• Bank to sell billions in bad loans in `digestible' tranches
  • Privatization of maritime lender unlikely before 2017

HSH Nordbank AG doesn’t expect the turbulence in China clouding shipping markets to hamper the sale of 2 billion euros ($2.2 billion) in faulty loans ordered by the European Union as part of a deal to keep the maritime lender in business.

“The demand for yield has never been as big,” Chief Financial Officer Stefan Ermisch, said in an interview in Frankfurt on Tuesday. HSH will have “no trouble” selling “digestible” tranches of the debt, which encompasses shipping and real estate loans, said Ermisch, 49. The bank, based in Hamburg, will provide more details on the package after the October agreement with the EU becomes legally binding, which will probably occur by April, he said.

Stefan Ermisch
Stefan Ermisch
Photographer: Martin Leissl/Bloomberg

The worsening forecast for container and bulk carrier markets, which make up most of HSH’s 21 billion-euro shipping loan book, prompted the bank to “set aside a pretty significant amount of additional risk provisions in the fourth quarter of last year,” said Ermisch, who’s a former board member at Unicredit SpA’s HVB and the German state-owned lender BayernLB. “Shipping markets are in an extremely difficult situation and it will stay that way for some time.”

The Baltic Dry Index, a measure of the cost of shipping commodities, plunged to a record low this month amid signs of slowing economic growth in China. Global container freight rates dropped as much as nine percent last year as the industry battles with an overcapacity of vessels and rates will probably decline further in 2016, according to Drewry Maritime Research.

HSH also plans to step up a restructuring of risky loans that are not included in the EU package to make it more attractive for potential suitors, said Ermisch.

In addition to the 2 billion euros HSH must sell on the open market, the EU has also ordered the lender to shift 6.2 billion euros in faulty shipping loans to a bad bank created by its majority owners, the northern states of Hamburg and Schleswig-Holstein, which hold a combined 85 percent. The states must in turn sell or list at least 60 percent of the bank within 30 months once the agreement is formally signed.

“We want to clean up the core bank as much as possible for the sale,” said Ermisch. A privatization of HSH is unlikely to happen before 2017, he said. “We will start preparations after the EU deal becomes legally binding.”

While the EU would be unlikely to approve a sale to a hedge fund or private equity firm, potential buyers may include domestic peers looking to consolidate a saturated commercial lending market or foreign lenders keen on growing or gaining a foothold in Germany, said the CFO.

Shipping aside, HSH has a “very solid footprint” in commercial real estate lending, which made up one-fifth of its 105 billion euros in total assets at the end of September, while the bank is “doing well in project financing, renewable energy funding and lending to small- and medium sized companies,” Ermisch said.

Key to a sale or listing of HSH, which is still struggling under the legacy of the bank’s excessive risk-taking in the pre-financial-crisis period, will be a 10 billion-euro guarantee provided by Hamburg and Schleswig-Holstein.

“The guarantee is part of our strong capital base and would therefore be part of a sale,” Ermisch said.

Parts of the guarantee will be used to cover losses arising from the 6.2 billion-euro asset transfer to the bad bank at prices modeled on the market, which Ermisch reiterated will probably be lower than the book value earmarked in HSH’s accounts, while declining to elaborate.

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