Ships, Banks and the Credit Crunch

Transcription

1 Ships, Banks and the Credit Crunch Intertanko Intercargo 25th June 2008 Contents 1. DVB A brief introduction 2. The Credit Crunch a digression 3. The Ship Finance Market 4. Vessel Values - Optimism and Experience 5. Terms and Conditions in a lender s market 6. The strange business of LIBOR 7. Conclusions Page 2 1

2 DVB Bank Foundation of Deutsche Verkehrs-Kredit Bank (DVKB) in Berlin DVKB shares (24.9%) introduced to official trading on the FSE and BSE; Deutsche Bundesbahn retains 75.1% DG BANK takes a majority share of 50.1% in Deutsche Verkehrs-Bank Strategy of the bank focuses on the transportation industry / Internationalisation through the acquisition of the Global Aviation and Shipping Finance division of the Long-Term Credit Bank of Japan Acquisition and integration of Nedship Bank N.V., closing of all German branches and establishment of four Transport Finance divisions Change of corporate name: DVB Bank AG Page 3 From regional to global coverage Deutsche VerkehrsBank AG 1997 DVB Bank - Group since 2003 America New York Curaçao ao Europe Bergen Hamburg London Rotterdam Frankfurt Piraeus Asia/Pacific Tokyo Hong Kong Singapore Frankfurt Hamburg Hannover Münster Köln Essen Kassel Mainz Nürnberg Saarbrücken Berlin Rostock Magdeburg Leipzig Dresden Erfurt München Stuttgart Karlsruhe Basel (Rep. office) Page 4 2

3 We are the unique asset expert in Transport Finance Shipping Aviation Land Transport Structured Asset Financing Equity Sourcing and Investments Risk Distribution Advisory Services Loan Participations Asset & Market Research DVB at a glance 1. Key facts Page 5 Shipping division 10 global sectors Three existing and seven new sectors 1 Container Box Group 6 Dry Bulk Group 2 Cruise & Ferry Group 7 Floating Production Group 3 Crude Oil & LNG Tanker Group 8 Offshore Drilling Group 4 Chemical & LPG Tanker Group 9 Offshore Support Group 5 Container Vessel Group 10 Product Tanker Group DVB at a glance 1. Key facts Page 6 3

4 Mission Statement We are the leading specialist in international transport finance Page 7 The Credit Crunch Page 8 4

5 What is Subprime? The US Mortgage Market is worth USD10 Trilllion Of this USD7.2Trillion has been 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 9 Who would invest in that? Originator of Mortgages The empires of the future are the empires of the mind Pool of Subprime Mortgages - $1bn, 5000 loans Winston Churchill. Mortgage Backed Security Tranches AAA AA A BBB+ BBB BBB- BB Equity Total % 80% 5% 6% 2% 1% 1% 1% 4% 100% $ $800mn $50mn $60mn $20mn $10mn $10mn $10mn $40mn $1000mn 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. Page 10 5

6 Housing decline An accident waiting to happen? US Real House Price Index since 1890 Source: Irrational Exuberance (2 nd Edition, Robert Shiller) Event, Venue, Date 2008 Page 11 Housing decline US House Price Movements since 1988 Event, Venue, Date 2008 Page 12 6

7 Subprime Lending - Subprime delinquency as % of total subprime loans Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Event, Venue, Date 2008 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Source: Bloomberg - May 2008 Sep-07 Page 13 Financial Turmoil The Decline of Securitised Products ABX Index: Implied Value of Asset-backed Bonds Issued July - 06 ABX AAA ABX AA ABX A ABX BBB ABX BBB Its got worse: AAA 72.5c AA 22.48c A 9.47c BBB 5.53c BBB- 5.40c 7/19/06 8/2/06 8/16/06 8/30/06 9/13/06 9/27/06 10/11/06 10/25/06 11/8/06 11/22/06 12/6/06 12/20/06 1/3/07 1/17/07 1/31/07 2/14/07 2/28/07 3/14/07 3/28/07 4/11/07 4/25/07 5/9/07 5/23/07 6/6/07 6/20/07 7/4/07 7/18/07 8/1/07 8/15/07 8/29/07 9/12/07 9/26/07 10/10/07 10/24/07 0 Source: ABX, DVB Analysis May 2008 Event, Venue, Date 2008 Page 14 7

