By Costas Paris
Germany, one of the world's main maritime players, saw its
commercial fleet shrink by a third over the past six years,
becoming the biggest loser in a vicious industry slump that has
reshaped global shipping.
Once the world's predominant shipping lenders, most German banks
have abandoned ship finance as they've written off tens of billions
of nonperforming loans to cope with around $100 billion in toxic
debt and sold scores of vessels to foreign owners at knockoff
prices.
The contraction in German shipping stems from an unprecedented
downturn over the past decade in which a glut of ships in the
water, exacerbated by easy lending practices, pushed freight rates
well below break-even levels.
Germany's crumbled ship-finance structure is the most visible
result of overleveraging in the business in the period leading up
to the global financial crisis in 2008. Demand for ocean trade fell
in the world-wide downturn, leaving some of the country's biggest
banks holding repossessed vessels because owners couldn't pay back
loans.
The grim picture also dealt a serious blow to investors, which
included hundreds of thousands of German citizens -- from dentists
and engineers to small-business owners -- that put their money into
shipping with encouragement from local governments.
"Lack of ship financing and the inability to cover interest and
principal payments have resulted in the massive sales of German
vessels, " said Alfred Hartmann, president of the German Shipowners
Association, known as the VDR.
Stricter regulation of European banks since the financial crisis
has required that banks hold more equity capital than in the past.
Large ship operators can still raise capital in places like China,
London, New York and Oslo, "but smaller companies have a much
harder time finding new investors," Mr. Hartmann said.
VDR data show that German owners operate 2,400 vessels compared
with 3,800 in 2012. In terms of gross tonnage the number is down by
a quarter. The majority of ships went to cash-rich Greek owners,
followed by Chinese and Singaporean operators.
"At its worst, there have been cases of five-year old ships that
were sold as low as twice scrap price, or a 70% discount," said
Basil Karatzas, chief executive of New York-based Karatzas Marine
Advisors, who has been involved in the sale of many German ships
through an insolvency administrator.
For decades, German shipping money has been tied to so-called
Kommanditgesellschaft funds, or KGs. Banks and asset managers
hawked shares in the closed-end funds to private investors, and in
the late 2000s, some 440,000 people became part owners of ships,
according to German shipping law firm Kravets & Kravets.
They were lured in by favorable terms like full participation in
the ship's profits, with liability limited to the value of their
shares. They also only paid a minimum flat tax to the federal
government under a system designed to keep local companies
competitive with owners in Asia.
Major banks like Commerzbank, HSH Nordbank and NordLB were
deeply involved in KGs.
Before the 2008 crisis, some 26% of new ship orders book came
from Germany. Today that number has fallen to less than 2.3%, and
hundreds of KGs have gone insolvent.
KGs need long-term charters that attract bank financing. But
with market uncertainty and growing risks from trade wars, such
contracts have become rare.
"When the market turned sour, the retail investors got burned
and have zero interest in investing in shipping again," Mr.
Karatzas said. "The banks stopped lending money to the KGs and the
whole edifice crumbled."
The shipping crisis brought some banks to the verge of
collapse.
HSH Nordbank became the world's biggest ship financier in the
2000s when its balance sheet grew to more than EUR200 billion ($235
billion) as it aggressively expanded its shipping portfolio.
But after suffering massive losses and facing the threat of
liquidation by European regulators, the bank was sold this year for
EUR1 billion to a group of U.S. private-equity firms.
"This bank had to write off about 10 billion euros in shipping,
and this will certainly never happen again," said Stefan Ermissch,
HSH's chief executive.
The lender has cut its shipping exposure to EUR5 billion from a
2008 peak of $40 billion and now does shipping transactions only
with a small number of German customers and select clients from
Greece, Asia and the U.S.
Deutsche Bank, Germany's flagship lender, agreed In June to sell
$1 billion worth of nonperforming shipping loans to U.S. investors
Oak Hill Advisors and Varde. Deutsche's shipping loans stood at
EUR3.3 billion at the end of March, down from at EUR3.7 billion in
2017.
State controlled NordLB plans to be partially privatized and is
marketing EUR2 billion in nonperforming loans, mostly from
shipping, at a discount.
Others have abandoned shipping altogether. Commerzbank has
slashed its ship portfolio of more than EUR20 billion in 2012 to
EUR1.4 billion and has stopped giving out new loans.
"We expect the rundown of our ship financing portfolio will be
finalized well before the original 2020 target," a bank spokesman
said.
Write to Costas Paris at costas.paris@wsj.com
(END) Dow Jones Newswires
September 23, 2018 09:14 ET (13:14 GMT)
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