Insight: European banks struggle to solve toxic shipping debt problem

Ezra Holdings

24/07/2017 07:00

* Banks lent heavily to shipping industry as trade soared 
    * Financial crisis, markets crash created toxic debt pile 
    * Shipping firms hit by overcapacity, lack of profitability 
    * German state-controlled banks among hardest hit 
    * Graphic: http://tmsnrt.rs/2t5bNzr 
 
    By Jonathan Saul 
    LONDON, July 24 (Reuters) - Dutch shipowner Vroon is finding 
talks with banks tough going as it tries to navigate a way out 
of a long slump in the shipping industry. But it is not an easy 
time for the lenders either.      
    Vroon, a 127-year-old family-owned group which operates 
about 200 vessels and transports livestock, oil and other 
commodities, wants to extend its credit lines and adjust 
repayment schedules.  
    But European banks that lent heavily to the sector when it 
boomed more than a decade ago have a heavy toxic debt burden 
following the 2008-09 global financial crisis and a shipping 
markets crash in 2010. 
    Shipping firms and banks are caught in a vicious circle of 
debt, causing a credit crunch that is hindering the industry's 
recovery. Overcapacity -- a glut of available ships for hire -- 
is a big concern, and another is a lack of profitability caused 
by problems such as slower demand and global economic turmoil. 
    One of the major companies, South Korean container line 
Hanjin Shipping Co Ltd, has gone under.  urn:newsml:reuters.com:*:nL4N1G21HM urn:newsml:reuters.com:*:nL3N1BB1MP 
    "We have difficulty in meeting all repayment obligations 
that we have and that is what we are in discussion with our 
banks about. Those discussions are constructive but are not easy 
-- not for us, or the banks," Herman Marks, the chief financial 
officer at Vroon, told Reuters.  
    "It is the lack of profitability for the industry that is 
causing the lack of availability of finance." 
    Marks said Vroon was confident of reaching agreements with 
its financiers soon.   
    Shipping finance sources say the shipping industry, which 
transports 90 percent of the world's goods including oil, food 
and industrial products such as coal and iron ore, has an 
estimated capital shortfall of $30 billion this year.  
    Some banks are being driven out of shipping and those that 
remain are now more conservative in their financing, Marks said. 
    "It is an industry that requires consolidation," he added.  
    That consolidation has begun, especially in container 
shipping. Denmark's Maersk Line  MAERSKb.CO , the global leader 
in the sector, is acquiring German rival Hamburg Sud and China's 
COSCO Shipping Holdings Co Ltd  601919.SS  has bid $6.3 billion 
for Hong Kong peer Orient Overseas International Ltd  0316.HK . 
 urn:newsml:reuters.com:*:nL8N1I01L2 urn:newsml:reuters.com:*:nL4N1K005J 
    Germany's Rickmers filed for insolvency in June, and firms 
that have filed for Chapter 11 bankruptcy protection since March 
include Singapore's Ezra Holdings Ltd  EZRA.SI  and U.S.-based 
firms Tidewater  TDW.N , GulfMark Offshore and Montco Offshore. 
 urn:newsml:reuters.com:*:nL8N1IY2UE 
             
