Ship Finance on Life Support

The drip, drip of bad news from Germany’s beleaguered shipping sector threatens to burst into a flood at any time.

More than 150 of the single-vessel companies, mainly container carriers, that dominate the nation’s shipping fleet, have gone belly-up in the past year. And with charter rates still heading south and banks severing credit lines, the figure could grow by several hundred more within months.

The escalating crisis, which also involves bulk carriers, is moving center stage in Germany as its impact extends beyond the banking and shipping sectors to the tens of thousands of ordinary investors whose pensions are tied up in the unravelling single ship KG funds.    

Ship finance is a big deal in Germany with its top dozen banks holding around $130 billion in outstanding loans to the industry. That’s twice their holdings of government debt from Greece, Spain, Portugal, Italy and Ireland — Europe’s most troubled economies. And it’s close to 60 percent of their aggregate core capital. Ratings agency Moody’s cited this overhanging shipping exposure when it maintained its negative outlook on the German banking sector in October.

The Berlin authorities are starting to get nervous about the banks’ exposure to a flat-lining industry critically dependent on global trade. The sector has yet to return to the solid pre-2008 recession growth rates that spurred a surge of orders for ships that were delivered during the global financial crisis and that now face increasingly bleak employment prospects.  

Shipping represents a “significant and sectoral risk” for the nation’s banks, Andreas Dombret, a board member of the Bundesbank, Germany’s central bank, warned recently. Earlier, Germany’s financial supervisory authority, BaFin, asked the leading banks’ auditors to carry out special checks on their shipping portfolios.

Meanwhile, the big banks — including HSH Nordbank, the world’s biggest ship financier, and third-ranked Commerzbank — are beating a retreat from the shipping sector, which will only hasten the demise of cash-stretched KG funds.  

The crisis is making news in the mainstream media because hundreds of ordinary citizens are impacted every time a KG fund declares insolvency. Banks played a key role in financing and marketing the tax efficient funds that attracted hordes of middle class professionals seeking to build up their pension pots and resulted in Germany becoming the world’s leading container shipping nation with more than a third of the global fleet.

The spectacular growth of the “doctor and dentist” shipowners was highlighted in late January when Claus-Peter Offen, one of Germany’s biggest shipping companies, revealed banks had asked it to sell 14 1,800 to 2,800 20-foot-equivalent ships it manages for a KG fund. The vessels were ordered five years ago at a cost of $630 million, of which $235 million was raised from 7,000 individual investors, around $26 million from Offen and the rest from bank loans. Selling the ships in a depressed secondhand market that has seen values plummet by as much as 70 percent is unlikely to raise sufficient cash to pay off bank loans, which means the investors will loss all their cash and probably a large slice of their pension funds.

And with shipowner Claus-Peter Offen warning that between 500 and 1,000 ships are facing the same fate as the 14 he was pressed to sell, thousands more private investors stand to lose large chunks of their savings in the coming months.

For now, the banks are deferring interest payments, restructuring loans to avoid foreclosures and writing off dud loans as vessel prices slump below the level of outstanding debt.

The feared fire sale of German ships hasn’t yet materialized. Acquisitive Greek owners, always on the lookout for bargain buys, say the secondhand market is pretty dormant because German banks aren’t ready yet to take big losses on their shipping portfolios. 

Some industry watchers say the reluctance of banks to bite the bullet is burdening the industry with “zombie” shipowners who are straining to meet interest payments but have no realistic chance of ever paying off their debts. The 14 ships Offen was pressed to sell are earning around $6,000 a day on the spot market, down from $19,000 when they were delivered and $12,000 short of what’s required to cover financing and operating costs.

The outlook is getting even bleaker as ocean carriers strive to cut capacity and costs by trimming their charter fleets. Almost 85 percent of laid-up container capacity, which accounts for 5 percent of the world fleet, is charter-owned tonnage, much of it small to medium-sized vessels favored by the KG funds.   

Even as the banks and KG fund managers ponder their next moves in a deteriorating market, smart shipowners are tapping into new sources of finance to grow their businesses. Rickmers Group, a leading German owner, paved the way by partnering  with Oaktree Capital Management, a U.S. private equity investor, in December, to place an order for eight “eco” container ships with an option for a further eight sister vessels.  

But this is small beans compared to the ongoing crisis in the KG market where shipowners are being kept alive — barely. Banks may soon have to embrace “creative destruction” and accept fire sales of ships that are unlikely to pay their way in the foreseeable future.

It’s not the German way. But what’s the alternative?

Contact Bruce Barnard at brucebarnard47@hotmail.com

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