⊗

The turmoil in the banking system this month, coupled with new recession-related concerns, has sent shockwaves through global markets, raising fears of a new financial crisis and an impending loan crunch. The collapse of US mid-sized lenders Silicon Valley Bank (SVB) and Signature Bank, followed by the demise of 167-year-old Credit Suisse, have alarmed investors about the possibility of further bank failures. Top central banks, faced with the risk of a fast-moving loss of confidence in the stability of the financial system, had to step in to bolster the flow of cash around the world. Veteran ship financier Dagfinn Lunde of eShipFinance.com is not surprised by the current events. Lunde’s reasoning of the market chaos comes when the authorities encouraged the banks to hold state and other long term A-rated papers that required low capital coverage but then suddenly needed to push up interest rates to dampen inflation. "However, such interest increases immediately reduces the value of all long-term papers and if you go from 0% to over 4% a 30-year paper immediately loses about 40% of its value and the authorities do require the banks to keep these papers in their books at market value. That means that the 40% value loss immediately reduced the bank's capital base. That created unrest with investors and deposit holders, and the game is on," Lunde explains. While some have raised concerns that the banking turmoil is not yet over, expecting more banks to fail in the foreseeable future, this is not expected to pose a further threat to ship financing, industry experts tell Splash Extra. Nicolai Heidenreich, managing partner at Norway's NRP Maritime Asset Management, is having a hard time seeing this as positive for shipping volumes. We're getting back into the real world where money is no longer free or cheap "Uncertainty tends to push lenders towards safer harbours and core businesses, and very few if any banks still consider shipping as core. For SMEs, and maybe in particular the Greek market where the local banks have become a player again this could be hard felt and we might continue to see an increase in demand for non-bank lenders as it is the SME owners that, in my opinion, have stepped up the S&P game the last month in particular on the dry side," he says. Lunde notes that this crisis is very different from the sub-prime problems of 2007 and 2008 and that the risk of spreading is lower although a serious problem for many banks. "I believe that banks will become even more restricted in what they can lend to shipping," he asserts, but points out that shipping does not need so many loans these days. Lunde sees a lot of capital flowing into shipping from many sources these days, and no real problems for shipping "due to this crisis created by the governments". Michael de Visser, head of shipping at Dutch lender NIBC Bank, agrees that current uncertainty might take liquidity out of the market but assures that this will not be the case for NIBC, which is looking to further grow its shipping portfolio. In fact, he finds that it could be good for the shipping market "as values might normalise if banks do not facilitate the funding for acquisitions at high values." De Visser also shares Lunde’s view on the various alternative funding sources available, which work with a different funding model versus banks. "Bank funding has become a smaller portion of the total financing pie," he concedes. Vetle Sjuve, an associate and investment banker at Fearnley Securities, tells Splash Extra that though traditional shipping lenders have been very active over the last two years, the Oslo-based investment bank has observed a slowdown, with a focus on a few select clients. Sjuve also highlights the alternative capital sources, including Chinese and Japanese lessors, alternative lenders and Asian banks as "steadily and actively available for new business resulting in a shift in the market over the last period of time". "We do not see a significant reduction in the overall availability of financing as there is pent-up-demand for ship financing among the alternative and Asian financiers. As a result, we see it as key for the shipowners to focus on diversifying their financing, both in terms of financing structures and geographic presence. The latter - geography - is particularly important as we see, for example, Asian financiers being a sticky source of funding through the cycles," he asserts. Greek shipowner Harry Vafias, chief executive of StealthGas and Imperial Petroleum, finds it’s too early to have a crystal-clear view but reckons that banks will be wary of conducting new business, especially with new clients or smaller outfits. "The banks will continue to focus on existing and larger corporations to minimise their risks and by sacrificing their returns. There will be a limited amount of lending for smaller and new outfits and especially those with non-holding company structures,” he says, echoing Sjuve, adding that smaller companies "will have to pay dearly for new loans from specialised finance boutiques that can take the risk and charge them accordingly." J Mintzmyer, a well-known shipping investor and head of research at Value Investor’s Edge, is not too concerned about a tightening in banking market conditions, "considering most shipping equities have the best balance sheets in history." "If anything, this is bullish since it will tighten financing conditions for an already sparse orderbook in dry bulk and tankers," he notes. Collapse of Greek shipping’s largest lender Market havoc forced the emergency rescue of ailing Credit Suisse by its fellow and rival UBS in a deal brokered by Swiss authorities to prevent its disorderly collapse. Switzerland’s largest bank UBS was never big on shipping but now controls the tenth largest lending portfolio in the industry, which stands at around $10bn. On top of that, Credit Suisse has been holding the top shipping financier position in Greece, Europe's largest shipowning nation, for the seventh year running, ahead of Eurobank and the largest shipping lender, BNP Paribas. A lot has been speculated about UBS taking over Credit Suisse, including the partial or complete sale of the ship-lending portfolio. Vafias is one of those who are not very optimistic regarding UBS taking over Credit Suisse, as he says it was never a ship lending bank and is cautious and conservative. "I believe they will gradually reduce their shipping loan book inherited from Credit Suisse, despite all shipping markets doing well currently," he adds. Basil Karatzas, CEO of maritime consultancy and shipping finance firm Karatzas Marine Advisors, thinks UBS will gradually prune the shipping portfolio to maintain only strategic accounts. It will have to be seen whether UBS will continue that business model, NIBC’s de Visser says. For Lunde, the effects on shipping after UBS took over Credit Suisse will only play out over time depending on whether the shipping team in Credit