Bonds backed by loans to German shipping companies may draw investors struggling to meet return targets while aiding an industry shunned by banks, according to a former Commerzbank AG (CBK) banker pioneering the securities.
The debt will offer yields as high as 5.75 percent and provide funds to companies struggling to obtain bank loans, according to Markus Brueckner, managing partner of Northern Invest GmbH & Co. KG in Hamburg. He teamed up with the Luxembourg branch of Frankfurt-based private bank Hauck & Aufhaeuser Privatbankiers KGaA to package the securities into bonds for insurers, pension funds and family offices.
HSH Nordbank AG, the world’s largest shipping lender, Commerzbank and Norddeutsche Landesbank Girozentrale have curbed or halted lending to small and midsized companies as they seek to meet new European capital rules. That’s left many ship owners struggling to cover operating costs after the fleet expanded while demand slowed, sending charter rates plunging.
“We can’t solve the shipping crisis, but we can solve investor problems with shipping,” said Brueckner, who worked at Commerzbank’s wealth-management unit for five years. “We are focusing on institutional investors with no shipping experience, but who have more capital than the banks exiting ship financing.”
The proposed yield on the bonds compares with about 1.5 percent for Germany’s benchmark 10-year debt. The benchmark DAX index (DAX) of equities gained 9.45 percent this year, while the Standard & Poor’s GSCI Index of 24 commodities rose 0.4 percent.
Commerzbank has said it wants to exit ship lending and Nord/LB, as Norddeutsche Landesbank is known, in May raised loss provisions against marine loans sevenfold. Moody’s Investors Service this month cited HSH Nordbank’s shipping loans as a reason for lowering the lender’s credit rating to Baa3.
“It makes me angry that executives asking banks for loans smaller than 5 million euros ($6.6 million) are not taken seriously,” said Brueckner. “Some companies can’t even borrow a million, even if they secured the loan with a ship’s scrap value of 3, 4 million euros.”
Appealing to institutional investors is one way to fill the funding gap, said Brueckner, who worked for eight years as managing director at Hansa Hamburg Shipping International GmbH & Co. KG before starting Northern Invest. Hansa Hamburg has a fleet that includes carriers of containers and oil, its website shows.
The challenge is persuading investors to buy, according to Brueckner. They may be wary because the bonds resemble collateralized-debt obligations and asset-backed securities. The value of many of those securities linked to risky, subprime mortgages was wiped out by a surge in defaults and the collapse of the U.S. housing market starting in 2007.
“There are similarities to CDOs and other asset-backed securities, as we bundle loans, but we don’t have options or derivatives attached,” said Brueckner. “We need to open the valve for an ultra-conservative group of investors. We need to wake up a sleeping giant that shouldn’t be sleeping anymore.”
With central banks holding interest rates near record lows, pension funds are struggling to reach targeted returns of 4 percent to 4.5 percent, according to Brueckner. Northern Invest is offering annual returns of 4.25 percent to 5.75 percent, while shipping companies pay interest of 8 percent to 9.5 percent, he said.
Northern Invest might be one of the last funding options for companies seeking capital, the Hamburg-based German Shipowners’ Association, or VDR, said by e-mail. “But given the high cost for shipping companies compared to what they used to pay for bank loans, we don’t rate it as particularly positive.”
Brueckner said he aims to issue 25 million euros of bonds backed by shipping loans by the end of November, providing enough capital for about a dozen vessels with a scrap value of 2 million to 6 million euros. Telos GmbH, a Wiesbaden, Germany-based credit-rating company, will assign ratings to the bonds by September, he said.
To hedge against the risk of falling steel prices, Northern Invest set the investment limit at less than half of a vessel’s scrap value while demanding a cash deposit from borrowers to service interest payments.
“We work like a pawnshop giving 100 euros for a Rolex worth much more,” said Brueckner. “Bottom line is that the investment is 35 percent of a vessel’s scrap value.”
A second, 250 million-euro issue that takes account of ships’ market value is planned for next summer, according to Brueckner. He said he’s in negotiations with a “major European insurer” and holding informal talks with Allianz AG, the region’s largest insurance company.
“For many investors, the first portfolio is way too small,” Brueckner said. “Germany’s industry has potential for a 3 billion-euro market in bonds secured by half a vessel’s market value.”
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