shipping loans

Gone Off Course

South Korea shipyard GoSeong-Gun Image source adrian mayers
All at sea.
  • Why it matters

    Why it matters

    A number of factors have contributed to a decline in profits in the shipping industry, which in turn adversely affects banks with large ship-loan portfolios.

  • Facts

    Facts

    • The Baltic Dry Index, a key measure of dry bulk freight rates and industry bellwether, has fallen sharply in recent weeks.
    • HSH Nordbank and NordLB are Germany’s two largest providers of shipping loans.
    • The European Commission has allowed HSH Nordbank to dispose of a portion of its non-performing loans, most of them in the shipping sector.
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    Audio

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The crisis among shipping companies seems unending and now, a manager at a German bank with a large ship-loan portfolio on its books has sounded a mayday call.

“The situation is serious, because many ship owners worldwide have exhausted their liquidity,” the senior manager, who wanted to remain anonymous, told Handelsblatt. Even Greek ship owners, generally considered to have deep pockets, are running short of cash, he said.

He is fearful that the situation may come to a head in 2016.

“Things are horrible in the shipping sector at the moment.”

Thomas Mirow, supervisory board chief, HSH Nordbank

Shipping markets are in their eighth year of crisis, without an end in sight.

Parts of the industry still suffer from an oversupply of ships, which were ordered during a boom that lasted until 2008. In container shipping, for example, German companies provide the most transport capacity worldwide, with a global market share of 26 percent.

German banks have been hard hit by the problem, which is refusing to go away. The banks were traditionally strong in ship financing but the industry was strongly affected by the crisis and the financial institutions, facing the risk of massive losses, had to increase their reserves to offset the likelihood of loan defaults.

This translates into fewer profits and growing pressure from shareholders.

Now, the price of shipping is falling, and lower growth in emerging markets is compounding the problem for the sector.

Shipping commodities around the world is getting cheaper and cheaper, according to the Baltic Dry Index, which monitors price developments in the industry. The index, which was already low, plunged even further in recent weeks. The same applies to freight rates in container shipping, making it more difficult for ship owners to service their loans.

Another complicating factor for ship owners is that the Chinese economy and the economies in other emerging markets are faltering, leading to a worldwide decline in the demand for goods and raw materials.

The market is now characterized by an oversupply of ships and a decline in the demand for shipping.

“Things are horrible in the shipping sector at the moment,” said Thomas Mirow, head of the supervisory board of HSH Nordbank. In an interview, Chief Financial Officer Stefan Ermisch hinted that the bank had significantly increased its provision for risk in the shipping sector.

With a ship loan volume of €21 billion, HSH Nordbank is currently Germany’s largest shipping bank and that means it also faces the biggest problems as a result of the malaise in shipping markets.

 

Shippig Loans on Banks Balance Sheets HSH Nordbank NordLB KfW Ipex DVB Commerzbank Unicredit HVB Hypovereisbank-01

 

Still, in the current European Union aid procedure, HSH succeeded in convincing the European Commission that it should be allowed to dispose of some of its bad loans. A few months ago, HSH Nordbank and the Commission agreed that the bank could dispose of €8.2 billion in non-performing loans, most of them ship loans.

The bank’s majority shareholders, the German states of Schleswig-Holstein and Hamburg, will make up for the losses it incurs because the market value of the loans is likely lower than their book value. But the states would also have had to account for the loans if they had remained on the bank’s books.

Despite this relief, HSH Nordbank will still have about €15 billion in ship loans on its balance sheet after the transaction. Even after the non-performing loans have been eliminated, the situation remains “very challenging,” Mr. Mirow said.

Gunter Dunkel, chief executive of NordLB, can only agree.

NordLB is Germany’s second-largest provider of shipping loans. “We are not issuing an all-clear signal for ships. We will probably be making substantial allowances for losses into 2018,” Mr. Dunkel said at an event late last year. “What do you think is going on out there?” he asked, referring to the shipping market.

Some 100 ships have already changed owners at NordLB, or their financing has been restructured. As a result, the bank has incurred losses of €750 million since 2009, including a loss of €250 million in 2014 alone. “These losses, which are essentially consumed value adjustments, will continue to rise,” Mr. Dunkel predicted. He estimates the bank’s adjustments for bad debt at €2.4 billion.

NordLB is not as heavily dependent on ship loans as HSH Nordbank and is in a better position to offset risks in the shipping business. Commerzbank got out of the business in 2012. But despite the miserable business outlook, the other banks aren’t planning to take the same course.

 

Frank Drost writes about the financial supervision and banks for Handelsblatt. To contact the author: drost@handelsblatt.com

 

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