8 Financial Turmoil Halfway through? UBS stated in a report earlier this year that US$ 600bn were to be expected in global writedowns. The worst projection is USD1.3 Trillion Writedowns vs. Capital Raisings Q307 2Q08 Total 2Q 08 1Q08 4Q07 3Q07 Prior Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital Americas Europe Asia Worldwide Source: Bloomberg May 2008 Event, Venue, Date 2008 Page 15 Financial Turmoil Banks Writedowns vs. Credit Raisings Writedowns vs. Capital Raisings Q307 2Q08* Rank Bank Loss Capital Raise Difference Market Cap 1 Citigroup UBS (11.3) Merrill Lynch (15.6) Bank of America Royal Bank of Scotland Morgan Stanley (7.0) HSBC (10.5) JPMorgan Chase (3.8) Credit Suisse (8.0) IKB Deutsche Washington Mutual Deutsche Bank (4.5) Wachovia Credit Agricole (6.4) HBOS Plc Mizuho Financial Group (5.6) Societe Generale Lehman Brothers Barclays Bear Stearns (3.2) West LB n/a 35 Goldman Sachs 3 0 (3.0) ABN Amro (2.4) Fortis (2.3) HSH Nordbank (2.3) n/a 43 Natixis (1.1) BNP Paribas (1.6) Unicredit (1.5) DZ Bank (1.5) n/a Total: (9.0) Event, Venue, Date 2008 *Table shows the 15 biggest losers and selected others. Major Shipping lenders are highlighted in blue Source: Bloomberg May 2008 Page 16 8

9 Financial Turmoil Writedowns vs. Credit Raisings Writedowns vs. Capital Raisings Q307 2Q08 US$bn % Writedowns/Losses Capital Raisings Citigroup UBS Merrill Lynch HSBC IKB Deutsche RBS Bank of America Event, Venue, Date 2008 Morgan Stanley JPMorgan Chase Credit Suisse Washington Mutual Credit Agricole Lehman Brothers Deutsche Bank HBOS Plc Fortis Lehman Brothers Barclays Societe Generale Mizuho West LB Goldman Sachs Natixis Bear Stearns HSH Nordbank BNP Paribas ABN Amro DZ Bank Unicredit Source: Bloomberg May 2008 Page 17 Pricing - US Commercial Mortgage Backed Securities when prices fall, yields rise Page 18 9

10 Bank Pricing (Credit Default Swaps) Page 19 Airline Pricing Page 20 10

11 Shipping Finance Page 21 Financial Turmoil Impact on Shipping Banks Writedowns vs. Capital Raisings Q307 2Q08* US$bn Writedowns/Losses Capital Raisings RBS HSBC JPMorgan Chase Deutsche Bank Credit Agricole HBOS Plc Mizuho Societe Generale Barclays West LB ABN Amro Fortis HSH Nordbank Natixis BNP Paribas Source: Bloomberg May 2008 Event, Venue, Date 2008 Page 22 11

12 Bank Portfolios of the top 20 shipping lenders directly impacted by sub prime. HSH Nordbank Royal Bank of Scotland Nordea KFW IPEX- Bank Deutsche Schiffsbank DnB Nor Caylon Lloyds TSB Mizuho Bank of Scotland DVB Commerzbank Danish Ship Finance SMBC Fortis Bremer Landesbank HVB ABN Amro Danske Bank BNP Paribas Page 23 The Implications in the Syndicated Debt Market Syndicated Shipping Loans: Total Volume and Number of Deals Syndicated Shipping Loans Q1 2004:Q USD mln Volumes $mln Number Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 Sudden drop off in syndication business banks liquidity squeeze, pricing confusion. Page 24 12

13 Ship Finance Price Development Reported Deals (to May 2008) Margin in BP Borrower s Objectives, Lender s Objectives Flash Points are related to RoE, Cash and Covenant Controls, and Recourse 2007 Source Dealogic Page 25 Borrower: High Leverage Back ended Repayment (Profile) Long Term Low Price Freedom to pay dividends Free movement of cash Limited Recourse (walk away option) Payment Default only High Certainty of drawdown Underwritten or Bought deal Lender: Low Leverage Rapid repayment Short Term High Price/Market Flex Dividend restrictions Ring fenced cash Full Recourse Financial and VMC Covenant Triggers Conditionality on drawdown (CPs) Book Building or Club Deal Page 26 13

