Burnt German banks will not be back in strength in international ship finance

It is SMM time, with the shipping world descending on Hamburg for the huge event, which for me means it’s time to take a look at what’s happening on the ground ship finance-wise.

German ship finance sits on a precipice. KGs – like KSs in Scandinavia – in my opinion are a wonderful way to raise money and are also nice for investors.

I think the whole KG system has been attacked unjustly. People do not trust them because the KG houses completely overdid things in the hot market from 2006 to 2008, contracting vessels without employment and equity or with employment, but no equity paid in. Banks were stupid to provide loans also for the equity part without proper checks. So when the markets crashed they were left out to dry for up to 100% of the project cost. The guarantees given by the KG houses for the loans for expected equity to be paid in, had in reality no value as in some cases the total obligation/guarantees by the KG houses were up to 200 times the equity value.

The banks have also learned that lending 70% of the value can be too much if it is done at the higher end of the market and to ships who might not be ideal for the future market.

However, please remember that the KG and KS systems date back some 200 years and still work fine in Norway and Denmark.

Banks in Germany mishandled the process, which is a shame as I do believe there is – and will be – a place for KG systems in shipping.

German banks have been badly burned by shipping and are now adopting a once bitten, twice shy approach to the sector. They are dealing with a lot of problem loans and management at the banks and public owners will not want much new shipping loan business on their books for the foreseeable future.

Take HSH Nordbank, for example. In July, its state owners warned it will take at least a decade for the Hamburg bank to wind down its EUR7bn portfolio of bad shipping loans. I’m pleased to see that my old DVB colleague Ulrike Helfer has been tapped to run the bank’s bad shipping loan portfolio, she is the ideal person to sort out this mess.

I do not see German banks active internationally in the future. Most of the banks are owned by local governments and taxpayers and politically they need to do some local business but will not be willing to risk more losses on shipping.

I understand there is a lot of satisfaction in Hannover after it became known that NordLB had sold a $1.5bn shipping loan portfolio to KKR and partners. It is said that it helps its balance sheet and equity ratio. Hopefully the customers involved will be as pleased when they from now on have to deal with quite different people with little or no knowledge about shipping. The further risk for those customers is that the buyers have absolutely no knowledge of who they are, their strengths and weaknesses and how to help them survive in this difficult market.

This move in my mind will put further pressure on the KG houses and the KGs involved. It will probably depress the market especially for previous panamax size containerships further. It is scary that we already have seen 13-year-old containerships being scrapped.