Featured Article

July 25, 2016
 

Financiers Step-up Lending in Shipping Sector

With capital markets activity running at very low levels, and many private equity players disillusioned with shipping investments, shipping is becoming even more reliant upon bank debt — at a time when the banks themselves are severely constrained by tougher capital requirements.

Between 2010 and 2013 the arrival of new private equity investors was the dominant market theme.

But shipowners generally didn’t like dealing with this new investor group, while many private equity players have made low returns or even lost money — regardless of which segment of the shipping industry they got involved in.

Some are looking at exit strategies, even if it means realising a loss.

This year could be the year for the first high-profile exit by a major private equity player.

That leaves the shipowners heavily dependent on bank lenders, but the banks are themselves already facing problems with their existing ship loan portfolios, and are under heavy regulatory pressure.

Not only are credit committees reluctant to sign off on specific shipping deals, but many are cautious across all segments of the economy, and are limiting balance sheet growth as Basel III capital adequacy requirements are phased in.

For global systemically important banks (GSIBs), a group to which most major ship financiers belong, there are additional capital requirements beyond the Basel III minimum.

With less money available to lend, most banks are focused on the top 50 shipping companies worldwide, believing that economies of scale will make them more resilient.

That leaves second-tier players in a situation where it is very difficult to attract financing.

At the same time, shipyards continue to be heavily supported by export credit agencies (ECAs).

Thus, the global fleet continues to grow, keeping up pressure on charter rates and secondary values for vessels.

There are still a few players looking at five- to 10-year-old tankers, or willing to take a bet on the extremely low prices for drybulkers.

Many, however, have given up on calling the bottom of the market.

“There is currently not as much new money lending, but where we do see an increase in activity is on sale and leaseback structures,” says Lindsey Keeble, global sector maritime head at law firm Watson Farley & Williams.

“The Chinese banks in particular have a strategy of growing their leasing subsidiaries — which gives them greater control over the vessel than as a lender.

“And over the past 18 months there have been more deals that do not involve either a Chinese shipyard or end user.”

Return of the Jolco

“We are also seeing a return of interest in Jolcos, where commercial lenders are teaming up with Asian operators with strong long-term charters,” Keeble adds.

“Though we are not seeing much new money on drybulkers or containers, there may be refinancings on the back of a long-term relationship,” adds Kavita Shah, partner at Watson Farley & Williams.

“There may also be some banks trying to get a foot in the door with a refinancing, hoping to build a new relationship,” she adds.

“But the banks are constrained by new regulatory capital charges.

“They are mainly focused on the major operators that may have some ships coming to the end of a current financing, or are looking to extend maturities; the smaller shipping companies are struggling to attract bank debt.”

Consolidation in box sector?

It is a certainly tough environment for smaller shipping lines, and Harry Theochari, global head of transport at law firm Norton Rose Fulbright, expects to see more consolidation in the container industry, following on from recent M&A activity and new alliances being formed.

“Size seems to be the driving factor at the moment for container lines, and as they continue to look for economies of scale, I can’t see the new container alliances sitting back, but rather continue to add new members and seek to increase their market share,” Theochari says.

“That could involve some of the biggest container lines acquiring smaller companies — or bringing them into their existing alliances.

“In the tanker market, charter rates have improved, but much of this is driven by the fall in the price of oil and the consequent demand for oil storage, and there is a view that if we see a meaningful increase in oil prices, it will prompt US shale producers to increase supply very quickly, which will keep prices down” he says.

“We are in new territory with regard to supply trends, and this makes the tanker market very unpredictable.

“The drybulk market is in a very difficult situation,” Theochari adds.

“That could change if demand picks up again from China, but the drybulk market remains very volatile, which makes it very challenging to attract commercial bank debt or indeed any financing,” he stresses.

Drop in available bank debt

“Since 2007 there has been a huge drop in the amount of commercial bank debt available to the shipping industry, and that hasn’t really been filled by the capital markets, which

have been very quiet recently,” Theochari says.

“At the same time private equity players have been disappointed by their investments, and much of the new money coming in is being used to prop up existing investments rather than expand.”

Indeed, analysts say that the availability of capital for ship finance is at its lowest level since 2012, although margins and structures are firming up again for those that are in a position to lend commercially.

In Germany, banks are still busy sorting out problems in shipping loan portfolios eight years after the beginning of the financial crisis.