14 Libor and the Cost of Debt 6 Month USD Libor 18% 16% 14% 12% Cheap in historical terms, but margins are up by bp 10% 8% 6% 4% 2% 0% Page 27 The strange story of LIBOR British Banker s Association sets interbank interest rates for 10 currencies. Quotes are provided by 16 banks based on their own cost of funds and the average of 8 median quotes is used. The question is are they telling the truth? The suspicion is that the panel is keeping rates artificially low: to suggest they are less desperate for liquidity than they are to reduce their borrowing costs on existing LIBOR based deals BBA is investigated, but many banks are still unsatisfied by its remedies In the meantime non bank borrowers are getting a great deal on short term money Page 28 14

15 Optimism or Experience? and where will the money come from? Page 29 Shipping Finance s biggest challenge: Optimism or Experience? VLCC Resale Project Cost: USD180mn Debt Cost: 4.50% % = 5.75% Opex USD10,000 Employment: Spot or 1 Yr TC Page 30 15

16 Interactive 80,000 70,000 USD per day 60,000 50,000 40,000 30,000 1 year VLCC Time charter rates (Clarksons). Range of possible TC Rate Projections 20,000 10,000 VLCC I year TC Average Page 31 Interactive VLCC 5 year old Value VLCC 5 year old Value 100 USD Mn Range of 5 yr Loan Oustandings Page 32 16

17 Interactive Project Resale VLCC Resale Project Purchase Price 180,000,000 IRR (Base Case) 14% Debt 126,000,000 % Finance 70% Opex $ 10,000 Swap 4.50% Margin 1.25% Day Rates (USD) Interest Cost 5.75% Historic Average 1 yr TC $ 30,233 Current 1 yr TC Rate $ 80,000 Repayment Profile (years) Spot YTD $ 102,325 Book Value Year 5 144,000,000 Spot Rate $ 57,374 Balloon o/s Year 5 78,000,000 Adjusted Repayments Breakeven Base Case Low Case Repayment as % Yr 1 14,000,000 68,205 80,000 45, % Yr 2 12,000,000 60,771 65,000 40, % Yr 3 10,000,000 53,657 50,000 30, % Yr ,000,000 41,385 45,000 30, % Page 33 The perennial question - where will the money come from? USD600bn newbuilding book, of this perhaps USD200bn debt finance still to be arranged Some banks still slow steaming or reserving capital for top clients, but even they are paying higher margins Top clients are generally those flush with cash But what about their s&p buyers? IPO candidates, new entrants, financial entities Will they get the leverage and terms they need to make buying a USD180mn VLCC resale viable? Could that ultimately reduce demand and vessel prices? Page 34 17

18 Conclusions 1. All banks are in some way affected by the credit crunch and have significantly increased funding costs 2. All borrowers are experiencing this through increased margins, more conservative terms etc 3. Shipping needs to compete with other industries for capital, so pricing will always be comparable 4. The loan syndication market has been difficult, forcing club and book build deals 5. In general it looks like bankers are being more conservative But 6. At the right price the newbuilding book will find the USD200bn finance it needs, but perhaps not the leverage they are hoping for 7. Some contracts will be cancelled 8. This will pass, but few are gambling on that happening soon Page 35 Thank you for your attention Peter Illingworth 18

19 Basel 2 Page 37 They said it would never happen The new BIS Rules - Basel II Credit Risk is part of this: New Basel Capital Accord (Basel II) Pillar 1 Minimum Capital Requirements Pillar 2 Supervisory Review Process Pillar 3 Market Discipline Page 38 19

20 Basel II Advanced approach Three step calculation of Expected Loss and Capital Requirement PD Financial Ratios: Solvency Liquidity Profitability Scale Rating Class determines default rate EAD Principal and Interest over next 12 months Calculation favours amortising facilities LGD Likely loss after realising security Calculated using Monte Carlo simulation Page 39 LGD: Future Market Value Method 2 out of approx simulation scenarios (simulated paths) Upper boundary of the 95 % confidence interval Distribution of the results from the scenarios Monte Carlo Scenarios 95% Expected value drift Time horizon of 1 year Lower boundary of the 95 % confidence interval Page 40 20

21 How will Basel 2 Influence Pricing? Today fixed 8% Capital (Simplified) 1% Margin = 12.5% RoE Basel 2 changed capital could dramatically change pricing: 4% Capital 50 bp Margin = 12.5% RoE 12% Capital 1.5% margin = 12.5% RoE Borrowers may be able to arbitrage the differences between banks Page 41 21