KG fleet consolidation bound to gain momentum

28.02.2015

Germany’s KG ship fleet is expected to consolidate faster this year after a slowdown in sales and management changes last year.

Many shipowners, fund managers and analysts agree that the industry must brace for another round of forced sales this year, driven by shipping banks like Commerzbank and HSH Nordbank that are under pressure to run off or scale back their portfolios.


It is estimated that more than 25\% of German ship mortgage loans are non-performing and lacking sufficient securities. However, the current recovery in charter rates in the container ship sector is expected to send asset values further up, allowing lenders to call in loans or haveshipsauctioned without taking losses after years of kicking the can down the road.


Prices for 10-year-old large panamax box ships firmed up by 14\% over the past year, according to Ernst Russ Shipbroker.


“The banks are tracking their problem ships very closely. Every time a mortgage loan gets back in the money, there’ll be an alert flashing up so the restructuring people know it’s time to sell,” a private German shipowner told IHS Maritime & Trade.


HSH Nordbank’s restructuring unit already caused headlines last week with another fleet/portfolio transaction involving eight container ships. Four baby panamax 4,300 TEU and four feeder/handy vessels with intakes of between 1,300 and 2,500 TEU were transferred in forced sales from their original owners to Hamburg ship manager Ahrenkiel.


The transaction was based on the Nautilus model that has seen ships with excessive debt burdens sold at loan and above-market value along with financing. The incentive for the buyer is that it gets a preferred return on equity after interest and principal on the secured loan tranche.


The unsecured junior loan that remains with HSH Nordbank gets served on a pay-as-you-earn basis after equity. This can get partly or fully recovered if ship values firm up again. Contrary to a similar major transaction with New York-listed owner Navios in 2013, HSH also provides the senior loan for an interim period, not just the junior loan, a spokesman for Ahrenkiel’s parent group, MPC, confirmed.


Neither the volume of the transaction, nor the identity of the ships and their original owners, who have been forced to sell, were revealed. “We push for consolidation and take more radical approaches now,” explained Jan Gross, head of special loans at HSH Nordbank, in a panel debate at last week’s Marine Money conference in Hamburg. Four Nautilus-type transactions have been completed so far and three more are planned already over the coming weeks, Gross said.


However, winding up the bank’s multi-billion restructuring portfolio that has been stripped from its core shipping loan book is likely to take several more years, Gross warned. The Nautilus approach keeps stirring up controversy, with some alleging that the bank is breaching its competencies in some cases to force distressed owners to sell. A ship finance manager from another bank suggested that the scheme, which may allow HSH to recover the original loans over time, cannot be replicated by any other bank – only at the expense of having to consolidate the involved tonnage on its own balance sheet.


This is because HSH can back up the unsecured junior loans with state loan guarantees provided by the states of Hamburg and Schleswig-Holstein, the manager said.


Analyst Deutsche Fondsresearch (DFR) warned in its latest market survey that sales and auctions of KG tonnage could be picking up again after a more benign 2014. Debt and liquidity shortages remain at alarming levels for many closed-end funds, that formally own the ships, as illustrated by a rise in insolvencies around the turn of the year, it said. 30 December 2014 saw six funds file for insolvency in one day and another 13 have been put into administration so far this year, DFR reported. The number of ships may be even higher as many funds own more than only one vessel. Fondsresearch’s managing director Nils Lorentzen explained that faith in a market recovery among KG shareholders remains very limited, hence many are not prepared to inject more capital, leaving KG managers no other option than to file for insolvency. Last year, however, saw a significant drop in fire sales of KG tonnage. Only 97 fund vessels were sold in 2014, against 166 units in 2013, DFR said. Also, the number of first restructurings within the monitored fleet of 500 KG ships dropped from 129 in 2013 to 36 last year. There is quite a backlog of ships with standstill agreements by their lender for which long-term restructurings or capital cuts have yet to be agreed.


Even the non-distressed segment of the KG fleet – ships with sufficient cash flows and healthy loan-to-value ratios – is facing renewed calls for consolidation on larger corporate balance sheets. A combination would create value for KG shareholders, open up new commercial opportunities and financing options, according to KG issuing house Lloyd Fonds.


The listed company with US investor AMA Capital as largest shareholder is trying to persuade KG shareholders of 11 vessels to sell their ships to Lloyd Fonds in a ships-for-shares transaction. “We take over the KG vessels, and the KG investors take us over,” explained Lloyd Fonds chief executive Torsten Teichert at the Marine Money conference.


The goal is to convert Lloyd Fonds, which has lost much of its core placing business after the collapse in the KG equity market, into an integrated shipping company over time – like the listed shipowners in New York and Oslo.


If the first batch of ships accepts Lloyd Fonds’ offer, “the second step will be to address the whole KG market and to act as a hoover [for one ship companies],” Teichert said. You don’t have to aim for an IPO overseas, he pointed out, “Frankfurt is a great stock exchange, Germany is incredibly wealthy.”


source:www.ihsmaritime360.com

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