In July, HSH Nordbank completed the transfer of a €5 billion ($5.5 billion) non-performing loan portfolio to a “bad bank” owned by the states of Schleswig Holstein and Hamburg.

Meanwhile, Bremer Landesbank recently announced that it needs another capital injection (see sidebar).

Chinese lessors

With many European lenders in cautious mode, it is the Chinese banks that have stepped up with an increased volume of new financings, notably involving leasing deals.

And Middle East banks remain active, notably in Islamic structures.

China Eximbank is heavily supporting its domestic shipyards on newbuilding financings, but on the commercial side the Chinese banks have been signing very large lease financings for both domestic and foreign ship operators.

For the Chinese operators, government policy is to significantly increase the volume of imports currently being transported on domestically owned vessels.

And international deals form part of the “go global” strategy for Chinese companies and financial institutions.

As European banks have pulled back, there is more non-China-related lending, and a number of European shipowners have been building close relationships with Chinese banks.

Although club deals are still common, Chinese banks are in a position to offer clients very large bilateral loans.

Some of the European banks are stepping up co-operation with Chinese counterpart banks.

In October 2015 ING Bank signed a $1 billion memorandum of understanding (MOU) with China Eximbank during a trade mission to China alongside a state visit.

The two parties expressed interest in co-operating on future Chinese ship financings, including both Chinese-built vessels and offshore transactions.

In April 2016, China Construction Bank unit CCB Financial Leasing signed a lease agreement with Singapore-based Pacific International Lines (PIL) for four 11,800teu container vessels that will be built at Jiangsu Yangzijiang.

PIL has also ordered four 9,700teu vessels from the same yard.

PIL is the largest privately held container shipping company in Southeast Asia.

Strengthening ties with China

The company has been strengthening links with China, and in June 2015 signed a joint venture agreement with PSA International and Beibu Gulf Port Group to establish a new container terminal at Beibu Gulf in the Guangxi Zhuang Autonomous Region, which borders Vietnam.

PSA Singapore is a leading global ports groups, owned by sovereign wealth fund Temasek Holdings.

The container port forms part of the “One Belt, One Road” project, and Guangxi is an important entry point for the Silk Road Economic Belt.

Also in 2015 PIL and China Shipping Container Lines (CSCL) began co-operation on the China-West Africa trade route, with 12 weekly Panamax sailings to ports, such as Lome and Abidjan.

Last November PIL also signed a banking relationship deal with Industrial and Commercial Bank of China (ICBC) covering a range of services, including not only ship financing, but also trade finance, structured finance, and international exchange and settlement.

ICBC is also aggressively adding new business, and in October 2015 ICBC Financial Leasing signed a $869 million 10-year lease agreement with BP’s shipping arm for 18 oil tankers.

This deal was signed during the October 2015 state visit to the UK by Chinese President Xi Jinping.

The first of these tankers was delivered in February from the Busan yard in South Korea.

In April, ICBC Financial Leasing signed a 27-year contract of affreightment (COA) with Brazilian mining giant Vale for the transport of iron ore by 10 vessels owned by the Chinese lessor.

Vale has also recently signed similar deals with China Merchants Energy Shipping and Cosco Shipping.

And on the domestic side, in February, the first of four very large gas carriers (VLGCs) financed by ICBC Financial Leasing was delivered to state-owned Shandong Shipping.

Bank of Communications (BoCom) Financial Leasing is also completing some very large deals.

A 9,400teu vessel built by Hudong-Zhonghua Shipbuilding was delivered to Mediterranean Shipping Co (MSC) on 4 April.

MSC has closed a number of deals with BoCom, and back in January 2015 took delivery of MSC Oscar on lease, which was at the time the biggest containership in the world.

The MSC Oscar deal, involving a South Korean yard and a European operator, was a groundbreaking deal since it had no Chinese element.

As the Chinese banks grow their business, however, the big question about the future flow of funding from China remains the unknown extent of non-performing loans on their books.

Any major problems in the Chinese banking sector could have a huge impact on the flow of new lending into global shipping.

GCC lenders

Gulf Co-operation Council (GCC) banks are having to deal with the impact of reduced oil revenues across the regional economy, but remain active, particularly in providing Islamic finance structures.

The main players in this sector are Abu Dhabi Islamic Bank, Noor Bank, and Al Hilal Bank.

