Is the global shipping industry heading for a new crisis?

Transcription

1 Interview with Dagfinn Lunde Page 1 Is the global shipping industry heading for a new crisis Mr Dagfinn Lunde, Member of DVB s Board of Managing Directors responsible for Shipping Finance, was interviewed by Elisabeth Winter, Senior Vice President, Investor Relations. The United States, as well as some euro zone countries, are in the midst of a sovereign debt crisis; equity prices are falling and the global shipping industry seems to be heading for choppy waters once again. Are these signs of a new crisis phase, which will overflow cyclical developments in shipping, and which might see our markets pitching about for quite a long time And just how closely to the wind is DVB sailing Dagfinn Lunde is renowned as a global shipping expert, and is a sought-after conference speaker. His responsibilities on DVB s Board of Managing Directors include Shipping Finance he is familiar with the causes and impact of market turbulence like no one else. In the following interview, Mr Lunde gives us detailed background information on key issues. Dagfinn, what we are currently experiencing on international shipping markets is that just a temporary sluggishness, or a long-term disruption of global maritime shipping Which market segments are affected in particular I think it is not just a temporary sluggishness, as you call it. We consider it a long-term disruption of the international shipping markets. The development on the demand side is a bit slower than we originally expected, but yet there is healthy growth. But the problem in most market segments definitely is the significant oversupply of ships which is basically due to the fact that markets were high for a while. A lot of ships were ordered during that period and as a consequence many countries, especially Korea and China, extended their ship building capacity. Today, the shipbuilding capacity is about 2.5 times as big as the immediate replacement of tonnage. We expect China and Korea to continuously put ships into the market. With too many ships persistently coming into the different market segments, the prices for newbuildings will further decline. Today the oversupply is significant in the dry bulk market specifically with the bigger ships there are of course too many container vessels, and to a lesser extent, the crude oil tanker market is experiencing oversupply. So let me recap the present situation: the oversupply is killing the shipping markets.

2 Inter v ie w 2 Since 2007, you have been highlighting, time and again, the imbalances between high supply and weaker demand, particularly in the three sectors you have just been mentioning. How has this excess supply developed so far this year, what is your assessment of the trend during the remaining months of 2011 and into 2012 We expect to see a further downward trend in the dry bulk market, in some of the tanker markets and also in the container market for the next 1.5 years and we do not anticipate a turnaround before the end of Hopefully, there will be more balance between supply and demand in the markets by then. In which way are shipowners affected by this renewed sluggishness In particular, do you see signs of further restructurings, of consolidation or even of insolvencies amongst shipowners This is a very basic economic scheme: if there is an oversupply in your market segment, you will realise less income for your product and resulting from that decrease your enterprise will then be facing a liquidity problem. A lot of participants in the shipping markets are actually short of liquidity at this point To summarise: it is always the lack in time. We see banks giving instalments of liquidity which kills a company. and granting delayed repayments to their clients in order to be able to restructure loan Dagfinn Lunde, Member of DVB s facilities. That is how financial institutions Board of Managing Directors are accommodating to lower income levels. Let me emphasise that the restructuring of transactions will be a key topic for the shipowners and the respective banks for the rest of 2011 and well into Those shipowners who bought very expensive vessels at the high end of the market are clearly facing problems on the liquidity side at moment. Due to the lack of liquidity, some fire-sales and foreclosures might occur, especially if the bank involved does not extend the loan. To summarise: it is always the lack of liquidity which kills a company. At present there are very few signs of real consolidation in the shipping markets with one company buying another one. That doesn t seem to happen very much at the moment. The reason is of course that many shipping companies are preserving cash and they are extremely careful with their balance sheets thus, they don t dare to invest too much in other companies. Well, one form of consolidation which can presently be monitored is that some shipowners give up and sell their tonnage to a competitor. But indeed there have been a few insolvencies just recently. However, more ships have been sold on auction within the last six months either pushed by banks or initiated by the shipowners themselves in order to take or cut their losses and sometimes even for the purpose of restructuring loan engagements. What are the current developments in the shipping finance market who is still acting an important part Well, difficulties are emerging and like a déjà vu we are re-experiencing at the moment what happened before in times of trouble: bank competitors withdraw from the shipping finance market leaving only very few banks acting globally. Thus, we only have a few competitors internationally: a couple of Scandinavian banks, one or two German banks, a couple of French banks, and there are HSBC and Standard Chartered.

