John Voos/ReutersParking an underused ship somewhere, like the River Fal in Britain, costs money.
FRANKFURT — Can a ship float and be underwater at the same time? If it has been financed by a European bank, the answer may be yes.
A glut of ships, and slack demand for shipping in the weak global economy, have reduced the value of cargo ships. According to some estimates, as many as half the cargo carriers on the high seas today may no longer be worth as much as the debt they carry — putting them underwater, in financial jargon.
Large vessels that might have sold for about $150 million new in 2008 fetch about $40 million today, according to Nicholas Tsevdos, a shipping specialist at CR Investment Management, which helps banks deal with distressed assets. And with cargo fees near record lows, many vessels are not earning enough to make debt payments, either.
As European leaders agonize about how to rescue Cyprus banks, the formerly obscure world of ship finance is a reminder of how much cleanup still lies ahead for the region’s banks. The growing fear is that some lenders, almost all of them in Europe, have yet to confront the scale of potential losses from an estimated $350 billion in loans made to the shipping industry.
“Many banks are still shackled by the leftover effects of the crisis,” Christine Lagarde, the managing director of the International Monetary Fund, told an audience in Frankfurt this week, without identifying any specific assets. “This is the weak link in the chain of recovery.” She urged banks to take a harder look at their problem loans.
Whether the risk from shipping loans is serious enough to put another torpedo into the euro zone financial system is hard to say because of a glaring lack of detailed information about banks’ portfolios of shipping loans.
Andreas R. Dombret, a member of the executive board of the German Bundesbank who is responsible for monitoring financial stability, said he thought the shipping crisis, while serious, did not pose a broad threat to the euro zone. “It’s not a concern for the stability of the financial system,” he said in an interview. “It’s not systemic.”
But he and other bank overseers are stepping up pressure on financial institutions to address their problems. Shipping is “a substantial regional and sectoral risk in the banking industry,” Mr. Dombret warned at an industry gathering in Hamburg last month. It was one of the few times a bank overseer of his stature had expressed concern about the shipping problem.
Under pressure from regulators, local governments that own most of HSH Nordbank in Hamburg said on Tuesday that they would raise their guarantees for the bank to 10 billion euros ($13 billion), from 7 billion euros ($9 billion). Though only a midsize bank, HSH is the biggest lender to the shipping industry, with more than $39 billion in outstanding loans. The announcement, by the City of Hamburg and State of Schleswig-Holstein, amounted to an admission that losses from shipping were greater than earlier estimates.
The shipping downturn, which began in 2008, has already driven several large fleet operators into bankruptcy. The Overseas Shipholding Group, the largest American tanker operator, filed for bankruptcy in November. The fear is that some of the banks most active in ship finance, which are concentrated in Germany, Scandinavia and Britain, are in denial about potential losses.
“It’s probably the most serious commercial problem that the banks have,” said Paul Slater, chairman of the First International Corporation, a consulting firm in Naples, Fla., that specializes in shipping. Banks with large portfolios of shipping loans “are just not taking the hits,” he said. “They are saying, ‘Give it time and it will work out,’ and it’s just not going to do that.”
For weak banks, the temptation to play down potential losses may be great. A frank appraisal of their losses would force some to raise billions in new capital or even to declare insolvency. That is true not only of shipping loans but also of other categories like commercial real estate, and it remains a fundamental problem for the euro zone economy.
The uncertainty about banks’ true financial health fosters mistrust among institutions, makes them reluctant to lend to each other and is partly responsible for a shortage of credit for businesses and consumers.
As sour assets go, ships are particularly troublesome. Unlike a plot of land, they require costly maintenance. They lose value over time from wear and tear or because more modern, fuel-efficient vessels make them obsolete. It costs money even to take an underused ship out of service and park it somewhere. The waters off Falmouth in Britain and Elefsina in Greece are popular anchoring spots for idle ships.
Investment funds that specialize in buying distressed debt have been wary about putting money into ships. That makes it hard for banks to unload unwanted shipping assets.
“Every hedge fund in the world is trolling Europe, but they are bidding on a small percentage of relatively good assets,” said Jacob Lyons, managing director of CR Investment Management in London.
Mr. Dombret of the Bundesbank pointed out that the banks that had made the most loans to the shipping industry were in nations like Germany or the Scandinavian countries whose governments had the least debt and were best able to cope with a banking crisis.
Mr. Dombret did not single out individual banks, but German banks like HSH Nordbank and Commerzbank in Frankfurt were among the top shipping lenders because German tax breaks favored ship finance. German banks’ exposure to shipping has been estimated at about $129 billion, more than double the value of their holdings of government debt from Greece, Ireland, Italy, Portugal and Spain. Aside from German banks, the DNB Group in Norway and Nordea in Sweden are big players in ship finance, as are Lloyds Banking Group and the Royal Bank of Scotland in Britain.
It does not necessarily follow that these banks will face losses on their shipping portfolios. Some of the savviest lenders probably still make money, or at least have made an honest appraisal of the value of their portfolios and set aside enough money to cover possible losses.
“We are very happy with our shipping business,” said Rodney Alfven, head of investor relations at Nordea. The bank, which is listed in Stockholm, increased the amount of money it set aside for potential bad loans in shipping to $81 million in the final three months of 2013 from $70 million the previous quarter. Over all, Nordea, the largest Swedish bank, has consistently made a profit from its shipping business, Mr. Alfven said. Shipping loans account for only 2 percent of Nordea’s lending, the bank said.
The sorry state of global shipping stems from a shipbuilding boom that peaked in 2008, just before the global financial crisis, and created a glut in cargo capacity. Rates for nonliquid cargo are half or less of the level needed for shipowners to break even, according an estimate by the consultant KPMG. That means that ships are doubly damaged. They do not earn enough to cover interest on their debt, nor can they be sold for the value of the loan.
Nordea has told investors it expects shipping to begin to recover in 2014, as the world economy rebounds. But others are more skeptical.
“By any kind of measure, this is a deeper and more difficult downturn than we’ve had in the last decade or two,” said Mr. Tsevdos of CR Investment.
Except for some specialized categories of ship, like liquid-natural-gas carriers, he said, “I don’t think there is a lot of indication for a lot of sectors that rates are going to turn around soon.”
Article source: http://dealbook.nytimes.com/2013/03/22/shipping-woes-may-weigh-on-european-banks/?partner=rss&emc=rss
Speak Your Mind
You must be logged in to post a comment.