In the Islamic banking sector, Noor Bank is one of the fastest-growing sharia-compliant banks.

In June 2015 Noor Bank closed a AED1.2 billion ($330 million) Islamic syndicated facility for offshore vessel operator Stanford Asia, part of Stanford Marine Group.

The bank consolidated existing conventional and Islamic facilities into a single facility.

Stanford Marine is based in Dubai, and specialises in providing offshore support vessels around the world.

Noor Bank not only structured but underwrote the deal — the single biggest underwriting commitment ever taken on by the bank.

As well as being initial mandated lead arranger, Noor Bank also acted in the capacities of sole underwriter and sole bookrunner.

Other participating banks in the transaction were Barwa Bank, First Gulf Bank (FGB), Qatar Islamic Bank, Ajman Bank, and United Arab Bank.

Noor Bank itself had a final hold of around 15%.

Vessels backed by offshore supply contracts with oil majors remain attractive to banks.

In March, Dubai-based Topaz Energy and Marine signed an offshore support vessel contract with BP Exploration (Caspian Sea).

Topaz will supply 14 vessels for five years, plus two one-year options at current market terms, primarily in support of BP’s ACG and Shah Deniz II fields off the coast of Azerbaijan.

Topaz is a subsidiary of Renaissance Services SAOG, a publicly traded company on the Muscat Securities Market in Oman.

Topaz has been taking advantage of adverse market conditions for the shipyards, ordering vessels at attractive prices.

In September 2015 Topaz ordered two subsea vessels from Vard Brattvarg in Norway, to be delivered in the third and fourth quarters of 2017.

The combined purchase price is $115 million and the deal includes options on two additional vessels.

“By building in what is a challenging time for the industry, we have minimised costs, and believe that at the time of delivery the market will have rebalanced sufficiently to be generating healthy demand,” Rene Kofod-Olsen, chief executive officer (CEO) of Topaz, said at the time the deal was signed.

Back in April 2015 Topaz signed a $550 million seven-year combined conventional and Islamic facility.

Standard Chartered Bank, HSBC, Emirates NDB, Noor Bank, Gulf International Bank (GIB), and FGB were mandated lead arrangers.

Following the merger of National Bank of Abu Dhabi (NBAB) and FGB, announced in June, analysts are predicting more bank mergers.

Consolidation in the banking sector is regarded as long overdue.

FGB is being advised by UBS, with NBAD advised by Credit Suisse.

Assuming that the merger is completed, the new bank will have a balance sheet size of $170 billion, moving past Qatar National Bank to become the largest banking institution in the Middle East.

European banks

As the once dominant German banks stay away from the market, a number of other European banks are picking up the slack.

With continued tightening of capital adequacy rules, however, along with direct European Central Bank (ECB) supervision plus European Banking Authority stress tests enforcing a tougher policy on writedowns, many of the banks are severely constrained.

There is also a significantly harder line being taken on internal risk modelling by banks for risk-weighted assets calculations.

The Financial Stability Board and Basel Committee on Banking Supervision are currently working on a set of rules for greater harmonization of these different models.

In the meantime, regulators in the US and European Union (EU) are taking a close look at bank books, and requiring a more conservative approach on loan writedowns.

In general the Basel III capital requirements, as well as the fine tuning of rules — which many banks actually view as “Basel IV” – mean lower appetite for new ship lending at many banks.

Little money for old ships

Newbuildings are overwhelmingly ECA-supported, but there is a severe shortage of money for refinancing older vessels, as well as for corporate loan facilities that smaller shipping companies so badly require.

Commerzbank announced its exit from ship financing back in Summer 2012, but the bank has made slower than expected progress winding down its loan portfolio.

Deutsche Bank is making a strategic shift to focus on a smaller number of client relationships, and is shrinking its overall balance sheet, which means that the bank is very constrained on new ship lending at present.

NordLB is aso very cautious, which leaves DVB Bank and KfW Ipex-Bank as the most active German shipping lenders at present.

DVB pursues a strategy of arranging loans and holding them on balance sheet, rather than selling down like many European competitor banks.

DVB completed nine deals in the first quarter of 2016, with a final take of 342 million.

The bank’s shipping loan portfolio stood at 11.1 billion as of 31 March.

