The entrance of private equity firms and hedge funds herald a radical shift in ship financing in Germany.
For many years, German shipping banks were accused of indecision in their handling of distressed loan portfolios.
“Kicking the can down the road” was the expression that was frequently used.
But a flurry of loan sales over the past two years has dramatically changed the country's ship-financing landscape.
Commerzbank was the first to set the ball rolling with sales of shipping loans, followed by HSH Nordbank, Deutsche Bank and Nord/LB.
'Relationship banking' to end
Around 10 private equity firms and hedge fund managers are habitually involved in the initial stages of looking at loan portfolios.
Names like Cerberus Capital Management, Oak Hill Advisors and KKR feature among those that are stepping into the void left by banks.
That has implications for shipowners.
The cosy “relationship banking” that has characterised German ship finance for many years looks set to be replaced by a fund manager with a different set of priorities.
Shipowners fear that some of the funds might pursue "loan-to-own" schemes, involving a conversion of debt into equity, in order to take ownership of distressed vessels.
But others suggest that the “new normal” in German ship financing may open up new opportunities as some shipowners may be in a position to buy their loans.
New opportunities
“I would rather see it as an opportunity,” says Oliver Faak, who previously worked as head of shipping for Nord/LB and is now a partner in the Hamburg office of financial advisory Transport Capital.
Because the banks have been stuck, maybe it’s true we tried to kick the can down the road rather than actively manage it
Oliver Faak
“Because the banks have been stuck, maybe it’s true we tried to kick the can down the road rather than actively manage it.”
“Now you have a new lender, which is a hedge fund of one of the loans, who has a clear strategy to come to quick solutions, who’s responsive, who’s willing to negotiate.”
“Everything that the banks, to that extent, were not. This creates a new opportunity for shipping companies.”
His colleague, Henrik Haeder, adds that the German market has not reached a turning point.
“The German fleet will continue to shrink in the next few years, maybe even faster pace than the last three years. And we are here to help and support those owners who have a story and to support the right financiers on the debt side.”
Loan trading will continue
The entrance of private equity firms into the German market is likely to mean that loan portfolios will continue to change hands in the coming years.
“That means that these situations need to be solved and tackled and dealt with,” says Braemar Naves managing director Axel Siepmann.
“And that will be still one of the relevant parts for the industry in Germany, because still a lot of these assets and loans are in Germany or related to German interests.”
“That will still be a task which will create, on both sides of the tables, problems and opportunities. For some people, it will be a buying opportunity, for others it will be problematic.”
The good news is the money is still there. But the criteria to lend it is higher and the volume much smaller
Axel Siepmann
The entrance of new financial interests and alternative lenders has not eradicated traditional sources of finance in Germany.
Foreign banks raise lending
German banks have not completely exited the market and continue to offer loans to shipowners, while foreign banks including Credit Agricole are said to be increasing their presence.
“The good news is the money is still there. But the criteria to lend it is higher and the volume much smaller,” Siepmann says.
Banks have changed strategy and shipping is a much smaller part of their portfolio, says Susanne Mertens of Silverton Maritime Solutions.
“Unfortunately all banks internationally have the same idea,” she says.
“So, there will be and is already strong competition for the good names and projects in the market, which has led already to softening conditions on covenants and margins.”
Mertens expects the new owners of shipping debt to provide “a good opportunity” for shipowners to buy back their ships.
“They [the funds] really look at each transaction and evaluate the options. They have different strategies,” she says.
'Developing investor base'
“It’s a developing investor base here in German too, because they now see the opportunities. You are now in a lower phase of the market, so it might make sense to invest,” says Frank Bergert of Silverton.
It’s normal in the world that hedge funds are buying or investing in loans. We have to get used to this
Ulrike Helfer
Ulrike Helfer, managing director of Portfoliomanagement, is sanguine towards the growing involvement of private equity firms and hedge funds in the German ship finance market.
“For me, it’s the arrival of a sort of normality,” says the executive, whose government-controlled bank serves as a "bad bank" warehouse for the troubled loans that were formerly held by HSH Nordbank.
“It’s normal in the world that hedge funds are buying or investing in loans. We have to get used to this.”
