Reederei Heinrich, a 149-year-old German shipping company, risks losing two of its three vessels unless it repays loans as financial stress in the industry spreads to banks facing a European Central Bank review.
The company, established near Hamburg, Germany’s biggest port, has endured misfortunes such as the death of a family member struck by anchor chains and ships that ran aground. Now General Manager Jens Robrahn says he’s concerned that HSH Nordbank AG may call in 22 million euros ($30 million) of outstanding debt and seize two boats acting as security.
“I currently get 4,000 euros a day for a vessel, which covers operational costs and interest payments, but I don’t have the money to pay back the loan,” Robrahn, 73, a ship captain, said in a phone interview from his office in Jork, 25 kilometers (16 miles) west of Hamburg. Smaller container vessels like his Anna Sirkka and Page Akia need to repay about 1 million euros in debt a year, he said. Robrahn and HSH Nordbank, the world’s largest maritime lender, declined to provide further details.
As it tries to clean up the region’s banks, the ECB is taking a closer look at whether they need more capital to absorb possible losses on loans like Robrahn’s. Shipping loans are among the riskiest assets on banks’ balance sheets and among those most prone to misstatement, an ECB spokeswoman said. German lenders including Hamburg-based HSH Nordbank, Commerzbank AG and Norddeutsche Landesbank Girozentrale controlled about one-third of the $475 billion global ship-finance market at the end of 2012, according to Swen Metzler, an analyst at Moody’s Investors Service in Frankfurt.
The three lenders set aside more than 3.6 billion euros in provisions for bad shipping debt in the past three years after dozens of firms in Germany’s 1,543-container-ship market, the world’s biggest, were hurt as overcapacity and an economic slump pushed down cargo prices the most since the 1970s.
The ECB, which began auditing 128 banks in February and takes over as Europe-wide regulator in November, is investigating whether executives are fully reporting the riskiest loans and whether ships such as Robrahn’s Anna Sirkka, a 135-meter container vessel built in 2006, are still valuable enough to use as collateral.
“German shipping banks’ two biggest concerns at the moment are whether they get their money back and whether they need to boost capital to support their risk exposure,” Lars Heymann, partner at a unit of auditing and consulting firm PKF Fasselt Schlage, whose clients include shipping companies, said in an interview at his office in Hamburg.
HSH Nordbank reported 9 billion euros of bad shipping debt, or about 43 percent of its loans to the industry, in fourth-quarter earnings published April 10. Nonperforming shipping loans at Commerzbank, Germany’s second-biggest bank, amounted to about 3.9 billion euros at the end of 2013, or 27 percent of its lending to the maritime industry, according to the company.
The ECB is also asking banks across Europe to reveal the loans they restructure, a process by which they extend repayment periods or lower interest costs. The Frankfurt-based central bank may force lenders to set aside more capital to reflect the greater risk of default from such loans.
HSH, Commerzbank and Hanover-based NordLB, the third-biggest shipping lender in Germany, are among European banks that don’t disclose restructured loans in their financial statements. Spokesmen for the banks declined to provide information when contacted by Bloomberg News.
Robrahn’s Anna Sirkka is among the smaller cargo ships purchased via Kommanditgesellschaft, or KG, a German system of using private funds, including loans, to finance ships.
The vessels are struggling to remain competitive as larger carriers take to the seas. About 400 KG-funded vessels filed for insolvency in the past three years, including 119 in 2013, according to the VDR shipowners’ association, which has about 220 German shipping companies as members.
Commerzbank, based in Frankfurt, expects a similarly high rate of bankruptcies this year, the lender’s shipping-unit chief, Stefan Otto, said in a telephone interview.
Higher provisions for bad debt at state-owned HSH, bailed out by the government in 2009, contributed to a full-year loss of 814 million euros in 2013, the bank’s biggest since 2008.
Uncertainty over how the ECB will value collateral on 52 billion euros of shipping loans at HSH, Commerzbank and NordLB has analysts concerned that it will ask the banks to raise more capital as the review nears its October conclusion. Between 36 percent and 45 percent of the shipping loans approved by the three lenders were used to purchase container ships, according to their latest financial statements.