    DOWNTURN 
    Banks were happy to lend to the shipping industry when it 
boomed after the surge in trade that accompanied globalisation.  
    Even the 2008-09 crisis did not deter all creditors. 
Expectations that China's fast economic growth would revive the 
industry prompted a brief new wave of lending before many 
shipping markets crashed again. 
    This left European banks with a debt burden of more than 
$100 billion and the value of at least 70 percent of those loans 
has fallen, according to industry estimates. Banks are 
struggling to find ways to recoup their mounting losses.  
    "There is probably about $150 billion of distressed bank 
debt stuck with mainly European banks -- mainly German -- that 
has still got to be de-gorged from the system," said Michael 
Parker, global industry head for shipping with Citigroup  C.N . 
    Large banks that once had a big role in the industry, such 
as Britain's Royal Bank of Scotland (RBS)  RBS.L , are pulling 
out. Some more specialist lenders, such as Germany's HSH 
Nordbank  HSH.UL , are still working through their legacy loans. 
    Ratings agency Moody's said in June it expected further 
losses as problem shipping loans continue to mount, possibly 
affecting banks' profitability and capital in 2017 and 
potentially beyond.    
    The European Central Bank said in May it would be carrying 
out on-site inspections at banks with a view to possible 
"remedial actions".  urn:newsml:reuters.com:*:nL8N19D4FP 
    Regulators want banks to shore up their balance sheets and 
comply with stress tests, which assess whether a bank has enough 
capital to cope with adverse developments.       
    "The belief that the regulators will allow the banks to go 
back to creating the disaster they created five, 10 years ago -- 
I think is highly unlikely," Citi's Parker told a Capital Link 
shipping conference in March.  
    German state-controlled lenders known as landesbanken, 
including HSH and NordLB  NDLG.UL , are among the hardest hit. 
    HSH was forced to take a second bailout from its 
public-sector owners because of provisions for bad shipping 
loans, and has to be privatised under European state-aid rules 
by the end of February 2018.  
    HSH had reduced its total shipping portfolio to 16.6 billion 
euros ($19.36 billion) by the end of the first quarter of 2017, 
from more than 30 billion euros nearly a decade ago.  
    By the end of the first quarter of 2017, HSH had 9.9 billion 
euros in its so-called 'bad bank' that it is running down, and 
the remaining 6.7 billion euros in its core bank. 
    "We have learned a lot of lessons from the past. We are 
conservative, we are cautious," Christian Nieswandt, global head 
of shipping at HSH, told Reuters. "I do not think people would 
do the same things now that they did in the past." 
     
    LOSSES PILED UP  
    NordLB set aside 2.94 billion euros in 2016 in provisions 
for bad shipping loans.  
    NordLB is preparing a sale of its property lender Deutsche 
Hypothekenbank as it seeks to repair its balance sheet following 
heavy writedowns related to its exposure to bad shipping loans, 
people close to the matter told Reuters.  urn:newsml:reuters.com:*:nL8N1K32EA 
    Banks in Germany were exposed when a number of closed 
shipping investment funds known as KG houses were forced into 
insolvency, leaving the banks carrying the risks.           
    The banks were also exposed when the container shipping 
sector, which traditionally accounted for a large segment of 
Germany's shipping industry, ran into trouble. 
    Dagfinn Lunde, former head of shipping at Germany's DVB Bank 
 DVBG.F , said a further problem arose because loans had been 
used to finance a type of container ship which became obsolete 
once the Panama Canal was extended in 2016.  
    "The losses were clocking up without them (the banks)  
seeing it," Lunde said.  
    With the shipping industry still struggling, the banks' 
prospects for offloading their toxic debts are challenging.  
    "How are they going to recoup an asset that is losing money 
all the time?" said Mark Clintworth, head of shipping at the 
European Investment Bank. "They will have to ring-fence their 
shipping assets and in a worst-case scenario take a complete 
haircut on it."    
     
    FIRE SALES 
    European banks have stepped up efforts to get rid of 
shipping loans by selling portfolios. RBS has sold hundreds of 
millions of dollars in loans to buyers including Japanese 
financial services firm Orix Corp  8591.T .  
    Others have found selling more difficult. Attempts by HSH to 
sell a 500-million-euro segment of shipping loans, as part of a 
3.2-billion euro portfolio sale which included other assets, 
proved unsuccessful because the debt was deemed toxic and 
attracted offers that the bank considered too low, shipping 
finance sources said. HSH declined to comment.  
    NordLB said in July it had abandoned efforts to sell a 
1.3-billion euro portfolio of loans to U.S. private equity group 
KKR  KKR.N .  urn:newsml:reuters.com:*:nL8N1JU3W9 
    Germany's Commerzbank  CBKG.DE  said in June it had sought 
to shed its 4.5-billion euro portfolio of distressed shipping 
loans through swaps with covered bonds -- securities backed by 
shipping mortgages. It is not yet known whether it will succeed. 
    Sellers still trying to offload billions of dollars in loans 
include Deutsche Bank  DBKGn.DE , shipping finance sources say. 
    "Investors will want to see a bit more sustained 
profitability to the sector - there is some way to go before 
that," said Paul Taylor, global head of shipping & offshore with 
French bank Societe Generale CIB  SOGN.PA . 
         
($1 = 0.8574 euros) 
 
 (Editing by Timothy Heritage) 
 ((jonathan.saul@thomsonreuters.com; + 44 207 542 4357 ; Reuters 
Messaging: jonathan.saul.thomsonreuters.com@reuters.net)) 
 
Keywords: EUROPE BANKS/SHIPPING