HSH Nordbank Sees $1.7 Billion in Bad Shipping Debt Deals

By Nicholas Brautlecht

(Bloomberg) — HSH Nordbank AG, the world’s largest financier of ships, is stepping up efforts to unload billions in bad debt racked up during a seven-year glut in the global container fleet.

The bank based in Hamburg is looking to seal a series of transactions in which maritime companies would take over vessels from defaulting debtors, Wolfgang Topp, head of HSH’s restructuring unit, said in a phone interview on Jan. 19. A dispute over ship and charter prices thwarted attempts last year to replicate a $300 million deal with Greek shipowner Navios Group in 2013.

“I expect that we will speedily wrap up — one, two, three — transactions with a gross value of 1.5 billion euros ($1.7 billion) this year,” the former Deutsche Bank AG risk manager said. “The problem last year was that our market forecast, particularly concerning bulk carriers, differed from that of market participants.”

Global trade plunged after the 2008 financial crisis, leading to an excess in capacity in the container shipping business that left HSH and other maritime lenders, including NordLB and Commerzbank AG, saddled with billions of euros of bad debt. HSH, bailed out by its state owners Hamburg and Schleswig- Holstein in 2009, holds 21 billion euros in ship loans, 9.2 billion euros of which are non-performing, according to company data.

Stress-Test Survivor

“Container ships were the market of concern, but the dry bulk sector is also doing terribly bad since the middle of last year and it’s expected to be bad for quite some time,” Basil Karatzas, a New York-based ship finance adviser, said by e-mail Monday. “This may limit banks’ options on packaging deals.”

The Baltic Dry Index, the barometer of the dry-bulk industry, fell to a three-year low this month alongside a drop in Chinese demand to transport commodities such as iron ore and coal.

Once judged as a possible failure in Europe’s review of bank assets, HSH passed the test in October after its owners bolstered its capital ratio with a 10 billion-euro guarantee. When the bank publishes its 2014 report on April 1, it plans to present the first full-year profit since 2010 on lower shipping- loan provisions.

NordLB, Germany’s second-biggest financier of ships, is also working to reduce potential losses and plans to dispose of its bad shipping loans by 2019, partly by drawing Asian private- equity funds to invest in distressed vessels.

Greek Deal

HSH’s Navios deal involved a partial sale of a shipping- loan book to the Piraeus, Greece-based company, which guaranteed to operate the 10 vessels for at least six years. The remaining debt was converted into a multi-year loan during which HSH will receive 80 percent of the returns generated by the ships, excluding operating and capital costs.

The transaction allows HSH to dispose of non-performing debt while speculating on a shipping market recovery to help it recoup the outstanding amount. “From 2016, we expect to get money on our junior loan in the Navios deal,” Topp said.

Last year, Topp’s unit cut outstanding debt by about 1 billion euros. This included three transactions with 34 vessels, in which the lender restructured loans with existing debtors, the HSH manager said.

Half of those ships were pooled in a newly merged entity involving three Hamburg-based shipping companies, including units of MPC Group, CF Ahrenkiel Group and Thien & Heyenga, as announced in April.

Mergers Expected

Encouraging mergers among the 350-odd German maritime transport companies with a fleet of 3,250 vessels is one way to stabilize struggling ships and avoid losses for the bank, Topp said. “Economies of scale are crucial,” he said. Consolidation is slow, though, as many family-owned shipping businesses are reluctant to give up control, according to Topp.

“Still, I expect to see mergers in 2015, not only smaller firms pulling together two vessels each, but companies with 20 ships each or ideally even more,” he said. “After a merger, we can assist with our restructuring efforts for existing vessels to make the company appealing for external financiers,” said Topp, who joined HSH in 2012 after leading Deutsche Bank’s global restructuring unit.

Fire Sales

HSH doesn’t plan any fire sales of ships, as that would mean forgoing a market recovery and undercutting vessel prices, he said. “It only needs a single medium-sized container vessel for market prices to fall by 1 million or 2 million euros per ship,” Topp said.

As the dollar is the maritime industry’s main currency, the greenback’s second-half rally against the euro erased restructuring efforts on paper, Topp said.

Before the collapse of Lehman Brothers Holdings Inc. in September 2008 sent the industry into a slump, German maritime companies heavily relied on private investors collectively financing single ships.

Retail investors will probably stay clear of this system following hundreds of insolvencies in recent years, Topp said. Professional investors may still use the model to put money in fleets of five to 10 vessels at once, which then could be complemented by a bank loan, he said.

HSH plans to cut total assets in the restructuring unit, including loans to industries such as real estate, to 17 billion euros by 2017 from 36 billion euros at the end of September. “This year I expect a reduction to 25 to 26 billion euros,” he said.

(c) 2015 Bloomberg.