German banks are struggling to recoup tens of billions of dollars of loans as a global shipping industry slump hits them hard.
The lenders – among the biggest backers of shipowners over the past 20 years – are behind up to a quarter of the world’s $US400 billion of outstanding shipping loans, three shipping financiers told Reuters.
These institutions are now grappling with a near decade-long slump of parts of the shipping sector since the 2008 financial crisis that is also hurting European peers, such as Britain’s Royal Bank of Scotland.
“German banks account for close to $U100 billion of shipping debt out of a world total of around $400 billion,” said Dagfinn Lunde, who spent more than a decade as head of shipping at Germany’s DVB Bank until the end of 2013.
The same estimates of German bank exposure and total sector debt were made by two other shipping finance executives, who declined to be named, citing the confidentiality of their business dealings.
Lunde, now a board member of Norway’s Maritime and Merchant Bank, said German lenders had been “throwing money” at the sector when shipping business was brisk. “When the values tumbled, they were left with massive exposure to toxic debt.”
As worsening conditions in the shipping sector leave some shipowners unable to meet payments, it is unlikely that many banks will see a full return on their investments.
The shipping difficulties come at a time when European banks are already bogged down by a sluggish economy and face tough capital demands from regulators which are eroding profitability.
Segments of the shipping industry are suffering their deepest downturn ever as international trade slows. Around 90 per cent of world trade is transported by sea.
South Korean container line Hanjin, which filed for receivership in August, is the latest casualty in a crisis exacerbated by a glut of ships, many of which were built before the financial crisis when the global economy was healthier.
“It seems like the shipbuilding and ship finance sectors are … imploding,” Anthony Gurnee, chief executive of ship operator Ardmore Shipping Corp, told an industry conference in London.
His comments echo remarks made by Stefan Ermisch, the chief executive of shipping finance specialist HSH Nordbank, who recently described the shipping sector as “on the floor”.
“For German shipowners, Hanjin is bad news as for them a large company falls away with which they can charter their ships,” Oliver Faak, global head ship and aircraft finance at NordLB, told Reuters.
He warned the outlook for the oil tanker market was worsening. “Many shipping companies have ordered tankers that are now being delivered. Supply is rising but the demand hasn’t changed.”
Bankers said the scale of the lenders’ potential losses from the loans now depended on how strict the European Central Bank would be in forcing them to tackle the problem.
In the meantime, banks are trying to offload some debt.
Sources have told Reuters RBS is trying to sell its Greek shipping business, which is valued at around $US3 billion, as well as up to $US500 million of a separate portfolio of Turkish shipping loans.
NordLB said in August it was selling a $US1.5 billion portfolio of shipping loans to KKR Credit, part of private equity firm KKR, and a sovereign wealth fund.
But one of the three shipping financiers said there were few buyers. “The market is awash with distressed debt. Once again the banks will be stuck.”
Nicholas Tsevdos, managing director of Ocean Way Navigation, a London-based shipping investor and asset manager, said the outcome of RBS efforts to sell off its shipping exposure was among the test cases being watched.
“If they fail to get buyers for the full books, it is not a great incentive for others to do the same,” said Tsevdos, whose firm has advised on bank financing deals in recent months.
NordLB said earlier this year it aimed to cut its overall shipping exposure to 12 to 14 billion euros ($16 billion) within the next three years from 19 billion euros at the end of 2015.
NordLB’s Faak said the banks would achieve “reduction targets because they have to reach them”.
“The only question is, at what price?”