Oil- and gas-related activity goes into the bank’s separate offshore finance segment, which had a volume of 2.3 billion at the same date.

DVB had to significantly increase its writedowns on the shipping and offshore portfolios in 2015, with allowances for credit losses of 141.5 million, contrasted with only 62.4 million in 2014.

Of the current amount, 88.4 million came from the ship finance portfolio, and 21.5 million from the offshore portfolio.

DNB Group and Nordea had been beneficiaries of the pullback by German banks.

With heavy exposure to oil and gas loans that were made when crude oil was over $100 per barrel, however, these two institutions are being highly selective on new lending.

At Nordea, total income from shipping, offshore and oil services reached 401 million in 2015, up 9% from 2014.

The increase in income was mainly due to higher lending volumes driven by a strengthening of the US dollar.

With regard to shipping, offshore, and oil services activity, Nordea noted in the bank’s 2015 annual report: “Lending margins and commission income were relatively stable compared to last year, while total costs were reduced by 6%.”

Loan losses have been low to date, and net loan losses in shipping, offshore and oil services for 2015 were only £7 million.

The more difficult conditions in offshore as oil prices have sunk, however, are making the bank more cautious in new lending.

DNB Group also has very sizeable shipping, oil and gas, and offshore portfolios that fall under the bank’s large corporates and international customers segment.

Total exposure at default stood at NOK815 billion ($97 billion), of which shipping accounted for around 15%, and oil, gas and offshore roughly the same percentage.

In 2015 there was a sharp rise in net impairment losses compared to the previous year, at NOK2.108 billion versus NOK674 million, due partly to oil-related industries.

And this figure jumped again to NOK1.174 billion just for first quarter of 2016.

Bright spot

One bright spot is increased activity from both ING and ABN Amro, while Crédit Agricole CIB (CA-CIB), BNP Paribas and Societe Generale continue to support the market.

In February, GasLog, an owner and operator of liquified natural gas (LNG) carriers, refinanced five vessels via a $576 million facility, featuring ABN Amro, ING, DNB, DVB Bank, Commonwealth Bank of Australia (CBA), CA-CIB, and National Australia Bank (NAB).

A sixth vessel was subject to a sale and leaseback to Mitsui & Co.

This vessel is the Methane Julia Louise, which is leased back to GasLog for 20 years, with an option for GasLog to buy the vessel back at pre-agreed terms between years 10 and 17.

Methane Julia Louise will remain on an 11-year charter to oil and gas company BG Group, now a subsidiary of Royal Dutch Shell, since a takeover was completed in February.

The Methane Becki Anne and Methane Julia Louise were themselves on nine- and 11-year sale and leasebacks, having been sold by BG Group to GasLog in December 2014.

There are also three- to five-year extension options, that would total $460 million.

One analyst expects more activity from the Japanese trading houses this year, although so far the Methane Julia Louise is one of the few transactions seen in the market.

GasLog has been tidying up various credit facilities with refinancings, while also pushing out maturities.

Debt has now been simplified into four multi-vessel facilities.

On 22 June, GasLog completed a legacy facility refinancing for eight on-the-water LNG vessels delivered between 2010 and 2015.

Six separate facilities have been refinanced by a single $960 million facility maturing in 2021.

In addition, the same banks led a new $100 million revolving credit facility, with Citi, Credit Suisse, and Nordea Bank as mandated lead arrangers and joint bookrunners.

European banks also continue to be very active on the ECA side, and borrowers are taking the opportunity to put some new debt facilities in place while working on ECA deals.

For example, in October 2015 container operator Hapag-Lloyd signed a $372 million 12-year loan to finance five new 10,500teu vessels, scheduled for delivery between October 2016 and May 2017.

The containerships are being built at Korean shipyards, and so are being backed by Korea Trade Insurance Corporation (K-sure) and Export-Import Bank of Korea (Kexim).

The bank syndicate on the deal was led by joint bookrunners CA-CIB, DNB, HSBC, and UniCredit.

At the same time Hapag-Lloyd increased its revolver from $95 million to $200 million, led by the same group of banks.

Hapag-Lloyd was advised by law firm Allen & Overy, while Watson Farley & Williams acted for the banks.

Mergers

With no end to overcapacity in sight, and with ECAs continuing to support their own domestic shipyards, major container lines have accelerated their push towards consolidation, through both M&A deals as well as by signing alliance agreements.

