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Shipping Finance in 2010
Peter IllingworthMD Crude and LNG Tankers, DVB Bank
Intertanko26 January 2010
Page 2
Introducing DVB
DVB Facts
Global Presence through 13 Offices
• European company listed on the Frankfurt Stock Exchange with market capitalisation of c. EUR 1.1 bn (Sept 2008)
• Rated A1/A for long term debt
• Majority owned by DZ Group, the largest co-operative banking group in Germany
• Net profit of EUR 72m in 1H08
• Return on Equity after taxes of 21.3%
• Cost / income ratio of 49.5%
• EUR 15bn loan book (June 2008)
• Over 500 clients, all active in the transport sector, worldwide
• Over 500 professionals, all specialising in transport finance
Bank Structure
Risk Distribution
Loan Participations
Research in Shipping, Aviation and Land Transport
Investment Management
Investment Banking
Structured Asset Finance
Shipping Aviation Land Transport
New York
LondonRotterdam
Piraeus
Singapore
Curacao
Bergen
HamburgFrankfurt
Oslo
TokyoMonacoZurich
Page 3
Shipping division – 10 global sectors
Container Box Group11
Cruise & Ferry Group22
Crude Oil & LNG Tanker Group33
Chemical & LPG Tanker Group44
Container Vessel Group55
Dry Bulk Group66
Floating Production Group77
Offshore Drilling Group88
Offshore Support Group99
Product Tanker Group1010
Page 4
Contents
Page 5
A Gathering Storm
0
50000
100000
150000
200000
250000
Date
2004‐03
2004‐06
2004‐09
2004‐12
2005‐03
2005‐06
2005‐09
2005‐12
2006‐03
2006‐06
2006‐09
2006‐12
2007‐03
2007‐06
2007‐09
2007‐12
2008‐03
2008‐06
2008‐09
2008‐12
2009‐03
2009‐06
2009‐09
2009‐12
VLCCs and the Credit Crunch
VLCC Average Earnings Modern (Selected Routes)
US Interest Rates rise from 1% to 5.35%
Huge expansion of US Consumer credit, emergence of Sub Prime Mortgage Securitisation
Higher default rates on US Mortgages –
Sub Prime Crisis
4/07New
Century
9/07Northern
Rock
8/08Freddie and
Fannie
3/08 Bear Stearns
9/08-11/08Banking Domino:
LehmannMerrills
AIGHBOSFortis
Washington MutualDexia
AIB & BoIHypo Real
RBSLloyds
WachoviaCitibank
Recession in US and Europe
Source: Clarksons
Page 6
The Credit Crunch
"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.”
John Maynard Keynes 1931
Page 7
Financial Turmoil – Banks Writedowns vs. Credit Raisings – end 2008
Source: Bloomberg –2008
Writedowns vs. Capital Raisings Q108 – 4Q08
*Table shows the 15 biggest losers
and selected others. Major Shipping
lenders are highlighted in blue
Rank Bank Loss Capital Raise Difference1 Wachovia Corporation 96.7 11 (85.7)2 Citigroup Inc 61 49 (12.0)3 Merrill Lynch 52.2 29.9 (22.3)4 Washington Mutual 45.6 12.1 (33.5)5 UBS 44.2 27.2 (17.0)6 HSBC 27.4 5.1 (22.3)7 Bank of America Corp 27.4 30.7 3.3 8 JP Morgan Chase 18.8 19.7 0.9 9 Morgan Stanley 15.7 14.6 (1.1)10 IKB 14.1 11.6 (2.5)11 Lehman Brothers 13.8 13.9 0.1 12 RBS 13.8 57.7 43.9 13 Credit Suisse 10.1 3 (7.1)14 Wells Fargo & Co 10 5.8 (4.2)15 Deutsche Bank 9.9 6 (3.9)…25 Fortis 9 22.1 13.1 27 Credit Agricole 8.4 8.1 (0.3)28 Barclays 7.5 29.2 21.7 30 HBOS Plc 6.6 27.3 20.7 32 Mizuho 6.5 0 (6.5)35 Societe Generale 6.3 9 2.7 37 Natexis 5.3 7.9 2.6 39 Goldman Sachs 4.9 10.6 5.7 42 West LB 4.4 6.9 2.5 44 BNP Paribas 3.7 0 (3.7)47 HSH Nordbank 3.4 1.7 (1.7)49 Bear Stearns 3.2 0 (3.2)52 DZ Bank 2.5 0 (2.5)54 Unicredit 2.4 0 (2.4)
Total: 638.2 498.4 (139.8)
Page 8
Total Cost of Credit Crunch?
