A case study on shipfinance in the context of trust

A recent article took up the point, what debt-for-equity swap in shipping assets would trigger, other than buying time, unless there would be a change in the business model.

In my articles I usually try to avoid the bad “c-word” since I am of the opinion that things must go on and a line has to be drawn.

Nevertheless, it is once in a while useful to look back in order to learn from history and it is worth to look sideways to learn from other industries.

So, in this context it’s worth noting that despite the wide influence on just about everybody’s life and the positive contribution to welfare and the ability to participate in never-before seen consumption through affordable products, shipping has a fundamental lobbying problem. I am not here to recount the numbers the big German banks and shipowners owe each other, but the opacity the industry creates around itself is significant!

Case Study:

Recent press articles have bashed a big Hamburg shipowner and its shipfinance bank for reducing the total loans by a significant number of more than €500 Mio. Now the press has reported that the individual is “filthily rich” and has a luxurious yacht. Apprently he was a member of the advisory board for more than 10 years of the bank in question who finance his vessels and was not taken into liability in return to the waiver. The bank is likely to be wound down according to an EU directive and leaves the shareholder (two federal states) pay for the mess, which subsequently means the tax payers.

Putting things into perspective of transparency and TRUST:

1.    As a matter of fact the company owns some 50+ vessels, whereas a large share will have their loan principals well exceeding resale market value, as ordered at high prices before the US subprime difficulties kicked in.

Throughout the fleet I would have thought the shipfinance debt write-off is more a drip on the hot stone rather than a real relief for the single purpose company.

The reason for the public (“ordinary taxpayer”) is however not clear, he asks himself was this really the best scenario? He only sees yet another big number and thinks: “Hey the politicians could have messed up another Elbpilharmonie for that money!”

The interests (the shipowner and shipfinance bank) instead should bring more transparency into their deal and put an emphasis on the condition of the waiver: among others, most noteworthy is that all earnings are going directly into the bank’s account (pay as you earn) until a certain threshold.

2.    The question is if the shipowner himself had (at least a passive) influence on decisions within the bank as a member of the advisory board during initiation phase of newbuilding vessels.

It appears to the public that the Hamburg businessmen are known for their ability to cross-connect their business interests and influence wherever they can. Still today this bank’s advisory board’s members include two business individuals related to shipowning (which by the way at least at first sight appears a common practice in banking as the second largest bank involved in shipping has a similar conflict of interest constellation).

Anyway, his influence will have had a positive effect on the ability to obtain loans and subsequently develop a business model to acquire shipbuilding slots.

But he for himself will have used his position to convince parties not to demand corporate or even personal guarantees but leave the guarantee alone on the ship’s value.

It will be interesting to see how the story develops and if similar creative finance approaches have been gone for at the time like it appears to be with the fallen heavylift operator from Bremen and if hidden “kick-back” strategies have influenced the capital structure upon initiation.

That would undoubtly blown up loans and exposure for the banks and diluted shares of equity providers:  only for the benefit of the shipowner?

Fatal for the bank in hindsight as it puts the bank into the driving seat to sort things out.

Good for himself personally and for the employees of the company.

3.    The bank (owned by two federal states) was in need of developing business and had positioned itself with little diversification as one of the leading shipping banks. Here, the politicians have to be asked how they can empower a bank with relatively little control mechanisms (or actually infested control mechanisms) to accumulate so much debt in such a historically volatile market.

4.    It is beyond the understanding of ordinary tax payers how debt can be accumulated on the account of others and still the responsible individuals are in the top league of wealth.

This case study shows that lack of transparency has resulted in lack of TRUST and adds to cause a big lobby problem. It has the potential of backfire for the whole (German) shipowning industry.

The backfire has already started: regulators have completely revised the conditions of equity placement for Europe and created AIFM rules. It adds through detailed risk analyses additional security for investors but also blow up requirements for describing all aspects of an investment. Whilst this is positive initself, it heightens the boundary of initiating a project and will have the effect that only (seemingly) good projects enter the market. But it also will make the whole equity placement even more pricy in their setup fees and might scare away the (usual in the past) private investor who wishes to diversify their investment portfolio.

A further concern for a backfire might be the tonnage tax system. Some politicians put a lot of emphasis here on the underlying terms of “granting” the tonnage tax (for example to have a certain amount of vessels under German flag). Without going into detail, they neither see the competitive necessity in order for the shipowners to survive within a highly competitive maritime economy where all other big shipowning nations have similar tax systems. Nor do they see (or in general are aware of) the added value the shipowning industry is bringing into the chain of local supply economy.

The concern is, if the shipping industry is keeping themselves as opaque as it is right now, despite its deep integration into just anybody’s life, there might be the consideration of abandonment “conveniences” the shipowners seemingly have.

It is advisable that associations within the maritime industry become wearier of the public appearance of their members and would steer the public appearance on the right course.