“Container shipping companies have been affected by very weak freight rates since late 2015, and we do not expect material rate increases in the foreseeable future,” comments Marie Fischer-Sabatie, senior vice president at Moody’s Investors Service.

“While the decline in freight rates can be partly attributed to companies passing on the drop in fuel prices to their customers, it is also a consequence of ongoing oversupply, as companies order larger, more cost-efficient vessels.”

She adds, “The existing supply-demand imbalance will persist over the coming 12 to 18 months.

“We project supply growth will outpace demand growth by over 2% this year, and keep freight rates low.

“If bunker fuel prices increase materially, the segment’s profitability will be further pressured.”

Container sector

The latest acquisition in the container shipping sector was finalised on 10 June, when CMA CGM completed its $2.4 billion takeover of listed Singaporean company Neptune Orient Lines (NOL).

NOL is post-acquisition a subsidiary of CMA CGM, and the company has been de-listed.

NOL operated 88 vessels, and the combined entity will give better geographical coverage for both container lines.

The enlarged group will now operate 536 vessels.

Although a listed company, NOL was majority-owned by sovereign wealth fund Temasek Holdings.

A voluntary general offer was made to acquire all shares in NOL at a cash offer price of SGD1.30 per share.

Temasek held a 66.8% stake in NOL, and agreed to tender all its shares to the offer.

CMA CGM’s intention to buy NOL was announced in December 2015.

At that time, firm commitments were put in place by a group of banks acting as financial advisers.

These were BNP Paribas, JP Morgan, and HSBC, with law firm Shearman & Sterling acting for the lenders, while NOL was advised by Citi.

On 29 June, Hapag-Lloyd signed a merger deal with Dubai-based United Arab Shipping Co (UASC) after several months of discussions.

UASC was 51%-owned by sovereign wealth fund Qatar Investment Authority, and 36% by Saudi Arabia’s Public Investment Fund.

Kuwait and UAE sovereign funds also had stakes in the company.

Hapag-Lloyd was listed on the Frankfurt bourse in October 2105.

In late 2014 Hapag-Lloyd took over Chile-based Compañía Sudamericana de Vapores (CSAV), which owns 31.4% of Hapag-Lloyd post-merger.

Other shareholders are the city of Hamburg (20.6%), German logistics company Kühne Maritime (20.2%), and Germany-based travel company Tui AG (12.3%), along with a free float of 15.5%.

UASC was advised by law firm White & Case; Hapag-Lloyd was advised by Freshfields Bruckhaus Deringer; and CSAV was represented by Linklaters.

The merger creates the world’s fifth-largest container line, with Hapag-Lloyd owning 72% after the share swap, and UASC shareholders holding the other 28%.

UASC is modernising its fleet, and currently has six 18,800teu and 11 15,000teu containerships on order.

The deal will also increase the strength of The Alliance, a vessel-sharing agreement, yet further.

Before the merger Hapag-Lloyd had signed up to become part of The Alliance, with five Asian shipping lines: NYK, Mitsui OSK and K-Line of Japan, Hanjin Shipping of South Korea, and Yang Ming of Taiwan.

Co-operation will begin in April 2017, including coverage of all east-west trade lanes.

Meanwhile, the CMA GGM alliance with Cosco, Evergeen, and Orient Overseas Container Line, known as the Ocean Alliance will also be in place from April 2017.

On 14 July the 2M Alliance, comprising Maersk Line and MSC, signed up a new partner, Hyundai Merchant Marine (HMM).

Hyundai is in the midst of a debt-for-equity swap with creditors, but this will soon be completed and the carrier’s joining the 2M network will be an important step forward as it recovers from financial difficulties.

Maersk and MSC have led the way in introducing a new generation of giant container vessels.

In June 2015 Maersk ordered 20 ultra-large containerships from South Korea’s Daewoo Shipbuilding and Marine Engineering.

MSC itself has 18 vessels on order that are larger than 19,000teu.

The largest vessels at HMM are currently 13,082teu, but as the carrier resumes financial health it is expected to order larger vessels.

Bank lenders will hope that these new alliances will reduce operating costs, increase efficiency, and gradually raise profitability in a sector where many companies are currently running at a loss.

Investors generally prefer large-scale companies, and the outlook for smaller companies, and for their existing bank loans, may be bleak.