Estimate is that USD10.5 Trillion has been used for bailouts worldwide.
In the UK, the number is GBP1.5 Trillion. Of this
GBP650bn Govt Bank Gtees
GBP400bn Govt lending and asset purchases
GBP200bn Liquidity support of Banks
GBP289bn Recapitalisation of Banks
Page 9
Lessons learned!
1)1) ASSET VALUES RESPOND TO THE SUPPLY OF MARKET LIQUIDITYASSET VALUES RESPOND TO THE SUPPLY OF MARKET LIQUIDITY
2)2) ASSET VALUES ARE SENSITIVE TO RISK APPETITE AND GEARINGASSET VALUES ARE SENSITIVE TO RISK APPETITE AND GEARING
3)3) BANKS ARE VULNERABLE DUE TO HIGH GEARING, LOW CASH AND BANKS ARE VULNERABLE DUE TO HIGH GEARING, LOW CASH AND MISMATCH FUNDINGMISMATCH FUNDING
4)4) NO MARKET CONFIDENCE NO INTERBANK MARKETNO MARKET CONFIDENCE NO INTERBANK MARKET
5)5) NO INTERBANK MARKET, NO MONEY FOR CLIENTSNO INTERBANK MARKET, NO MONEY FOR CLIENTS
6)6) DUE TO HIGH BANK LEVERAGE, EVERY USD1BN LOST FROM EQUITY IS DUE TO HIGH BANK LEVERAGE, EVERY USD1BN LOST FROM EQUITY IS USD20BN LESS LENDINGUSD20BN LESS LENDING
7)7) IN EXTREMIS, GOVERNMENTS WILL HELP OUT, BUT THERE ARE IN EXTREMIS, GOVERNMENTS WILL HELP OUT, BUT THERE ARE STRINGS ATTACHED, AND SHIPPING FINANCE ISNSTRINGS ATTACHED, AND SHIPPING FINANCE ISN’’T A PRIORITY.T A PRIORITY.
Next - four factors in the shipping finance market:Pricing, Players, Availability and Terms and Conditions
Page 10
Pricing:CDS levels pre- and post- Lehman collapse – we’re not out of the woods yet
What we pay drives what you pay!
Source: Bloomberg
Normal Level?
Page 11
Pricing: Corporate Investment Grade and Sub Investment Grade
Source: Dealogic
General Syndication market is starting to pick up, but only for top tier corporate names!
Pricing for top credits is coming down, caused by- banks’ flight to quality- competition from bonds- scarcity of deals
Pricing for second tier and below will remain high for time being
Note: chart reflects general global market; not limited to shipping
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
Average Investment Grade 47 73 116 143 183 240 242 145
Average B‐BB 214 227 238 256 296 328 344 336
‐
50
100
150
200
250
300
350
400
Margin in BP
Page 12
Availability: The Global Shipping Loan Market
Source Dealogic
Global Shipping Finance Volume $ (bn)
0
10
20
30
40
50
60
70
80
90
100
USD
Bn
Volume $ (bn) 9 11 13 15 21 15 10 20 16 12 19 31 65 76 94
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Page 13
0
5000
10000
15000
20000
25000
30000
2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4
Shipping Loans Closed USDmn
EMEA
Asia Pacific
Americas
Availability: Shipping Finance Volume 2008-9
Source: Dealogic
Page 14
Availability: Shipping Loans – Volumes and Nos
Closing Date $ (m) No. $ (m) No. $ (m) No. $ (m) No.
2008 Q1 5,876.55 21 2,110.28 21 7263.07 32 15,249.90 742008 Q2 3,296.25 11 7,079.47 34 17197.19 45 27,572.91 902008 Q3 3,994.32 15 5,783.34 34 17414.53 45 27,192.19 942008 Q4 3,774.75 9 3,631.58 10 4124.8 15 11,531.13 342009 Q1 1,289.60 7 1,647.15 10 9452.17 15 12,388.92 322009 Q2 1,200.35 3 1,143.60 11 1910.46 7 4,254.42 212009 Q3 1,550.16 5 4,535.59 18 1204.1 8 7,289.85 312009 Q4 1,260.00 3 2,049.55 16 1165.81 7 4,475.36 26
Americas Asia Pacific EMEA Total
Source: DealogicNot a lot of deals reported – ship financiers must be busy on workouts…
Page 15
Players:
The result is a shortage of money to fund the order book.
Increasing role for ECAs and other funds in ship exporting countries.
