Ship finance would 'take years' to return to its peak
The industry will have to wait for several years before the ship finance market returns to its peak, a senior official of DVB Bank, specialist in the international transport finance business, has warned.
The situation in the Middle East is far better than what's prevailing in Europe, even as banks today are expressing more interest on small containers, the official said.
Dagfinn Lunde, member of the board of managing directors for DVB Bank also told Emirates Business that the offshore, drilling and the service markets are showing better prospects for investment.
Despite a drop in 2009 revenues, the bank is optimistic about its business this year, he said.
The Germany-based bank offers integrated financing solutions and advisory services to shipping, aviation and land transport sectors. DVB Bank closed two debt re-financing deals in December, one of them for a 2008-vintage A320-200 for Jazeera Airways.
"We normally have at least one or two deals every week. The bank's shipping portfolio in 2009 was around $14 billion (Dh51.42bn). I don't expect it to grow much this year.
"New business was basically replacing the real payments and pre-payments we got on old loans. Our portfolio actually went slightly down, although at a very small percentage. But we plan to increase it a bit this year," said Lunde.
DVB Bank reported its nine-month results ending September 2009 with consolidated net income before taxes of €77.9 million (Dh391.5m) despite a challenging international Transport Finance environment.
The bank had to recognise €17.2m in allowance for credit losses during the period.
About the competitiveness in the market and how thebank handled it, he said: "There is less competition now. The difference today is that the syndicated bank market [ship financing] has disappeared. So what banks do today is either club it or take it on their books.
"We haven't changed our market strategies. We were successful before and we'll continue to be successful. What has happened is that the price of the ships had dropped so much in 2009 that the advance ratio on the level of financing per ship had also gone down. Typically, the finance has gone down by about 60 to 70 per cent [based on the lower value]. The pricing of ships has declined anywhere between 10 per cent and 75 per cent. A 10-year-old ship, which was worth $28m two years ago, is worth just $7 million today," said Lunde.
According to him, most of the problems of the banks engaged in ship financing are linked to complictions in credit markets rather than troubles in the shipping sector.
"I didn't see much of a difference in the situation within the Middle East compared to the rest of the world. The activity has been quite steady and the local banks are still doing business as usual. In the Far East too, it has been very steady. The most dramatic development on the finance market, however, was in Europe between England and Germany," said Lunde and added that the situation as far as the ship finance market is concerned was extremely difficult in 2009.
"By the end of 2008, the industry experienced a crash in the bulk market. Then there was the banking problem. Many banks started facing problems starting from the last quarter of 2008 and the first quarter of 2009. Many big banks such as HSH Nordbank and the Royal Bank of Scotland faced banking or finance problems, which made them stop business in general. So, long before shipping started to influence their portfolio, they had problems in their own books and hence they stopped lending," said Lunde.
A severe oversupply of new ships into the market further added to the crisis.
"There were many deliveries of new ships and it was difficult to cover them all. It was a combination of commercial banks and export credit institutions that helped the sale of the ships from the yards and sometimes, even banks supporting the yards also helped to cover the gap. Also the capital market was quite active, so a lot of people took up bonds and took over their financing needs," he added.
Currently, the situation as far as shipping finance is concerned is pretty poor, he said.
"There aren't as many banks coming to shipping these days. There are a few banks that are coming back and looking at corporate credit, while there are some looking at the energy side. This should help, particularly the offshore market, where there is more capacity coming back in the American market.
"Today, I would be more optimistic about the offshore market. The offshore, drilling and the service markets are places where there are best prospects right now. The oil companies are starting to explore and are developing again. When the oil prices dropped down to $47 last summer a lot of them pulled back. At the moment they are coming back and investing again," said Lunde.
Lending will continue to remain weak, he said. "I don't think it will get back to a situation where it was for a very long time. Because it was primarily the finance market that created a problem for the banks. However, at the moment it is the shipping loan portfolio, that is creating problems for some of the banks. It will take a long time before we will have the same capacity in the ship finance market. I don't think for many years we will see the capacity as we saw in 2007 and 2008," said Lunde.
Meanwhile, there has been a huge commitment of the Export Credit Agencies (ECA). "Most of the countries such as Norway, Finland, Denmark, Germany, France, Italy, Korea, Japan China are very supportive. All of them got more resources from their governments to support the exports industry. That immensely benefitted the shipping industry," he said.
An earlier statement by DVB Bank revealed that ECA funding for 2009 reached a record $21bn.
The industry itself is going through a restructuring phase, he said. "Restructuring within the market has been depending on the segment of the market. If you look at the bulk market, it was the worst-hit sector in the beginning of 2009, but recovered fast. In 2009, what was really hitting the banks were the container ships sector as so many ships had to be laid up as the market was very low," said Lunde.
However, banks could also use this opportunity and invest in smaller container ships, said Lunde.
"Is it a good time to invest in container ships. The issue for me is that there is an enormous oversupply in general in the market, particularly in medium-sized containers. However, if you look at it as an investment opportunity, smaller containers have better prospects. As more and more bigger ships [upto 14,000 TEUs] enter the market, there is a greater requirement for local distribution."
According to him, while there is good demand for small container ships, the supply side is also matching up with it. More old ships are going out of the market, combined with very small order book.
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