Newbuildings

As container lines order more ultra-large vessels, they are engaged in a clear strategy to make the industry more efficient.

In other sectors, such as bulkers and tankers, Chinese, Japanese and South Korean shipyards continue to offer cheap deals, merely adding to capacity without any industry restructuring.

Bulker owners are for the moment holding back on new orders, which is one positive sign for overcapacity.

There is limited visibility in the order book going forward, since analysts note that in recent years there has been a discrepancy over what was ordered and what was actually delivered to which companies.

Many orders were cancelled, or vessel types changed.

This has led to protracted negotiations between the shipowners and the shipyards.

For example, in May, Thai drybulk owner Precious Shipping signed a settlement and cancellation deal with Taizhou Sanfu Ship Engineering (Sanfu) of China in connection with an order for 10 ultramax vessels.

Contracts for the final three vessels were terminated, with installments paid so far being applied to three other vessels under construction.

Sanfu is itself providing unsecured corporate loans, repayment of which is based on arbitration in relation to two vessels already delivered.

And the contract price of the seventh vessel has been reduced.

Precious Shipping was represented by the Singapore office of Watson Farley & Williams.

Such agreements illustrate the flexibility of Chinese yards, which are willing to find solutions in order to keep up a steady flow of deliveries and ensure cashflows.

One shipyard even recently put a debt syndicate in place in order to construct and lease six bulk carriers.

The $245 million 10-year senior secured club loan to CSSC (Hong Kong) Shipping Co was provided by Standard Chartered Bank, Bank of America and Societe Generale.

State-controlled CSSC Group is owned by the Assets Supervision and Administration Commission of the State Council (SASAC), and has three publicly listed subsidiaries: China CSSC Holdings, CSSC Jiangnan Heavy Industry, and GSI.

The six Newcastlemax bulk carriers will be leased out, giving the shipyards greater flexibility in situations where orders are cancelled, which has been a common situation in the bulker market.

Offshore market

CSSC has also been active in sale and leasebacks of vessels built at yards outside of China, including the floating liquifaction (FLNG) infrastructure being put in place by Golar LNG, where floating liquefaction vessels can be positioned globally.

The first unit is being converted from an LNG vessel at a Keppel yard, and is on schedule for a targeted startup in the second half of 2017.

CSSC (Hong Kong) Shipping Lease provided a $960 million commitment for the conversion and leaseback of the GoFLNG Hilli.

The sale and leaseback agreement includes an option for master limited partnership Golar LNG Partners to eventually buy the vessel back.

In another deal in the oil and gas sector, in April a $216 million K-sure-backed post-delivery financing was put in place for floating storage and regasification unit (FSRU) vessel BW Singapore, operated by a subsidiary of BW Gas.

CA-CIB acted as agent on the transaction, and was advised by Watson Farley & Williams.

BW Gas was advised by law firm Stephenson Harwood.

The FSRU is based in Ain Sokhna Port in Egypt, and is currently employed by Egyptian Natural Gas Holding Co.

The FSRU commenced operations in October 2015.

New York Stock Exchange-listed Teekay Corporation and Teekay Offshore Partners also recently signed new bank debt facilities, illustrating the fact that top names in offshore shipping can still attract new money from banks.

Teekay Offshore put in place $400 million of bank financing, and raised $200 million in fresh equity, along with the deferment of certain bond maturity dates.

And parent company Teekay Corporation completed $350 million of bank financing and raised $100 million in equity capital.

ABN Amro, Citi, Credit Suisse, DNB, ING, Nordea and Swedbank acted as lead banks on the debt facilities.

Teekay was advised by Watson Farley & Williams.

Cruise sector

As demand for holiday cruises booms, cruise lines are ordering bigger and more luxurious vessels.

Financing cruiseships almost exclusively features ECA support.

The cruise sector is a maritime segment in which European shipyards dominate, and those yards receive aggressive government support.

In late June, cruise giant Royal Caribbean Cruises (RCL) signed financing agreements for the first and second Edge-class cruise vessels, scheduled to be delivered late 2018 and early 2020.

According to a filing with the US Securities and Exchange Commission (SEC), Citi, HSBC, SMBC, BBVA, Santander and Societe Generale led the syndicate.

The 12-year dollar-denominated loans are backed by Coface, which can support 80% of the total vessel price.

The cruiseships are being built by STX France.