Suisse can convince the new management of its viability. "I see no immediate issue - they will stand behind the circa $400m committed/undrawn to Greek shipping," he reckons. Mintzmyer notes that Credit Suisse had been backing away from shipping for several years and doesn't think there's much of an impact from this. He adds, however, that there will be more alternative financing structures in the future, adding that it is not a coincidence that Costamare recently announced a $200m investment into a leasing venture with Neptune. Fearnley Securities’ Sjuve also reckons that whichever way UBS decides to go, it will coincide with strong demand from alternative and Asian financiers looking to deploy capital and to plug the potential financing gap. "We believe it would be sensible for any shipowner in this market to utilise this change of flow in financing to diversify and minimise the risk related to the current uncertainties," he advises. In a statement to Splash Extra, UBS spokesperson Serge Steiner said that it is too early to say, as the companies are only at the beginning of a comprehensive integration planning process, but highlighted that the wealth management business with Greek clients is important to UBS, stressing that the wealth management businesses of Credit Suisse and UBS are complementary. "Our wealth management business in Greece is an integral part of our strategy in the Europe region and one we are looking to grow, having recently announced a new market head to support those ambitions," UBS added. Speaking to investors, UBS CEO Ralph Hamers said that by combining forces with Credit Suisse, UBS would be able to drive scale and boost capabilities across its asset-gathering platform. "So, clearly, what Credit Suisse brings is actually on the wealth side quite complementary to our strength," Hamers said. According to Ted Petropoulos, head of research at Petrofin, which monitors Greek and global banks’ shipping portfolios, the Credit Suisse file is secured by clients' wealth managed funds and deposits, with limited pure shipping risk. He believes the Credit Suisse clientele consists of quality and financially strong owners who could easily refinance their loans and that, in overall ship financing terms, the impact of the UBS takeover is unlikely to be significant. "There is also a small probability that UBS will realise that disposing of the shipping portfolio would be against its interests and that it might as well keep a part of Credit Suisse that seemingly worked well," Petropoulos tells Splash Extra, stating further that it is also likely that there will be client overlap with commonly shared clients enjoying the private banking services of both banks and which should assist in a smooth transition. One thing he doesn’t expect is the fire sale of the Credit Suisse shipping book, which for him would make little sense and would be largely unnecessary. What crisis? Speaking at Capital Link’s annual international shipping forum in New York this month, shipping lenders said that the wider industry fallout would be negligible. "I don't think it really has any impact on shipping," said Michael Parker, chairman for global shipping, logistics and offshore at Citi. "If you look back, apart from some German banks who were overextended, other banks that suffered in the global financial crisis have nothing to do with shipping, because shipping is a relatively small part of most banks portfolios, and of course most banks don't do any shipping." "I think it's more broadly that we got used to cheap money with interest rates rising to deal with inflation. It's not the new normal, it's the old normal… we're getting back into the real world where money is no longer free or cheap and return on investment requires more than just buying an asset and hoping it goes up in value," he added. Reflecting on the previous forum discussions, Parker observed that shipping companies have paid down debt dramatically and many of the owners and CEOs had talked about having zero net debt. "I think the shipping industry as a whole is in a very good position, looking from a debt perspective if this banking crisis were to go on." Evan Cohen, managing director and group head for CIT Group's maritime finance business, has not seen any impact. "We're not seeing anything affecting our business. We've had quite an active year; it's not slowing down and not affecting our client base," he assured. Andrew Shohet, a senior vice president in the ocean industries division at DNB Bank, commented: "From our perspective, it's very much business as usual. I think there's a lot of noise and it obviously does create a lot of uncertainty, particularly as it relates to the capital markets. But I think that looking at the syndication market for shipping in general, at least at this point in time, it is unimpacted. We've closed a transaction in the middle of all of this, and I think that gives you some flavour as to where banks participating in the shipping market are in general." A panel on shipping investments highlighted that cash flow is the king today. Larry Glassberg, executive managing director and co-head of investment banking at Maxim Group, told delegates that a lot of maritime companies they are dealing with are generating cash flow and that "there is not a gun to their heads" to come into the market and necessarily raise capital". Observing the whole situation, Karatzas remarks that banking is on much sounder ground now than it was during the financial crisis, and the present contagion concerns "seem a generally well-fenced scenario". For him, the main issue is that interest rates have been historically low for too long, and many parties have taken that as a given in terms of borrowing methods and maximising banks' equity returns by looking for optimal yield at the risk of mismatching maturities. A reset may be on the cards now, he reckons. There seems to be a consensus in ship finance circles on what the fallout of the banking crisis is going to be. Providing some colour on what’s next in the banking and lending market in shipping moving forward, Petrofin’s Petropoulos, whose latest bank research is set to be published next month, summarises: "We do not anticipate any difficulties for the ship finance industry." Shipping will hope these words do not come back to bite him.

Banking uncertainty and shipping

Splash Extra gives subscribers unique insights into what shipping needs to know in the wake of the demise of Credit Suisse.

⊗

To continue reading, please login below or subscribe here.

Read Next

Owners advised to cash in

Measuring shipping hubs

April 2024 Review

The on/off risk premium for tankers

Curse of the dry cargo optimist

Owners advised to cash in

Measuring shipping hubs

April 2024 Review

The on/off risk premium for tankers

Curse of the dry cargo optimist

Maritime CEO Forum Singapore

Maritime CEO Forum Monaco

Advertising

Press Releases

Splash

Splash Extra

Splash Special Reports