Merle Stilkenbäumer and Claas Ringleben from the Liberian Registry chart the fall and rise of shipping in Europe’s largest economy.
During the past 15 years, German shipping underwent dramatic changes: The KG model ended, going concern and insolvency cases piled up, and German ship finance banks cleared their balance sheets and disposed of parts or all their shipping exposure, ship finance activities were halted, and exits from the ship finance arena made. Simultaneously, the private and individual investors, once the backbone of the KG system, shied away from shipping, and so did the institutional investors, leaving shipowners with no access to capital.
As owners withdrew from the market – either by choice or by force – one must acknowledge the continued outflow of owned tonnage from Hamburg and Germany into regions abroad. This started with the collapse of the KG system and will likely carry on into 2022.
Signs of life
But despite the hard times, German shipping maintained a heartbeat. Vessels sold out of Germany to non-German interests often remained with German shipmanagers located in Hamburg or other maritime centers in the north of Germany, in acknowledgement of their proven track records, expertise, and professionalism. Many of these fleets are currently adding tonnage to their respective portfolios.
And by no means all German ship owners disappeared, to the contrary: many German players in the maritime industry kept their confidence over the years, knowing full well that shipping has always been and will always be a cyclical business. And now that the tide has turned, at least in the dry segments, smiles have returned to many faces within the German shipping community.
Improved markets (and profits) have come with a revival of ordering activity placed by German shipowners, a phenomenon that had been nearly extinct for the past 10 years. While the first vessels have already been delivered, many more are due between 2022 and 2025. The current ordering activity will not offset or turn around the tonnage outflow, but it is a signal that is extremely important for other active market players in the German industry, such as shipyards, suppliers, and insurance companies.
With the original KG scheme non-existent anymore, and with many (former) leading ship finance banks slamming the doors shut, shipowners needed to find new ways to gain access to funds – and quite a few succeeded on the basis of a ”KG 2.0“ concept, involving (a) the shipowner and the shipmanager for the equity portion and the take-over of a tangible entrepreneurial risk portion, (b) a handful of pre-selected investors with a notable equity contribution (compared to the vast investor base of former times), and (c) a bank or other third party loan for the balance of the purchase / ordering price in the form of mezzanine capital, senior tranches, super senior tranches or after-ranking tranches.
And funding is available, albeit in anemic doses. Those banks in Germany who stood by the German clientele and continued to extend loans to shipowners selectively and on more healthy and digestible levels are those banks who lived through the crisis relatively unscathed. It remains to be seen if and for how long other German banks will be able to continue to watch from the sidelines and shy away from shipping, a capital-intensive industry with a remarkable risk-return profile. But, as soon as the former ship finance banks adjust their business models and revive their ship finance activities, the German maritime sector may experience another positive push.
Management of carbon risks
On the operational side, shipowners and shipmanagers alike will also have to take into account the multiple regulatory requirements to meet the climate goals in the not-so-distant future. Decarbonization and emissions reduction is high on the agenda of regulators, tonnage takers, and end-consumers.
The management of carbon risks in newbuilding design will have to meet the expectations of both the cargo owners and the end-consumers in an ever-changing regulatory environment. And it is only fair to assume that capital investors, banks and other institutions will employ a strong GHG and decarbonization-driven approach as to who will be granted funding and who not, and which covenants will apply to loan facilities.
A key role in carbon risk management is the choice of the correct fuel – IF there is “the” correct fuel at all, a big “if”, admittedly. The common denominator for regulators, developers, and users alike appears to be the replacement of heavy fuel oil with alternative solutions. And now, alternative fuels, such as LNG, methanol, ammonia, hydrogen, and synthetic fuels are being hailed as the foundation for shipping’s energy transition.
Informed decisions are to be made by German shipowners and shipmanagers when ordering vessels with an economic lifetime of 20+ years to avoid negative impacts for their business models and assets in the future. Such decision-making must comprise not merely the cost-income ratios, but also storage and capacity requirements, propulsion, and the supply side – without compromising on the safety and the protection of the environment. One can infer from the vessels already delivered or on order that German shipowners have done their homework and developed vessel designs in line with tomorrow’s regulatory and commercial requirements.
Like no other industry, maritime shipping is an industry that is internationally positioned – and accordingly requires internationally comparable framework conditions. This is especially true with regards to tax aspects. Because only if German shipping companies can offer their services under comparable conditions will they have a real chance against tough global competition. In this respect, tax measures are required to support German shipping further. Measures to maintain and restore the competitiveness of German shipping are being discussed in the German shipping community, including tonnage tax relief for pure ship management companies, an environmental bonus component in the tonnage tax regime, and a significant relaxation or abolition of the insurance tax for marine insurances.
The rise of gas
As recently as June 2021, MEPC 76 adopted additional technical and operational measures to reduce carbon intensity of international shipping from 2023 onwards. The measures include the Energy Efficiency Existing Ship Index (EEXI), the enhanced Ship Energy Efficiency Management Plan (SEEMP) and the Carbon Intensity Indicator (CII) rating scheme. With the new IMO requirements addressing greenhouse gas emissions, the Liberian Registry is also positioning itself to assist shipowners and shipmanagers. The Liberian Registry is actively supporting owners in making informed decisions, ensuring safe operations, and achieving the goals set forth by the industry. Critically, gas is going to place a role here, and the Liberian Registry has assembled a global gas team to liaise on the smooth implementation and compliance of regulations across a spectrum of gas technologies and options.