While Commerzbank’s total assets are more diversified, HSH Nordbank is underestimating the risks of its shipping clients defaulting, said Sascha Steffen, an associate professor at the Berlin-based European School of Management and Technology and co-author of a study on stress-testing Europe’s banks published in January.
“I fear that the asset-quality review will show a very different risk assessment and will detect a significant lack of capital,” Steffen said.
Hansa Treuhand Group, a Hamburg-based company with a fleet of 52 vessels declared two of its container ships insolvent in February, the first time it has done so in its 31-year history.
“The ships were worth less than the debt they were carrying,” Julia Eble, a spokeswoman for Hansa Treuhand, said in a telephone interview. “Banks and private investors were just not willing to inject further money into the vessels.”
The ratio of bad loans to total loans in the KG segment are as much as twice the average in shipping, illustrating significantly higher lending risks, Metzler of Moody’s said.
The ECB may not accept the way German banks value ships as collateral for loans, said Heymann of PKF Fasselt Schlage.
Rather than valuing vessels at market value, a method used in Nordic and other European countries, banks in Germany typically categorize ships as long-term assets, price them using a multiple-year average or calculate a “fair value” that may exceed market prices.
“Foreign bankers have been rubbing their eyes with amazement,” Heymann said. “Pure accounting doctrine would stipulate that you look at a ship’s market value, which in these crisis years may well go down to the scrap or steel value of a ship.”
The ECB is telling auditors that banks should set aside provisions for a shipping loan according to whether ships continue to generate cash or whether they need to be liquidated. Auditors have a clear position on how to value ships consistently across Europe, a spokesman for the central bank said by e-mail.
Vessels with a total capacity of 779,000 containers lay idle across the world last year as the industry suffered from oversupply. Before the 2008 crisis, the amount never exceeded 200,000 containers a year, according to Hansa Treuhand.
About 8 billion euros of loans, including 4.8 billion euros committed by private investors, are at risk of default in the German KG-funded sector, according to a study by Deutsche FondsResearch published in November.
Nonperforming loans are “more common in the container segment,” Otto of Commerzbank said, declining to disclose the size of his KG-ship loan portfolio. About half of Commerzbank’s loan book includes German clients, he said.
Commerzbank, which like HSH Nordbank received a bailout after the financial crisis, started exiting ship financing in 2012. Last year, it cut its debt to the industry by about 4.5 billion euros, or 24 percent, to 14 billion euros, reaching a target three years earlier than planned.
HSH reduced its exposure to shipping by about 7.6 billion euros to 21 billion euros last year. Its assets amount to 109 billion euros, the company said April 10.
To dispose of riskier assets ahead of the ECB review, banks are seeking buyers for nonperforming shipping loans and the assets that back them.
HSH sold a loan secured by 10 container carriers and tankers to Greek marine company Navios last year. It is planning another two or three such transactions in 2014 worth about $1 billion, Jan Gross, HSH’s head of special loans, said at a February maritime conference in Hamburg.
Commerzbank sold 14 chemical tankers to a fund managed by Oaktree Capital Management LP in December, eliminating 280 million euros in bad shipping loans. Oaktree Capital Management, Blackstone Group LP, JPMorgan Chase & Co. and Tennenbaum Capital Partners LLC are among firms buying German vessels and taking stakes in companies that need financial backing.
HSH also is urging debtors to merge with other firms to prevent bankruptcy, while Commerzbank is leasing out some ships that borrowers had previously used as collateral to help reduce losses from lending that turned sour.
Moody’s Metzler expects the ECB review “to contribute to further increases in loan-loss provisions” at shipping banks. “The German regulator has allowed banks relatively high discretion in their approach to reclassifying recovered loans into performing categories,” he said.
Robrahn, who’s married to Petra Heinrich, a descendant of the company’s founder, said he hopes his vessels will be spared from insolvency, also for the sake of the private investors involved. “Billions of euros of investor money have already been burned, and if more ships file for insolvency even more people lose their savings,” he said.
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