Shipping Funding Gap April 2012

Eurofin Group of Companies
1
Janos F. Koenig, Managing Director
Who will step into the funding gap
created by European shipping banks?
EUROFIN: Independent, privately held advisory group
28 Years Presence and Commitment in the Ship-Financing Industry
200 years Cumulative Ship-financing experience
Flexibility Tailor made ship-financing structures
Recognition Representatives of KfW IPEX-Bank in Greece
Commitment Team of 15 professionals dedicated to the shipping industry
US$ 20billion Successfully arranged Ship-Financing Transactions (globally)
Strong Relationships With all major ship-financing Providers and many key Shipowners
Global Coverage Presence in major shipping centers
2
Who we are
2
London
Athens
Singapore
Eurofin Group is the oldest, largest, specialized ship-financing
investment boutique with global coverage
Eurofin Group offices
Shipping cycles are
not new. We have
been through them
before and will do so
again
OVERSUPPLY
LOW FREIGHT RATES
DEPRESSED VALUES
But now there is a new
killer More dangerous
than before
BANK FINANCE IS
NOT AVAILABLE IN
ANY SIGNIFICANT
QUANTITY
Horseman Number four
THIS HAS NOT OCCURRED SINCE THE 1930S,
AND IT WILL NOT CHANGE ANY TIME SOON
Mismatch in the global ship-financing industry
The present challenging ship-financing landscape
Mismatch in the global ship-financing industry
4
Source: Dealogic Source: Clarksons
Estimated Debt Required
for the Shipping Industry
(2012 - 2014+: Newbuildings Only)
Global Debt Ship-Financing Advanced
[by Volume],
(2005 2011)
Ship-Finance DEMAND
for Debt remains strong
Ship-Finance SUPPLY
of Debt continuously decreases
Orderbook stands at: US$247bn
Debt Requirement (at 60% leverage): US$ 99 bn.
Syndicated and Significant Bilateral Shipping Transactions
Includes Re-financing
5
Source: Marine Money
Big number of rights issues in 2010-2011(follow on listings / ATMs commonplace), but
subject to window of opportunity
Bond issues served already listed companies, all in the form of non-investment grade
with high yields
Capital Markets: considerable help butnot any more
0
2
4
6
8
10
12
14
16
18
9 11 13 15 17 19
Bank internal rating
B
a
n
k

C
a
p
i
t
a
l

(
E
U
R
m
)
The impact of risk migration on bank capital
6
Source: ING
US$m Oct 06 June 08 April 09 Aug 09 Jan 10
Vessel
Value
89 95 51 46 40
Rating 9 (BBB) 10 (BBB-) 12 (BB) 14 (B+) 20 (D)
LGD 16.1% 13.5% 25.2% 26.7% 28.6%
Capital
Costs
(EURm)
1.1 1.4 3.8 5.0 16.7
An example: 5,300 TEU containership delivered in 2009 and financed with a US$ 71m loan
Internal ratings downgrades have an exponential effect on bank capital
Reduced collateral values also increases capital requirements
Pressure on bank finance availability
7
Effect Pressure
Provisioning
Risk costs increasing as
borrowers come under financial
pressure.
Internal competition for
capital
Other sectors (eg offshore)
currently have better risk/reward
characteristics
Risk Migration
Increased capital costs with
limited portfolio growth
Poor market outlook
Oversupply remains; demand
recovering from a low base
Exits
Well-known shipping banks have
exited the market or scaled back
Several
banks still
struggling
Moderate
demand
outlook
Massive
orderbook
Limited
availability
for ship-owners
8
Top 12 account for 76% of the
current
global shipping finance portfolio
But how many of them are still
lending?
Where funds are available they are reserved for:
- Solving Re-structuring problems
- Existing clients
Those few banks that can do new business target only the best
names effectively freezing out most shipping companies
European banks capacity issues
9
The price of Credit Default Swaps is a clear indication
Source Marine Money Freshly Minted 29
th
Sept 2011
Banks have problems funding themselves
Shipping viewed as a non-core business
10
The limited financing options currently available for shipping was
outlined clearly by Jerzy Majewski, Deputy Head, Origination Europe,
at HSH Nordbank. He pointed out that several leading shipping banks
have indicated they are reducing dollar-denominated lending
to shipping. Banks are currently facing sharply higher liquidity costs,
resulting in less bank debt capacity available for shipping and at a higher
cost, which are likely to move higher still in the coming months.