RCL also has Quantum-class cruiseships being built at the Meyer Werft shipyard in Germany, with financing arranged by KfW Ipex-Bank, and with ECA support being provided by Euler Hermes.

KfW signed up to finance the fourth and fifth vessels in the series in December 2015, and in its role as overall structurer for the financing will bring in an international banking consortium during syndication.

SIDEBAR

Almost eight years after the bankruptcy of Lehman Brothers kicked off the financial crisis, German banks are still grappling with problems that should have been more aggressively dealt with at an earlier date.

Bremer Landesbank (BremerLB) shocked the market in early June with an ad hoc announcement that the bank was making another 400 million ($442 million) of writedowns on shipping loans.

The bank expects the total number to reach “a high three-digit million figure” for the financial year to 31 December, and is looking to put new equity in place.

Gunter Dunkel, chief executive officer (CEO) of NordLB, which has a 54.8% stake in BremerLB, commented that “we are agreed that Bremer Landesbank should continue to be an active, valuable member of the NordLB Group, and should keep its own identity.

“The negotiations must now be commenced without delay so that we achieve a satisfactory result for all concerned by the end of the year.”

The reference to “its own separate identity” illustrates one of the issues that has held back more consolidation amongst the landesbanks, which is that each of the 16 federal states tends to jealously guard their own local institutions — where politicians usually sit on the board.

The federal state of Bremen owns 41% of BremerLB.

Nonetheless, a full takeover by NordLB could now be on the cards, leaving just the BremerLB brand.

Meanwhile, NordLB (59% owned by the state of Lower Saxony, with the balance held mainly by savings banks associations) is still grappling with deteriorating loans in its own shipping loan portfolio.

NordLB units get downgraded

In early June, Moody’s Investors Service downgraded a number of units within NordLB Group, in a move prompted by its first quarter results.

NordLB announced that for its first quarter it would be making loan loss provisions of 435 million.

Of this total, there were specific valuation allowances totalling 393 million, mainly derived from the bank’s shipping customers.

In 2015 specific valuation allowances for ships were 916 million, and the bank has indicated that it expects to post an overall negative result for 2016.

NordLB has been reducing its shipping portfolio, with a medium-term target of between 12 billion and 14 billion.

As of 31 March, the exposure at default (EAD) number was 18 billion for the shipping portfolio, which is highly diversified across vessel types.

The bank has total assets of 180 billion, already well below the level of 225 billion as of December 2012.

The current NordLB strategy is an expansion of exposure to cruiseships, ferries, specialised tonnage, and very selectively in offshore.

Exposure to merchant shipping is being steadily reduced.

The German bank’s A3 long-term senior unsecured rating has been placed on review for possible downgrade by Moody’s.

With NordLB cutting back, the level of new ship lending coming out of Germany is running at very low levels.

Small appetite at Deutsche Bank

Deutsche Bank has a limited appetite, since the overall size of its balance sheet is being reduced across many sectors of the economy.

In July the bank was reported in the German press to be showing a 1 billion shipping loan portfolio to interested buyers.

Deutsche Bank’s long-term rating was downgraded from A2 to A3 by Moody’s in March.

Deutsche Bank had total assets of 1.131 trillion as of 31 March.

Under its Strategy 2020, announced by Co-CEO John Cryan in 2015, the bank will reduce the number of clients in global markets and corporate and investment banking by around 50%, especially in higher operating risk countries, given that approximately 30% of clients produce 80% of the revenues in these businesses.

Another 170 billion worth of risk-weighted assets will be shed.

Some countries will be exited altogether — with Russia as one high profile example.

Commerzbank already out

Commerzbank (via its former Deutsche Schiffsbank unit) has already exited the shipping market, and has been steadily running down its non-core assets (NCA) portfolio, which is now handled by the bank’s newly named Asset and Capital Recovery (ACR) department.

During the 2015 financial year the Deutsche Schiffsbank EAD, including non-performing loans, was reduced by 3.7 billion to 8.4 billion.

As the portfolio is mainly denominated in US dollars, the reduction would have been 900 million greater if exchange rates had not fluctuated.

The portfolio is divided principally between three standard types of ships, namely containers (3.2 billion), tankers (2 billion), and bulkers (1.8 billion), with the balance consisting of various special tonnages.

