$500m worth of private equity funding flows into German ship loans arena
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Around $500 million worth of private equity funding has been reeled in by the oldest bank in Germany in order to invest in ship loans, fuelling the suggestion that the asset class may begin to regain some of its former popularity.
The Hamburg-based Joh Berenberg Gossler & Co KG, signed a memorandum of understanding with an unidentified global investment firm at the end of last month. The agreement will see loans granted on a joint basis to more than 400 Berenberg shipping clients. It is hoped that the major finance injection will help to fill in some of the funding gaps that have been left by the country's largest ship financiers, who have pulled away from the asset class ever since the 2008 financial crisis.
In the years following the global financial crisis, prices of charter vessels and transport containers plunged alongside commodities, and asset prices plummeted as the sector became bogged down with new ships entering a depressed and already saturated marketplace. However, fast forward to 2016 and loans are now a far safer bet for those investors keen for strong yields, due to the fact that default risks have been minimised as a result of low prices.
Philipp Wuenschmann, Berenberg’s head of shipping, told Bloomberg that Berenberg was especially targeting “dollar-based funds” and institutional investors, many of which “are much more familiar with the sector than their European counterparts” and many of whom are not keen to take on their own shipping-focused teams. “That’s why they need our expertise,” he added.
The bank has stated that it plans to offer 'unitranche loans' that merge senior loan and subordinate debt components in a manner which boosts the loan-to-value ratio from the single-loan standard of around 40 per cent to 70 per cent.
“Many private equity firms have burned their fingers in recent years,” said Mr Wuenschmann, adding that many investments were made “without substantial analysis, solely on the basis that there is a rock-bottom market with a commodity and a China story.It’s time to position shipping in a different way” through a series of far more conservative loan investments.
The bank has said that it will be targeting yearly yields of up to 10 per cent compared with "as much as five per cent for credit with lower loan-to-value ratios," stated Bloomberg.
“Second-hand vessels are sold near scrap value, so the chances of a further retreat of asset prices are very small and we are seeing the opportunity-risk profile improving," added Mr Wuenschmann. Berenberg also plans to adopt the maritime loans that have been sold by counterparts in both Germany and abroad, “mainly performing loans," said Mr Wuenschmann. These loans will also be made use of for a new shipping fund to be based in Luxembourg, which has been operational since May of this year following its creation in February of last year. The Luxembourg mortgage-backed security fund sees Berenberg acting as a go-between to bridge the gap between shipowners and institutional investors.
Finally, Mr Wuenschmann confirmed that, in his opinion, efforts by investors hoping to reap strong returns using distressed shipping loans are worthless. “It’s been eight years since the collapse of Lehman Brothers, which means underlying ships are at least eight years old and not necessarily state of the art,” he said.