Lloyds List 25th Oct 11
German ship finance giant HSH Nordbank will have to shrink its shipping
business by a further 4bn ($5.8bn) by the end of 2014, according to an
agreement with the European Commission, the bank announced today.
Lloyds List 26th Aug 2011
11
The aggregate shipping portfolios of European banks are likely to
continue to fall because there are fewer banks able to engage in new
loans, costlier funds and tighter lending conditions.
Dagfinn Lunde at DVB Bank told Lloyds List there were now only a
handful of European banks actively undertaking new lending to shipping.
Lloyds List - 20th Sept 2011
Kjartan Bru, DnB NOR Senior Vice-President Shipping, Offshore
and Logistics, DnB Nor
..lending volumes in the first half of 2011 were high, but activity has
stopped abruptly in the third quarter. We came back from our
summer holidays and everything had almost stopped. And it is still
getting worse..
Lloyds List 29
th
Sept
12
Lloyds Banking Group in the UK has confirmed that its head of
ship finance is leaving the bank amid speculation
its shipping portfolio is up for sale. Lloyds List 20
th
Jul 11
We will not rule out that market participants will execute vessel workout
measures to a larger extent than in the past, says Holger Janssen,
head of ship financing at UniCredit/Hypovereinsbank.
Lloyds List 7
th
Oct 11
13
Source: FT (November 2011)
30 Biggest Banks
(by market cap, $ billion)
Financing alternatives from Asia/Australia
Financial institutions from Asia/Australia
14
Bank of China
ICBC
China Construction Bank
Bank of Communications
Minsheng Banking Corp
The Export Import Bank of China
China Development Bank
Sinosure
Busan Bank
Solomon Financial Group
Korea Export Import Bank
K-Sure
Mizuho
BTMU
SMBC
JBIC
NEXIA
Affin Bank
AmBank Group
CIMB Group
RHB
Maybank
CHB
Chinatrust
Mega Bank
Land Bank
Axis Bank
Bank of India
Bank of Baroda
State Bank of India
ICICI
Bank of Ayudhya
Kasikornbank
Krung Thai Bank
Thanachart Bank
PT Bank ICBC
PT Bank OCBC
PT Bank UOB
Financial institutions from Asia/Australia
What happens next?
15
Ship financing environment
Is it a lifesaver?
Or an empty promise?
Asian governments actions to aid shipping in 2009-10
16
Asian economies Comments on Shipping sector
IFS scheme Government took 80% share of default risk for loans of up to
SGD50m ($40M) extended to Sgp based companies (overseas acquisitions or
working cap)
Withholding tax exemption for shipping companies extended by 5 more years
Korea Asset Mgmt and KDB set up US$ 4.8bn fund for distress ship acquisitions
KDB Shipping fund acts as additional buffer on top of senior and junior loans
Hanjin and HMM were the first beneficiaries of government intervention
Provide more financial support to shipowners (with buyers credit and incentives)
Introduce policies to expedite vessel replacement via competitive bank loans
Encourage state owned enterprises to pick up cancelled shipbuilding orders
Source: Marine Money
MYR 3 bn ($! bn) shipping fund, managed by Bank Pembangunan
BP disbursed MYR 800 million ($267M) of loans in 2009 and remaining in 2010
Ships had to be managed by Malaysian companies and carry national cargo
Plans for new tonnage tax system in 2010
Results in a decrease in tax burden by up to 90%
Malaysia
Taiwan
China
Korea
Singapore
Export Credit Agencies role in ship-financing
17
JAPAN
NEXI: Nippon Export and Investment Insurance
JBIC: Japan Bank for International Cooperation
KOREA
K-sure: Korea Trade Insurance Corporation
Korea Exim Bank
CHINA
Sinosure: China Export & Credit Insurance Corporation
China Exim Bank
Chinese Banks, an emerging ship financing power?