Aside from the ongoing reduction in problem loans at individual loan level, the focus of reduction activities in 2015 was the sale of selected loans from the performing loan book.

Running down the portfolio has been much slower, however, than for commercial real estate (CRE), and Commerzbank noted that market conditions remained difficult for the shipping portfolio rundown.

The annual KPMG European debt sales report from Portfolio Solutions Group shows that in 2015 104 billion worth of transactions closed in Europe, both performing and NPL.

Whereas the CRE segment was busy with a sizeable pool of buyers placing bids, shipping loan activity has been very sluggish.

HSH Nordbank

Against this background, the new bad bank created to take on HSH Nordbank shipping loans could take a decade to wind down the portfolio, Philipp Nimmermann, deputy finance minister of the state of Schleswig-Holstein, told Bloomberg in an interview in mid-July.

The bad bank, known as HSH Portfoliomanagement AöR, was established at the beginning of the year by the federal states of Schleswig-Holstein and Hamburg, with the staff based in Kiel.

Effective 30 June, HSH Nordbank transferred a 5 billion portfolio of NPLs to the bad bank, in a transaction approved by the European Commission (EC).

JP Morgan acted as adviser on the deal, with law firm Clifford Chance acting as legal counsel to JP Morgan.

Freshfields was legal counsel to HSH Nordbank.

HSH Nordbank still hopes to dispose of another 2 billion of NPLs via portfolio sales to private investors.

Thus HSH Nordbank can be privatised free of some of its legacy assets, while continuing to pay an annual guarantee fee to the two federal states on other portfolios.

The transaction followed a final decision on the future of HSH Nordbank by the EC.

In early May the EC set a February 2018 deadline for privatisation of HSH Nordbank, while putting an end to its state aid investigation.

The European Union (EU) has threatened that — if HSH Nordbank cannot be privatised — the bank will have to cease business activities and be wound down.

The federal states of Schleswig-Holstein and Hamburg jointly control 85% of the bank.

Fitch: deadline is challenging

Fitch Ratings notes that the February 2018 deadline is challenging, since progress made by HSH Nordbank will only be reflected for the 2016 and 2017 financial years.

“The short deadline is particularly challenging because a key business segment for the bank is shipping, a sector that Fitch has on negative outlook,” the rating agency noted.

HSH Nordbank has, however, at least partially resolved its shipping NPL problem through its bad bank deal involving state governments.

With regard to commercial transactions, it is a very challenging market in which to find buyers for large shipping loan portfolios — whether the loans in a portfolio are performing or not.

Tough regulatory regime

Most of the potential bank buyers with the necessary expertise are facing tougher regulatory capital charges, while also sorting out problems in their own portfolios.

Private equity players showed some interest in 2011 and 2012, but have since backed away.

As one analyst recently told GTF, “private equity firms investing in distressed situations were a bit naïve on how easy it is to get their hands on a vessel.”

To some extent the German banks missed their opportunity in 2011 and 2012, when there was interest in shipping NPLs.

At that time, however, German institutions were nowhere near discounting to levels needed to attract buyers — since they were still betting on a market upturn.

RBS showcasing a portfolio

Out of the UK, another major legacy shipping lender has been active in seeking buyers.

Taxpayer-supported Royal Bank of Scotland (RBS) has recently been showing a shipping loan portfolio around the market, advised by Lazard, with interested buyers reportedly including Credit Suisse.

As of the end of the first quarter, RBS had total shipping exposure of £7.1 billion.

Surprisingly, Deutsche Bank has been tipped as interested in acquiring part or all of a $3 billion Greek shipping portfolio owned by RBS.

China Merchants Bank and at least one Japanese lender are also eyeing the RBS shipping portfolio, according to a source close to RBS.

The sale process has been described as fluid, and may not result in a deal.

The expected auction of the RBS shipping portfolio comes as the European Central Bank (ECB) is scrutinising lenders’ exposure to the shipping sector.

An exit by RBS from the shipping business would mark another chapter in the bank’s international retrenchment since its £45.5 billion bailout by taxpayers in 2008.

RBS has already exited dozens of countries and is continuing to take steps to shrink its vast balance sheet, which now stands at approximately £700 billion.

Last autumn, RBS warned of tough conditions in the shipping market, echoed earlier this year by shipping industry giant AP Møller-Maersk, that said the environment was worse than during the 2008 financial crisis.