The Vassilios Tsitsiringos Report - The Secrets about German Banks and Their Shipping Portfolios

Let me begin by mentioning German bank restructuring and HSH Nor Banks move to wind

up and phase out some $8 Billion of shipping loans from an initial $11 Billion portfolio. These were characterized as its bad bank grouping of loans. The initial $11 Billion represented about a quarter of its total ship finance book. The bank is required to cut by 50% its overall lending volume across all assets and divisions. Essentially those owners with ships that are in the wind up pool will not be able to obtain from Nor Bank any future funding.Essentially the bank is culling its client portfolio.A lot of the shipping loans given by the German banks that have been restructured with deferred payments come due either at the end of 2010 or at the end of 2011.Given that 2011 is likely to be a very challenging year given the size of the delivery schedule particularly for dry bulk (and even if that schedule is cut by 50% due to cancellations, slippage, scrappings etc) the tonnage will far exceed demand given that global GDP and global trade growth will likely fall in 2011 before picking up again in 2012. The outcome is likely to be acceleration in vessel foreclosures over the next 2 years. Likely a lot of off-market private deals will be done so as not to upset the open S&P market.

Unresolved for the German shipowning and KG groups is the $50 Billion dollar new building order book and the fact that both the ship owners and the KG's lack the equity and the time charter commitments to cover costs. Price Waterhouse estimate that 55% of German owners require extra liquidity and that owners intending to sell vessels next year has risen to 26% versus 18% in 2009. The combination of weaker markets, higher deliveries and the need to sell will impact negatively on prices. These factors could make 2011 a bottom feeding year to reposition and take advantage of the progressive pick-up in global trade from 2012 onwards (barring any black swans).

Thinking there is probably room to set up a investment fund to bridge the equity gap for owners through second mortgages with an interest premium and prospectively some level of carried interest in the vessel owning company such that an up tick in the market in rates and values would flow back to the investment fund. One would only fund vessels that have committed time charters with A rated charterers.

The new Basel III rules are going to be a significant problem for the German Landesbanken sector. Although the basic change is that Tier 1 capital must now go to 7% of a bank's Risk Weighted Assets (RWA) the iceberg in the rules is the items that now have to be subtracted from Tier 1 such as goodwill, tax credits, which will be capped, minority investments, retained earnings, government loans, etc. The objective is that equity has to be liquid to absorb losses in a crisis. The net effect of subtracting items that were formerly included as equity on the balance sheet effectively moves Tier 1 capital to the 10%+ level. The regulators as well as the banks are sufficiently concerned about the removal of these items from equity that they will be phased-in starting 2014 over 4 years. The deductions issue is going to be a mine field and will substantially impact the banks and their lending ability.

The German government is going to use the Basel III rules to pressure and more-or-less force the Landesbanken sector to restructure and consolidate. This is why HSH Nor Bank is deleveraging its balance sheet. The government is initially seeking to force a sale of West LB as a trigger. The regional government owners of West LB are resisting and are looking for a consolidation solution that could bring in Helaba plus Nord LB rather than a sale to outside investors. The issue is quite political.

The other issue for the banks as part of Basel III is how they deal with their Risk Weighted Assets as the riskier assets will require a higher numerator than safer assets. Initially RWA's should increase as more assets and activities are deemed riskier which link back into the Tier 1 capital requirement provisions. The net effect of this will be that banks will have less flexibility to fiddle their balance sheets. On the RWA issue exposures to large counter parties, for example, will have higher risk weightings and there will be a risk charge for certain trading book credits. Also so called market risk becomes more expensive from a capital standpoint as do mark-to-market losses. These changes will affect banks around the world differently. The European banks have only a fifth of the market risk related capital that US banks hold according to a recent Credit Suisse study. Banks will try to mitigate rising RWA by moving for example derivatives to a centralized clearing facility as this will reduce the amount of capital required as well as off-loading risky assets. No doubt banks will seek to reduce the denominator by playing with the definitions of risk to try to put themselves in their best position.

In short the German shipping banks will be looking to offload deals in 2011.

The Vassilios Tsitsiringos Report - The Secrets about German Banks and Their Shipping Portfolios

By: Vassilios Tsitsiringos

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