These are heady days for Hamburg, with its home carrier Hapag-Lloyd on the verge of acquiring the Chilean line CSAV’s container assets to leapfrog a couple of Asian rivals into fourth place in the global rankings just five years after it was rescued from a near-certain bankruptcy and a humiliating takeover by Singapore’s Neptune Orient Lines.
And the German city, also home to Europe’s second-largest container port, could become an even bigger player in the industry amid signs its second-largest local carrier, Hamburg Süd, is ready to revive advanced merger negotiations with Hapag-Lloyd that were suspended at the 11th hour in 2012 following failure to agree on which company would have majority control of the enlarged carrier.
But even as Hamburg celebrates Hapag-Lloyd’s climb up the global league table and wills Hamburg Süd to joining forces with its larger neighbor to create a German mega-carrier with annual revenue nudging $20 billion, it is sweating over the end game for its other shipping community — the single-ship, tax-efficient KG funds that financed a third of the world’s container ship fleet.
Funds that own mainly small to medium-sized vessels for hire have faced freefalling rates, ever shorter charters and lengthening periods of unemployment since the recession of 2009, and they are going bust in increasing numbers as the market deteriorates further and banks lose their patience with non-performing loans.
More than 300 of Germany’s 2,000-odd KG funds are reckoned to have been declared insolvent by the end of 2013, leaving investors around €4 billion ($5.6 billion) out of pocket.
And the failure rate is rising rapidly as Germany’s shipping banks, among the world’s largest, take tougher action over non-performing loans to avoid failing the eurozone’s new stress tests. The nation’s top eight ship financiers are facing €16 billion in credit losses this year, with a fifth of their total shipping loans of €105 billion — concentrated in the troubled container, tanker and bulk sectors — categorized as non-performing, according to ratings agency Moody’s.
The banks have succeeded in slimming their shipping books and building up their corporate and real estate business. Hamburg-based HSH Nordbank, the world’s biggest ship financier, which has been kept afloat thanks to a €10 billion guarantee provided by the federal states of Hamburg and Schleswig Holstein, has cut its portfolio to €21 billion — of which €9 billion are non-performing — from €33 billion four years ago. Commerzbank, until recently the second-largest lender, is quitting ship financing altogether; it reduced its shipping exposure from €21 billion in 2012 to €14 billion — including €4 billion of non-performing loans — by the end of 2013, three years ahead of schedule, and plans to remove a further €10 billion from its books by the end of 2016.
As a result of the banks’ tougher stance, the most indebted shipowners are losing control of their vessels, and others are being pressured to consolidate by teaming up with local rivals. HSH is widely believed to have forced family-owned Ahrenkiel, a ship-manager with debts of around €500 million, into a takeover in early April by MPC Capital and Thien & Heyenga that created a top 10 container ship manager with a fleet of 62 vessels. Days later, the bank reported a pre-tax loss of €563 million for 2013, its worst result since the recession year of 2008.
Banks are still renegotiating loans, but increasingly they are repackaging assets and selling them to investors, most, but not all, in the shipping sector. The banks publicize successful high-profile transactions, like HSH’s recent deal with Navios Partners, which saw the leading Greek shipping group pay $127.8 million in cash and take on a $173.4 million loan for five container vessels and five bulk ships. But they stay mum about the many deals that fall through because potential buyers expect ships prices to fall even further.
The growing number of KG fund insolvencies is expected to accelerate consolidation among German “tramp” shipowners similar to the Ahrenkiel takeover. The number of owners is projected to shrink from around 300 currently to about 100 as they join forces to create fleets large enough to survive the charter market slump, according HSH Nordbank managing director Christian Nieswandt.
Despite the ongoing crisis, Hamburg remains a global ship finance hub, though it has lost market share to other centers, including London and Oslo. HSH, for example, still generates 20 percent of its income from the sector, and it has lent €2 billion in the three years through 2013 — albeit only 10 percent to German owners.
And as the KG system unravels, German shipowners are tapping new, innovative sources of finance, including private equity funds and bonds. The Rickmers Group, one of Hamburg’s most prominent owners, trumpeted its transformation into “a capital market-oriented company” last year when it became the first German charter shipowner to issue a bond that raised €175 million. The company also broke new ground in forming a partnership with U.S.-based Oaktree Capital Management to order eight container vessels, with an option for a further eight sister ships. Later, it established a joint venture with another U.S. investor, Apollo Global Management, to invest $500 million in secondhand vessels.
Hamburg is sure to be in an upbeat mood when it hosts some 5,000 container shipping professionals, from owners and forwarders to terminal operators and brokers, from around the world at the annual Eiseinessen get-together in November.
What’s less sure is what the attendees will be talking about most: the chances of a Hapag-Lloyd/Hamburg Süd merger or the light at the end of the tunnel for the KG crisis.
A lot could happen over the coming six months.
Contact Bruce Barnard at email@example.com.