Page 16
Players:
Source: Marine Money
Page 17
Players: Consolidation of banks: impact for shipping
Page 18
Shipping market requires an increase of lending, but general bank market trend is to reduce the shipping exposure…
- Strategic Change - Banks that have formally exited shipping finance
- Internal Competition for Capital- Consolidation – duplication of or excessive exposure- Repair - Banks that are in a de-leveraging process (to repair the
balance sheet after general losses)- Shipping Market – banks which have large problem portfolios in
shipping
Players: Strategic reasons for reducing shipping book
Page 19
Terms: Typical Structure for Pre and Post Delivery
-
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
Steel Cutt
ing
KeelLa
ying
Laun
chDeli
very 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Period (Years)
USD
Straight Line LoanAnnuity Loan
Profile (15 Years)Term (10 Years)
Ballo
on
Predelivery Period
Postdelivery Period
Page 20
Terms: Typical Structure for Pre and Post Delivery – Credit Crunch – Smaller, Shorter and Later!
-
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
Steel Cutt
ing
KeelLa
ying
Laun
chDeli
very 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Period (Years)
USD
Straight Line LoanAnnuity Loan
Profile (15 Years)Term (5 Years)
Ballo
on
Predelivery Period
Postdelivery Period
Page 21
53
79
26
40
64
31
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
VLCC D/H 300K DWT 5 Year old Secondhand Prices $ Million
Suezmax D/H 150K DWT 5 Year Old Secondhand Prices
Aframax D/H 105K DWT 5 Year Old Secondhand Prices
Shipping Markets: As markets fall, bankers get nervous…
DVB Research, Ccmpass
-50%
Real and Nominal Values
Page 22
…and risk averse, reducing leverage.
37,000
33,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
VLCC Breakeven in $pd by Leverage of USD100mn
50% 55% 60% 65% 70%75% 80% 1 Year TC 3 Year TC
Page 23
The Capital Gap - Example: VLCC ordered in mid 2008
Contract Price: USD160mn
Deposit of Contract Signing: 10% = USD16mn
Expectation of Senior Debt: 70% = USD112mn
Scenario 1 – Finance committed in 2008 USD112mn
Value test at 70%. Value USD100mn. Actual availability USD70mn.
Additional Equity required: USD42mn (total USD92mn)
Scenario 2 – No Committed Finance – Likely terms today…
Max 60%. Availability USD60mn
Total Equity required: USD100mn
Crude Oil Tanker Market | 1. Rates, Value, Banks
Page 24
Liquidity is in most banks no longer the issue. Capital is.
- Under Basel 1, 8% capital required for assets (ie: loans) regardless of risk
- Basel II allocates capital according to risk
- Reduced shipping values, weaker counterparties and higher default will increase capital requirements (so will Basel III)
- That will also push up prices on new deals
Basel I, II and III
Page 25
Conclusions
Many (most?) banks got badly burned in the credit crunch
All banks ran out of cash/liquidity/funding
Bank funding cost went up and was transferred to loan pricing
In shipping, several key players are still out, and pricing remains high
Terms changed and particularly leverage was reduced
The bank crisis coincided with a ?USD500bn funding requirement
Much of this will have to come from equity
…and Basel 2 will add a bit of extra uncertainty!
Page 27
What is Subprime?
The US Mortgage Market is worth USD10 Trilllion
Of this USD7.2Trillion was issued in the capital markets as Mortgage Backed Securities.
12% of the Mortgage Market is classified as Subprime. A further 10% is Alt-A. That’s about USD2.2 Trillion in total. Most of this has been “Securitised”, ie: Pooled, Tranched and sold to the capital markets
Subprime borrowers are typically low credit scoring with high gearing and low incomes.
Market forces have made this market more and more aggressive in recent years:
Interest Only – 37% of new loans
No deposit – 38%
No proof of Income – 43%
ARM - Low introductory interest rate, “exploding” after 2 years – c. 80%
Page 28
Who would invest in that?
Mortgage Backed Security Tranches
% $
AAA 80% $800mnAA 5% $50mnA 6% $60mnBBB+ 2% $20mnBBB 1% $10mnBBB- 1% $10mnBB 1% $10mnEquity 4% $40mnTotal 100% $1000mn
Originator of Mortgages
Pool of Subprime Mortgages- $1bn, 5000 loans
BBB paper can be still further pooled and re rated up to AAA
Rating Agencies made most of this paper, or up to 95% of the value of the underlying property valuation appear very safe indeed, and it attracted a wide investor base.
“The empires of the future are the empires of the mind”
Winston Churchill.