3 Inter v ie w 3 The export credit agencies (ECAs) have to some extent substituted those banks withdrawing from the finance market since They have become very active and supportive to all ship building projects in all countries, especially in China. The ECAs commitment is a very big change in the finance market. In the near future, capital markets will only serve to replace the decrease in financing volumes for really strong and big corporate names if at all. And in some cases we have recently even seen ship yards (and/or the bank financing the yard) giving credit to a shipping company in order to facilitate a specific ship delivery. Dagfinn, can you confirm that DVB continues to provide finance to its clients in maritime shipping, including the admittedly challenging sectors of container, bulk and crude oil shipping Oh yes of course, and I d like to emphasise that we will remain active in all shipping market segments very active! And, as DVB has continued access to retail liquidity through the German Cooperative Financial Services Network, we will pursue new business throughout By end of July 2011 we did US$1.8 billion in new business, including US$400 million in the crude oil and LNG tanker market and US$300 million each in the container vessel and bulk carrier segment. So just in those three sectors carrying a negative outlook we have achieved about US$1 billion in new business. We did that expecting these three market segments to even get worse (please compare Dry Bulk Index as shown below ). But with very good and solid reasons: the structure of each individual transaction is composed in such a way that we feel comfortable with the specific customer and his project. Basically we want to see three essential criteria to be met before we are granting a loan. Firstly, the project has to be supported by sufficient liquidity, as this is the key component for successfully managing the crisis. Secondly, the advance ratio has to be low with the client buying at the low end of the market with very low ship prices, which is the case at the moment. And thirdly, of course there needs to be employment for the ship. Either the client has his own cargo or he charters capacity out to good corporate names, so he gets the cash flow. Development of the Baltic Exchange Dry Index since 2007 Points 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Source: Clarksons Shipping Intelligence Network So, we basically analyse the market for the ship, the individual vessel and its potential, the customer and his situation etc. Our long-standing attitude and strategy is: if the shipowner failed in the worst case (which happens every now and again), we should always be able to take the specific ship from him and run it. Over time the asset will then earn back the loan. Thus, the earning power of every transaction lies within the individual market conditions for the ship. This alone generates income and brings the money back. But I also like to emphasise that in the present, difficult market situation we are not prepared to do pre-delivery financing and we are not supporting any speculative ordering!

4 Inter v ie w 4 What are the steps you take to steer DVB s Shipping Finance portfolio safely through these choppy waters When I joined DVB in 2000, Uwe Flach, our former Chairman of the Supervisory Board, said to me: Dagfinn, you have one task and that is to prevent us from falling into the big hole and lose all our money in a shipping crisis, like we have seen happening to shipping banks before! So, how are we precluding this loss scenario Firstly, we always have very experienced staff in the front line with profound knowledge in their submarkets. Our relationship managers know their customers, they know the trade, and are backed up by our first-class, award-winning proprietary Asset & Market Research. So DVB s whole Shipping Finance team is constantly learning about markets and assets. Secondly, we have diversified our risk exposure by pursuing a balanced structure in our Shipping Finance portfolio for many years. Our portfolio is diversified by multiple criteria and diverse categories such as types of assets, trades, regions and borrowers (please see pie chart Shipping Finance total lending volume as at 30 June 2011: 9.8 billion ). Diversification is really one of DVB s key competitive advantages. In order to further explain, let s focus on bulk carriers for a moment: this segment is subclassified in nine different size ranges from Minibulk (up to 14,999 dwt) to Very Large Capesize (>200,000 dwt). Thus, we have all sorts of carriers and customers, some with long-term charters and some with shortterm charters. So we always generate a balanced mix in our Shipping Finance portfolio. Shipping Finance portfolio by vessel type as of 30 June 2011 Tankers thereof: 12.4% Crude oil tankers 7.8% Product tankers 7.5% Chemical tankers 3.0% Gas tankers 30.7% Offshore 21.2% thereof: 14.4% Offshore support 6.8% Offshore drilling Bulk carriers 17.6% Container carriers 10.2% Container boxes 6.7% Cruise ships 5.8% Ferries, passenger vessels F(P)SO 2.3% 1.1% Others 4.4% Thirdly, we adapted a sectorisation structure, coming from a regional geographical model, before the crash in 2008, in order to adequately deal with the swift and everchanging shipping markets, to meet the specific needs of our customers and to enhance our own understanding of shipping clients and their business models. This was really a fortunate move, as today for example Evan Cohen, Head of DVB s Dry Bulk Group, located in Singapore, has got a grip on all issues concerning the dry bulk market and its participants. He knows, masters and steers all portfolio details but he doesn t have to take care of tankers, cruises and container ships on the Asian market at the same time (which proved to be

