Credit Margins in Ship Finance Expected to Shrink
Banks lending to the shipping sector will have a tougher time making money as more creditors are entering the market in the search for yield, an executive of German transport finance specialist DVB said.
"We expect credit margins for ship loans to continue to shrink", Ralf Bedranowsky told Reuters on Tuesday.
"Some banks are pushing into the market trying to put the cheap U.S. dollar funding on their books to work. That will continue to put pressure on margins", said the manager, who served as Deutsche Bank's head of shipping until changing to DVB last year.
After years of anaemic economic growth and record low interest rates, banks are scrambling for asset classes that promise higher returns.
That has pushed interest rates on new ship loans to historic lows. DVB is charging its best clients less than 200 basis points above the Libor interbank lending rate, while the majority of its clients still faces coupons of 250-350 basis points above Libor.
Private equity investors, too, are increasingly turning to the sector, scooping up ships or buying into ship loans often with a view to taking control of the asset through a subsequent debt for equity swap.
Many buyout firms team up with shipping groups to access sector expertise. Among others, private equity group Apollo and Germany's Rickmers group recently set up a joint venture to buy used ships.
"Currently, we are seeing a peak in private equity investments in the shipping sector. They not only buy used ships but also acquire contracts for the delivery of new ships from shipping companies not taking delivery of the vessels", Bedranowsky said.
Earlier this month, ship investor Scorpio said it made $50 million on a sale of seven oil tankers that are still under construction at Korean shipyards.
According to media reports, the vessels were bought by General Maritime, which is backed by Oaktree Capital. General Maritime and Oaktree were not immediately available for comment
Investments in shipping assets do not come without risks. The sector is still struggling to recover from the worst slump on record, in which a weak global economy and an oversupply of vessels have pushed dozens of shipping firms into default or restructuring.
Despite a recent uptick of ship charter rates, the fees that shipping groups get to put their vessels to work still often do not suffice to pay for their costs and loans.
Little change is expected in the short term, Bedranowsky said. "Charter rates have bottomed out. But the current low rates are likely to be the new reality. I do not expect a return of charter rates to pre-crisis levels."
Despite overcapacities, companies continue to order new vessels, while taking too few old ones out of service.
"The worldwide order book for large container ships accounts for 54 percent of the existing fleet. That is way too much to allow any kind of sustainable rebound," Bedranowsky said.
By Arno Schuetze (C) Reuters 2014.