HSH may take decade to wind down faulty shipping loans

It will presumably take a decade before the German states of Schleswig-Holstein and Hamburg are finished paying the shipping loans which they took over in relation to the bailout of HSH Nordbank.

Photo: HSH Nordbank

HSH Nordbank AG's state owners say the wind-down of EUR 5 billion (USD 5.5 billion) of troubled shipping loans, taken over as part of a deal to restructure the Hamburg lender, could take at least a decade as an abundance of distressed assets weighs on sale prices.

The bad bank created by the German states of Schleswig-Holstein and Hamburg will publish terms on the loans, granted during the pre-crisis shipping boom, in the third or fourth quarter of 2016, Philipp Nimmermann, deputy finance minister of the state of Schleswig-Holstein, said in an interview. It plans to increase the number of employees overseeing the process to as many as 50 by the end of the year from about 10 now, he said.

Overcapacity in the shipping industry is exacerbating the slump that drove HSH to tap state aid in the aftermath of the crisis, sparking an almost three-year review by the European Union that ended with the bank's owners agreeing to set up the bad bank and sell a restructured HSH by 2018. With no end to the downturn in container and bulk shipping in sight, the EU has set the price for the loan package on 256 vessels at EUR 2.4 billion, about half the book value on the bank's accounts.

Entry Price

"We don't know how the market will develop," said Nimmermann, who previously worked as chief economist at BHF Bank AG in Frankfurt. "I don't see why we should sell below our entry price of EUR 2.4 billion."

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The EU has also ordered HSH to sell an additional EUR 3.2 billion in soured loans to the shipping, real estate and aviation industries directly on the market by mid-2017 as part of the move to shift EUR 8.2 billion of distressed assets off its balance sheet.

Under the stewardship of new co-head Ulrike Helfer, a former DVB Bank shipping banker who joined on Monday, the bad bank will rely on HSH's industry expertise to manage the loans until it selects an investment bank to advise on the sales, said Nimmermann, declining to provide a timeline.

The special entity has all the credit-restructuring tools of a professional bank, allowing for prolongation and deferral of payments if discounts demanded by the market are deemed too high, Nimmermann said.

Assume Ownership

"If the market for shipping loans declines, we'll take this into account and if it's more efficient for us to keep a loan running by way of restructuring it, then that's what we'll do," he said. In the case of insolvencies, the states may even assume ownership of vessels for a transition period, he said.

German lenders hold about one-quarter of global shipping loans, measuring about EUR 400 billion. Under pressure to unwind legacy assets that went sour after the financial crisis, banks including Norddeutsche Landesbank and Commerzbank AG are also endeavoring to shrink their loan books, increasing the supply pool.

Further complicating shipping-loan sales is the trend by distressed-asset investors to turn their attention to other crisis-hit markets in the hunt for yield, according to Michail Zekyrgias, managing director of Global Credit & Special Situations at Bank of America Merrill Lynch.

"It's not only shipping that is at a certain point in the cycle, but the whole commodities sector, oil and gas, the offshore sector, the entire US high-yield market," Zekyrgias said. "There are fewer players to buy those shipping loans now than was the case two or three years ago."

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