German Shipping Funds Die as Investors See Losses Rise: Freight
24 April, 2012
When Germany’s Container Flotten- Fonds filed for insolvency last year, more than 1,000 investors who had been promised annual returns of as much as 15 percent instead lost 37.5 million euros ($49 million).
The collapse of the fund, which was raised in 2005 and used a mix of private capital and bank loans to finance four vessels, is just one of at least 10 shipping funds that have become insolvent in Germany in the past two years, according to the Association of Non-Tradable Closed-End Funds, as the maritime industry was beset by rising fuel prices, excess capacity and falling freight rates.
Shipping funds in Germany, with a total volume of 51.5 billion euros and almost 450,000 investors, are exempt from corporate tax and thus can provide cheaper financing than banks, according to the VGF fund association. They are fated to disappear as a major financing source for ships, said Christian Nieswandt, head of domestic shipping clients at HSH Nordbank AG.
“The shipping fund market is more or less dead for years to come,” Nieswandt said in an interview in Hamburg on April 18. “There will absolutely be further insolvencies.”
Along with tighter lending criteria and higher interest rates at banks, the rising insolvencies may make it harder for shipping companies to secure financing and probably will lead to more loan losses at German banks that lent to the funds.
Thirteen of the world’s 19 largest shipping banks stopped new loans to the industry amid an “extreme” vessel surplus that cut cash flows and led to vessel seizures, Dagfinn Lunde, a member of DVB Bank SE’s managing board, said on March 9. Some lenders have also stopped promoting shipping funds to clients.
Investments in new German shipping funds slumped 49 percent to 506 million euros last year, from 997 million euros in 2010, according to the VGF. That compares with 3.1 billion euros and 2.5 billion euros in 2007 and 2008, respectively.
Many shipping companies in Germany can’t service their debt, according to the VDR German shipowners’ association. All the largest container lines, including A.P. Moeller-Maersk A/S (MAERSKB) and Hapag-Lloyd AG, posted losses last year because of high fuel costs, oversupply and a price war on Europe-Asia routes.
Banks are also getting hurt. Commerzbank AG (CBK), the world’s third-largest maritime lender, may see shipping loan losses of 2.1 percent of such lending this year, according to Morgan Stanley. Norddeutsche Landesbank Girozentrale, the world’s fifth-largest shipping lender, Deutsche Bank AG (DBK), the No. 20, and KfW Group are other German banks involved in lending to the maritime industry. Hamburg-based HSH Nordbank, a regional state- owned German lender, is the world’s largest shipping bank.
Shipping funds combine the investment capital of potentially thousands of private investors, according to the VGF. Unlike open funds or shares, an investment in a closed shipping fund is normally time-limited and involves a specific object, such as a container ship or a chemical tanker.
The average investment volume in German closed funds, which also put money in real estate, airplanes and infrastructure, was 26,000 euros in 2008, according to the VGF. Investors’ returns are paid out annually for as long as the fund operates. The German funds pay no corporate tax, only a lower so-called tonnage tax.
Many of the funds financed their ship purchases with a majority of borrowed money from banks rather than just using cash from investors, leaving them vulnerable when lenders raised interest rates, Christian Luber, a Munich-based lawyer at CLLB, which represents investors in failed German shipping funds, said in a telephone interview.
“It is like when you buy a house: the less equity you put in, the more interest you have to pay,” Luber said, adding that some shipping funds financed their vessels with 30 percent of investors’ money and the rest with credit from banks.
Some funds have been unable to service their debt “for years” and their ships may have to be sold, Christian Murach, transportation finance head at KfW IPEX-Bank, said in an interview on April 16. Such auctions may lead shipping banks to write down the value of their portfolios if prices turn out to be low, he said, adding that bank loan losses may rise.
As with the housing crisis in the U.S., many ships were bought at the price peak, in 2007. After asset values slumped, the size of the loan in relation to the value of the ship used as collateral for the funding from banks rose.
The contract price for a new container ship able to carry 8,500 standard containers dropped 31 percent to 92.5 million euros in 2011, from a peak of 134 million euros in 2007, according to Morgan Stanley.