Shipping debt: The tip of the iceberg
Exposure to shipping debt has been a key challenge for German banks for many years. The root of the problem lies in the aggressive sale of shipping debt funds by German independent financial advisers in the years preceding the global financial crisis, a trend which was aggravated by a lack of regulatory oversight, lax standards on how to value debt and fiscal incentives provided by the German government.
By 2013, the date of the latest audit on shipping debt conducted by Germany’s Federal Financial Supervisory Authority, Bafin, total shipping debt among 19 German lenders amounted to €95.5bn, of which roughly a third constituted non-performing loans.
INFLATED VALUATIONS
“The Hamburg valuation model assumed asset earnings would return to their historical averages quickly, which in turn inflated the valuation of assets,” explains Tony Foster, CEO of specialist shipping asset manager Marine Capital.
“One problem here is that the very high historical rates which bump up the average have now dropped out of the time-series. Over the last couple of years there has been a gradual tightening of screws by the ECB. They have established a specialist sub-committee looking into shipping debt and are increasingly putting pressure on German banks to become more realistic in their valuations,” he says.
Foster suggests that the issue of inflated valuations continues to be a problem. “While the Hamburg valuation model is probably history, some form of discounted cashflow valuation is still permitted. For our shipping funds we would not be allowed to use this model, we would have to mark to market, but banks are still allowed to do that,” Foster warns.
Yet the topic rose to the surface again in August this year, with NORD LB announcing significant losses in the first half of 2016 before subsequently taking over ailing Bremer Landesbank, which faces even greater losses from shipping debt as a ratio to overall assets.
Neither Bafin, the Bundesbank nor the ECB provide recent public data on the exact scope of German shipping debt, but incidental evidence suggests that those banks whose shares have been listed on the stock exchange, such as Deutsche and Commerzbank, appear to have taken initial steps to reduce their exposure.
Deutsche, which currently has €5bn-€6bn in shipping loans, announced in July the planned sale of $1bn (€0.89bn) of such loans. While inconvenient, the total scale of shipping debt is manageable in relation to its total assets of €1.7trn.
THE THREAT TO LANDESBANKEN
The issue is a lot more pressing for the Landesbanken, where shipping debt constitutes a relatively bigger percentage of assets. NordLB for example currently holds total assets of €189bn but also a shipping debt portfolio of €17.9bn.
As part-government owned institutions, Landesbanken aim to resolve the deleveraging process in joint negotiation with the local authorities. In 2013, HSH Nordbank, once the biggest shipping lender in the world, received a €3bn bailout by the state governments of Hamburg and Schleswig-Holstein. It has since struggled to privatise the business.
Another example is the Nautilus Model, as Foster explains. “HSH tried and largely didn’t succeed in disposing of debt by selling the underlying ship to a new company. The bank would then offer a loan in tranches in order to sell ships above market value in order to avoid a haircut. The problem is that this model doesn’t work for the buyer, who would have to repay all the debt before making any profit on the equity and would not be able to sell until maturity. It would also be challenging for the regulator because the bank wasn’t really exiting its position.”
Other attempts of Landesbanken to deleverage include Chrystal Ocean Advisors, a joint venture between Nord LB and shipping firm Offen Group. Foster remains cautious on the outlook.
“We are in discussions with Landesbanken on how we can help them in the disposal of their assets but we are talking about aging assets, which are not easily saleable, and the underlying markets are not in a good state,” he warns.
“At Marine Capital, we believe as a matter of principle that the better opportunities lie in equity, rather than seeking indirect exposure through debt,” he concludes.
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