5 Inter v ie w 5 absolutely unmanageable). The same kind of sector-specific expertise and steering control is available in all our eight Shipping Finance sector groups. We are very pleased with our sector approach as otherwise we would have seen much bigger losses in our Shipping Finance portfolio, just like other banks did. And at last, we foster a consistent, forwardlooking risk management approach for the We are identifying any problems at purpose of closely monitoring our credit an early stage and we are able to find exposure. Through manifold stress testing, a solutions. Closely Monitored List and a Watch List we are identifying any problems at an early Dagfinn Lunde, Member of DVB s stage and we are able to find solutions. In Board of Managing Directors this context we merged our Shipping Asset Management team (SAM) and our Restructuring Unit Shipping (RUS) to form the new Restructuring & Asset Management (RAM) as of 1 June RAM is primarily responsible for managing and restructuring critical Shipping Finance exposures. Initially the idea behind SAM was to offer asset management services to other banks and institutions in times of crisis. But it did turn out that there was no real market for that, and the SAM team is now helping to resolve problematic loan cases. At the moment we control or own 15 vessels out of a portfolio of 1,600 ships you might assume that this is not a big number, but still you need a lot of administration and structures to take care of. So once the customer fails completely, which is currently the case in about 1% of our loan book, we take over full control of the vessel. But of course, this is the ultima ratio, and we don t want to sit on the ship for good. Our further modus operandi can be described as follows: we get the ship operating again, we take it through the auction, we find a new home for it and we ultimately get the money back into our books. Has the sectoral approach now comprising eight globally active teams within DVB s Shipping Finance business paid off Should we expect further team mergers As mentioned earlier, our sectoral market approach is fantastic in terms of risk handling and control, because our sector teams are on top of their market segment and they prevent a lot of losses in the first place. Our teams in-depth knowledge and expertise are unparalleled and even peerless in the shipping markets. Most of our competitors are very envious of this expertise. In terms of earnings potential, sectorisation causes two issues: on the one hand, we have increased our earnings power due to our boosted market and asset knowledge which triggered new business with interesting margins. The negative factor of sectorisation is, on the other hand, of course the grown cost base. But in DVB, we work hard on improving our services for our customers all the time. Thus, I constantly evaluate organisational structures and the teams composition. Effective 1 January 2011, we merged four of our originally ten sector groups into two which was mainly a cost exercise (please see chart comprising the present eight sectors on next page). If you contrast the cost increase with the enhanced earning power, the added value for our customers, the lower loss ratio and the resulting financial surplus for DVB become obvious.

6 Inter v ie w 6 Shipping Finance Specific sector expertise 1 Container Business Group (container vessels, container boxes, car carriers, reefers) 5 Dry Bulk Group (barges, dry cargo, combination and bulk carriers) 2 Cruise & Ferry Group (ferries, yachts, ocean/river cruise, RoRo s) 6 Floating Production Group (FPSO, FSO, FPU) 3 Crude Oil & LNG Tanker Group (crude oil and Liquefied Natural Gas tankers) 7 Offshore Drilling Group (jack-ups, drill ships, semi-subs) 4 Chemical, LPG and Product Tanker Group (chemical, specialist, Liquefied Petroleum Gas, product and asphalt/bitumen tankers) 8 Offshore Support Group (AHTS, PSV, subsea, diving and heavy lift vessels, others) Shipping Finance Specific sector expertise Slide 2 Thus, a final this is it is unrealistic. Let s not forget that the best possible service for our clients is on top of our list. Once the markets and our clients are moving and changing, we might want to come up with further appropriate sectoral adjustments. Currently, I am, for example, still evaluating if the mix of container vessels with container boxes is really efficient. For the moment though eight sectors work fine, but as I said the markets are changing so quickly, that the business potential might also alter again. Therefore, in order to keep on running and for the purpose of risk control we might undergo more structural alignments. We are and have to be very flexible. Last but not least looking ahead to the year-end 2011, do you expect net allowance for credit losses in the Shipping Finance portfolio to be in line with the previous year First and foremost I expect DVB s Shipping Finance business to be very profitable again as it has been all years. Our segment results at the end of June 2011 speak for themselves with the following key financial figures and indicators well above June 2010 levels, and let s also keep in mind that 2010 was a record year: net interest income (+13.3%), net fee and commission income (+25.4%), net income (+10.5%), consolidated income before taxes (+8.8%), return on equity (+6.9 percentage points) and finally our cost/income ratio fell by 1.0 percentage points. Of course you can t simply extrapolate these results to the end of 2011, but we see this positive income trend being sustained in July and August Looking forward into the rest of the year, I am optimistic that we will pursue interesting new business, but we will also watch our step according to our conservative credit policy. Thus, allowance for credit losses in Shipping Finance will approximately be on the previous year s level of about 25 million and about 50 million are calculated on DVB Group level. But please bear in mind that this money is not necessarily lost, as we are able to exercise a lot of reversals every year (at the end of 2010: additions for the Shipping Finance portfolio of 55.3 million, reversals of 30.8 million and direct write-offs 1.3 million resulted in net allowance for credit losses of 25.8 million). Well, in times of choppy waters, as you call the current market conditions, our competence and corporate strength as a dedicated niche player in international shipping finance becomes most obvious!! Thank you very much, Dagfinn.