18
Source: BoC
* Estimate of BoC 2009:
(includes shipping, shipbuilding, as well as refund guarantees)
Market Share to finance ship
owner and shipbuilder
ICBC,
25%
BOC,
25%
CEXIM,
25%
Others,
25%
Total Portfolio estimated* at:
RMB 600 bn700bn
(US$ 88bn -102bn)
Leaders: BoC, CEXIM, ICBC
CDB, CCB, CMB, MB, SPDB, ABC
andSINOSURE
Past transactions with Chinese Financial Institutions
Borrower Arrangers/Buyers
Amount
(US$ M)
Pricing/Purpose/Remark
Toisa Limited Citigroup, CExim 127 10 year loan 3 x AHTS & 1 PSV
Angelicoussis
Group
DnB NOR, CExim 111 3 x Chinese Mini Capesize vessels
Diana Shipping DnB NOR, CExim 83
70% financing for 2 x 206,000 Dwt dry bulk
carriers (China Shipbuilding Trading Company
and Shanghai Jiangnan-Changxing
Shipbuilding)
Costamare DnB NOR, CExim -
3 x 9,000 teu newbuildings (Contract price
$95 million per unit - Shanghai Jiangnan)
Danaos
Citigroup, CExim,
Sinosure
203
3 x 8,530 teu newbuildings (Shanghai
Jiangnan Changxing Heavy Industry)
Cardiff Marine CDB , Sinosure 74
1 x VLCC newbuilding, (Shanghai Jiangnan
yard)
Safe Bulkers Citi, JBIC, NEXI 122 3 x 95,000 Dwt post-Panamax bulkers
19
20
Borrower Country Arrangers/Buyers Amount Purpose (where applicable orders in
CHINESE shipyards)
(US$ M)
NWS Transport HK BoC, Calyon, HSBC & SC 168 3 year club deal
OSG USA China EximBank 389 12 year loan for 5 x tankers
Noble Group HK Agricultural BoC, CDB &
other
Non-Chinese banks
2,400 Secured & Unsecured Revolving credit
facilities
Schulte Group Germany Bank of China 149 Credit Line for 9 x Tankers
STX Pan Ocean Korea Bank of China 180 3 x 176,000 Dwt Chinese Bulkers
FH Bertling Germany Bank of China,Sinosure China 40 2 x GC Newbuilding orders
NITC Iran CExim& other Chinese Banks 1,112 90% financing for 12 VLCCs
Bourbon France CExim 400 12 year loan (Sino-Pacific yard)
InterOrient Cyprus CExim, Sinosure 65 2 x Chinese built Mini Capes
Ethiopian Lines Ethiopia CExim, Sinosure 235 80% loan for 7 x MPP & 2 x Tankers
J. Lauritzen Denmark BNP Paribas, Societe Generale,
Bank of China, Sinosure
267 5 x MR Tankers and 2 x LNG tankers
ordered in China
Peter Dhle Germany China Development Bank 1,000 Cooperation framework agreement for
vessels to be built at Yangzijiang
Shipbuilding
Past transactions with Chinese Financial Institutions
Requirement of Asian/Australian lenders
21
When considering a European shipping client, it is very challenging
to assess counterparty risk, requiring therefore:
Best in Class Household name (note that big is not necessarily beautiful)
Easily credit scored
Local links: Shipyards, Charterers
Security: Time charter long enough to cover loan term
If successful
Non preferential terms and conditions
More expensive pricing
Significant slowdown & increased pressures (1)
22
Substantial inflationary pressures: 4.1% (yty in December)
Continuous wages increases / Labor force shortages
Strong bank lending in 2009-10 from the PRC Banks
and a rising money supply
Despite the visible drop in official figures
on net new loans from PRC Banks,
in reality lending has not moderated;
it was diverted into/through other channels
Source: National Bureau of Statistics of China (February 2012)
Chinese CPI Index (%)
2010-2012
23
Gradually tightened monetary policy to curb excessive lending
through
12 increases and one decrease of reserve requirements over
the past 24 months
Chinese Reserve Requirements Ratio
24
Gradually tightened monetary policy to curb excessive lending
through
5 increases of interest rates over the past fifteen months
Chinese Basic Interest Rate for 1-years Loan
25
Individual reserve requirement ratio
CBRC(China Banking Regulatory Commission) ended its decades-old practice
of announcing an overall annual system-wide credit lending quota and rather
than operating within the constraints of an annual, industry-wide quota,
Each bank will have its lending limits prescribed by regular reviews of its
individual reserve requirement ratio
Hedging against expected increases in bad loans
Losses from bank loans to Local Governments (LGIVs)
