Since early 2013, I have argued in numerous articles that the traditional shipping markets, containers (liner), dry bulk and tanker markets will take longer to recover than most investors, shipowners and analysts envision.
In late June, Tradewinds discussed the non-performing shipping portfolio of Commerzbank. In the article, Commerzbank’s, Deutsche Schiffsbank unit Chairman of the Board of Managing Directors Stefan Otto stated there would be “no firesales” of vessels. As of December 31, 2012, Commerzbank’s total shipping loan portfolio was Euro 18.9 billion. The non-performing part of Commerzbank’s shipping portfolio is worth up to Euro 4.5 billion (US$5.86 billion).
In November 2012, Commerzbank stated it was targeting a 40% reduction in shipping loans by 2016. The plan is to sell the ships at a later date when the market is stronger. Last month, the bank set up Hanseatic Ship Asset Management to acquire and operate distressed ships. According to Reuters, Mr. Otto stated, “Nothing has changed in regard to our plan to sell non-core assets. We want to reduce portfolios over time and in a way which does not destroy value.”
The bank was responding to market speculation that it is struggling to sell the shipping portfolio, and that bids are so low that the necessary write-downs related to a sale would jeopardize Commerzbank’s equity.
It is hope and prayer time for Commerzbank and Mr. Otto.
While hope, and even prayer, is a good thing, it is not something that a corporate strategy should be based.
Commerzbank and Mr. Otto are banking on a recovery in which traditional shipping markets will revert in the near-to-intermediate term, the global economy will resume growing at improved rates, and valuations will not deteriorate as central banks unwind accommodate monetary policies, such as Quantitative Easing (“QE”) and Zero Interest Rate Policy (“ZIRP”) [See Blogs: Shipping Markets and Quantitative Easing – A Double-Edged Sword and Peter G. Stokes/Lazard: Shipping and Quantitative Easing].
QE and ZIRP have propped up assets during this current period of excess capacity. The unwinding or tapering may be deconstructive to the shipping industry and the financial institutions it relies, as they experience asset deflation effects. The impact on Commerzbank, if central banks unwind before it aggressively sells ships, could be devastating to the bank and the shipping industry as the bank is forced at that point to sell shipping assets at firesale prices during a period of asset deflation.
The shipping industry is challenged by the fact that not only does Commerzbank have Euro 4.5 billion of non-performing shipping loans, which is a lot of ships, but that other banks and financial institutions are laden with non-performing loans.
For the shipping markets to begin to recover, the financial structure of the banking industry requires a cleansing, particularly given that new accounting standards by 2017 are expected to cause shipping companies to place bareboat charters and timecharters exceeding one year on balance sheet, increasing liabilities/debt ratios and causing shipping companies to be in default of loan covenants.
As Mr. Peter Stokes succinctly acknowledged in the Tradewinds article, a cleansing will require financial institutions to no longer hide real value of their assets, forcing governments into a thorough clean-up of the financial institutions restructuring their balance sheets.