Container Crisis German Shipping Faces Wave of Financing Problems
As recently as 2008, container ships were transporting record amounts of products across the world's oceans. Now, many German shipping companies are struggling to pay for the vessels they ordered during the boom. Their banks could be in trouble, too.
Major shipowner Bernd Kortüm and his wife were enjoying fresh snow in the Austrian ski resort of Lech last week. "The crisis is almost over," Kortüm, one of Hamburg's richest residents, said calmly, noting that things are beginning to look up for his industry. But the owner of a fleet of 102 container ships was exaggerating mightily.
Less than a year ago, Kortüm and his company, Norddeutsche Vermögen, were on the brink of collapse. Hamburg-based commercial lender HSH Nordbank had previously set aside risk reserves of close to 250 million ($338 million) to cover a credit line in the billions. "Because of the inadequate economic circumstances," the auditors of KPGM wrote, there were "acute risks of default." The lender was even threatening an extraordinary termination of loan agreements.
Things are hardly looking any better for the rest of the German shipping industry. Despite a slight recovery in the freight market, many shipowners and ship funds face critical questions about their financial survival.
The crisis is also eating its way into the foundations of German banks. Institutions like HSH Nordbank, Commerzbank, Nord/LB, state-owned bank KfW's subsidiary Ipex and DVD Bank are the world's biggest ship financiers, with close to 100 billion in ship loans on their books.
At Anchor Worldwide
For many of the borrowers, it has become a question of survival, and the subject of profits hardly comes up at all anymore. Depending on the type of ship, charter rates are up to 80 percent lower than before the crisis, when they were at their highest point. In fact, writes Hamburg shipbroker Harper Petersen & Co., charter rates have arrived at "a painfully low level, and most shipowners are still losing money." For lack of contracts, almost 500 ships are currently at anchor in ports worldwide.
In the boom years, intoxicated with their success, German shipowners ordered $60 billion worth of new ships. Banks were expected to provide 70 percent of the financing, while shipowners planned to drum up the rest of the money from German small investors through so-called "ship funds" set up by brokerage firms like HCI, MPC and Lloyd. But now investors are balking. The supposedly safe ship funds, which had promised high returns subject to minimal tax rates, are suddenly requiring additional investments to cover their losses.
With the first funds already capitulating, shipowners can no longer depend on selling shares in new ship funds to finance their current orders.
Although brokerage firms and shipowners guarantee the equity shortfall for which the banks are now providing interim financing, they are unable to come up with the cash. "In theory, many are bankrupt," says Hamburg industry expert Jürgen Dobert. "But the banks are deferring debt service and are not enforcing their claims because they know that an entire house of cards could collapse if they did."
In the worst case, shipowners would have to sell ships from their fleets. "This would lead to new market distortions that would affect shipowners, shipyards and banks," one banker warns. Fire sales would depress already low ship prices even further, thereby reducing the value of the banks' collateral.
Not Even Discussed
Where, then, is the money supposed to come from? Not from the government, at any rate. Last fall, two major Hamburg shipowners, Claus-Peter Offen and Peter Döhle, tried in vain to obtain funds from the 115 billion German Economic Fund, which was passed in 2009 to help private companies weather the economic storm. The government's 1.2-billion loan guarantee for the Hapag Lloyd shipping line remains an exception.
The German government's negative stance toward the shipping industry hasn't changed. At a crisis meeting in the Economics Ministry last Thursday evening, the industry's request for a 10 billion loan guarantee was not even brought up.
Instead, the roughly 50 industry representatives agreed to a 13-point plan with top government officials and Hans-Joachim Otto, the federal government's maritime coordinator. So far, the plan primarily calls for a number of studies. The goal is to examine whether the federal government can move up public shipbuilding orders, partly in connection with development aid, such as those for ferries in Africa. In addition, the industry wants to determine whether the government-owned KfW bank can relax the requirements for obtaining funding from the German Economic Fund.
This will hardly be enough. Some 1,000 ships ordered by German shipowners have not yet been delivered. They include about 300 giant container ships, with an estimated value of about 30 billion.
The maritime business is having a significant impact on bank balance sheets. The division of government-supported Commerzbank that is partly responsible for ship financing lost close to 850 million in 2009.
Succumbed to the Temptations
Ailing lender HSH Nordbank, the world's largest shipping industry financier, doubled its reserves to 1 billion for the 2009 fiscal year. Ship loans worth about 35 billion are languishing on the books of the Hamburg-based lender. An auditor's report on HSH Nordbank reveals how threatening many a ship loan was for the bank -- and, in some cases, still is.
The auditors were particularly interested in the Kortüm case. With a credit line of 2 billion at the end of 2008, the shipowner is one of the bank's biggest customers. He had also succumbed to the temptations of the boom years. His floating cash machines were such tremendous moneymakers that he embarked on a veritable ordering frenzy shortly before the crisis erupted.
Kortüm couldn't have picked a worse time to expand. He and his wife were on a sailboat headed for Australia on Sept. 15, 2008, the day US investment bank Lehman Brothers went under. The volume of freight orders for ships declined sharply, and the bankers at HSH became alarmed.
By now, all of Kortüm's new ships have charter agreements. But his company, Norddeutsche Vermögen, will be forced to acquire two new ships without the help of outside investors due to lack of interest in shipping funds. Indeed, leading ship fund businesses have their backs to the wall. In February, HCI was able to negotiate a moratorium with its creditor banks, deferring payments until Sept. 2013, in a move that saved them from bankruptcy. Other brokerage firms are still in talks.
Cases like Kortüm's are the rule rather than the exception at HSH Nordbank. Another example is the Danaos Group, most of which is owned by Greek shipowner John Coustas. Until recently, the 53-year-old was counted among the world's richest men. But according to an audit report by KPMG, the group owed Hamburg banks more than half a billion euros by the end of 2008. In their report, the auditors wrote that the Coustas fleet was expected to include "30 new ships with delivery dates through 2011."
In 2008, HSH lent more than 400 million to Dryships Inc., a ship holding company, which even includes two mobile drilling barges in its fleet. It is now unclear whether the loans will be repaid in full. The financial markets, at any rate, have largely lost confidence in the company, whose stock price has declined sharply, from more than $80 to about $6 a share.
HSH is unwilling to provide any information about individual borrowers. But bank executives are making a deliberate effort to appear unperturbed. No one at HSH is willing to admit that there are acute risks, not to mention a threat to the bank's very existence. CEO Dirk Jens Nonnenmacher is already promising profits for 2011.
"The ships have financing periods of 13 years, but lifespans of 25 years," says HSH division manager Harald Kuznik, who also attended last week's crisis meeting in Berlin. In other words, he adds, shipowners can defer debt repayment during the crisis "without losing money in the end." In addition, he says, the major shipping lines, such as Hapag Lloyd, are "operationally out of the woods."
Industry expert Dobert, however, sees all of this as "nothing but cheap propaganda" since the future development of the economy is still up in the air. "If consumer spending doesn't pick up and remain strong," he warns, "the shipping lines won't have much to do soon."
Translated from the German by Christopher Sultan