From US$ 220bn (FT) to US$ 400bn (WSJ) to US$ 600bn (The Economist)
26
Continuous volatility in Global, Chinese, and Shipping Markets
Closer examination of loan books
Re-evaluation of recent transactions across segments and asset classes
Continuous intervention from CBRC
Purchase of foreign exchange with RMB in order to hold down its value has as a
result the foreign exchange to end up in CBRCs reserves
Sterilisation of much of the newly-issued Rmb by selling special bills to banks
and requiring banks to hold more of their deposits on reserve with the central
bank in order to manage liquidity in the Chinese economy
Appreciation of Renminbi
Shortage of USD
Preference in Renminbi denominated loans
Downgrading of credit rating of Australia's 'Big Four' banks
Standard & Poor's put the credit rate to AA minus
(December, 2011)
Fitch ratings agency placed Australia's four major banks on
review for possible downgrade (January, 2012)
However:
Australia is a country with large import/export requirements
vital to their economy
This may provide the stimulus for their banks to finance
shipping
27
What do we do next?
28
Back to Reality
Chinese banks may be relevant, but lets not hold our breath in
the short term.
In the meantime Banks do not have capacity to fund the
industrys normal capital requirements.
They will not return in the near term. They have not left because of
the shipping downturn All the major shipping banks have a
proud history of supporting clients through the cycles.
They have left because of external pressures e.g. Eurozone
crisis; BIS II & BIS III increases in regulatory capital
requirements; continuing industrial world economic stagnation
If the Banks sell portfolios, it is likely to be to short term buyers
with vulture fund mentality, which is of no help to the shipping
industry. Banks are reluctant to accept the discounts that this
implies
What is happening now?
29
Back to Reality
This slide deliberately left blank
What if the funding deficit is not resolved?
30
Back to Reality
Capital adequacy pressures on banks may mean they cannot continue to
support owners through the cycle More distressed, unfunded assets will
increase and prolong downward pressure on ship values
Even top drawer shipping companies will struggle to renew and modernise
fleets
Future investment in modern, fuel efficient and environmentally improved
ships will be curtailed (There may be too many orders now, but this is part
of a normal cycle and will not last)
But there may be some benefits:
We may see greater transparency and more consolidation (but
consolidation also requires funding)
Small, inefficient owners with old ships may be forced out of business
Most marine transportation does not need shiny, expensive new ships.
Medium size owners with mid-aged units will be starved of vital loan capital
for fleet replenishment, forcing older, unsafe vessels to continue trading
beyond safe operating limits
What Can Be Done?
31
Back to the Future
Nature and Wall Street (Not a combination of words usually seen in the same
sentence) hate a vacuum - air, and money should flood in when demanded
At this low point in the cycle, lending and investment downside risk is limited,
upside is enhanced
Ship mortgages are tried and tested securities, enforceable quickly and easily
in most jurisdictions globally. Lenders have priority over most creditors.
Loan to value ratios are at historically conservative levels and are expected to
remain so. A safer profile than an outright equity investment
Loan pricing for solid, professional medium and large size shipping
companies is at record highs
Mortgaged backed ship loans provide a secure and predictable cash flow
and are self liquidating The exit route is written into each deal!
TIME FOR SOME NEWLENDING INSTITUTIONS
Ship financiers are real sector experts and over many decades have a
strong track record of profitability and excellent risk management
Eurofin Group of Companies
32
Janos F. Koenig, Managing Director
Thank You

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