde, who is retiring.

Mr Lunde has presided over one of the best performing shipping departments at any European bank. As of December 31, 2012, the DVB shipping book totalled €12.2bn equivalent (ship loans are still predominantly dollar-denominated right across the industry). At the beginning of 2013, DVB's offshore activities were separated from shipping in a newly created offshore division and, as of March 31, the offshore book totalled €2.5bn and the shipping book €9.7bn.

"Starting in January 2008, we changed from geographical client coverage to a sectorised structure, giving us a very high level of expertise in each individual segment such as container vessels, liquefied natural gas tankers or chemical tankers," says Mr Lunde. "We also have an extremely diversified portfolio geographically, which is spread over different types of vessels, and a mixture of short- and long-term charters, and our approach to risk management has contributed to a solid performance right through the global financial crisis, with a very limited level of loan provisions." 

DVB Bank posted record profits for the first quarter of 2013, with consolidated net income after tax of €39.4m. For the 2012 financial year, new shipping finance write-downs totalled €107.9m, but there were substantial reversals of previous write-downs, and the net figure for shipping credit loss allowances was €70.7m.

Banks involved in ship lending are seeing extreme variations by sector. Offshore drilling rigs and support vessels, liquefied petroleum gas and liquefied natural gas are all doing well. Container ships, chemical tankers and dry bulkers have all seen ship values and charter rates massively depressed because of the wave of over-ordering, much of it funded by the KG market. And the largest crude oil tankers have their own sectoral problems associated with the rise of the US fracking industry, reducing its need for oil imports.

The wave of new orders is finally subsiding, but bankers anticipate another 18 months scraping along the bottom of the market before a hoped-for upturn in charter rates and cash flows in early 2015. In the meantime, there will be more bankruptcy filings from shipping companies, more loan restructuring work for bank lenders and more charters being renegotiated at lower rates.

Down but not out

In late April, HSH Nordbank closed an innovative financing solution, which it views as a template for vessels that are either in insolvency or on the brink of filing for insolvency. Ten vessels that had $300m-worth of HSH Nordbank debt attached have been put into a platform run by the powerful New York Stock Exchange shipping company Navios Group, which is based in Piraeus and run by Greek shipping tycoon Angeliki Frangou. Navios puts in a small amount of fresh equity ($10m) to acquire the vessels (five tankers and five small container ships) since given its strong banking relationships it has been able to bring in $120m-worth of senior debt from new lenders.

The remaining $170m of HSH Nordbank debt is converted into a subordinated participating loan. HSH still hopes to participate in any market improvement, and fully recover the original credit amount at a later date. The approach allows HSH both to reduce its risk exposure, and also to reduce its balance sheet, and so aids the overall deleveraging process.

"We are seeing deals in the market where vessels that were owned by defaulting shipowners [including KGs] are being transferred to other top-class ship owners with strong management," says Harry Theochari, head of transport at law firm Norton Rose Fulbright in London. "Typically there is a senior/subordinated loan structure, with the original bank lender hoping to see the subordinated loan repaid as charter rates recover and cash flows improve."

Wolfgang Topp, head of the restructuring unit at HSH Nordbank, sees the structure as a template for the shipping industry. "We are currently discussing with representatives of Hamburg ship owners regarding a comparable transaction," says Mr Topp, who estimates that HSH Nordbank might complete future transactions with a total asset volume of more than €1bn.

Cutting losses 

Taking the long-term view, and managing their way out of the current crisis, looks to be the best way forward for the German banks. Loan portfolio buyers such as private equity firms and hedge funds are actively looking for deals, but there is a big gap between their price expectations and those of the sellers.

A few deals are getting done. In June 2012, Citibank, still one of the world's largest ship lenders, acquired about $2bn-worth of ship loans from Société Générale, which has scaled back ship lending. And, in October in the UK, Lloyds Bank sold a $750m shipping loan portfolio to Oaktree Capital Management at a rumoured 50% discount.

German banks prefer to play a long game rather than sell and crystallise losses. But the pressure may be on for loan provisions to be kept running at high levels during the 2013 financial year, in order to keep regulators happy. 


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