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HCOB ready to finance ‘booming’ boxship companies after clocking up 25% return on equity

Many new loans front loaded, with higher repayments in the first year or two, in expectation things will cool off later in 2020s, with arrival of newbuildings taking markets back to normal levels

‘On a mid-term view, I think rates will stabilise or even reduce, but liner companies will still earn a lot of money,’ says Jan-Philipp Rohr

HAMBURG Commercial Bank is making a healthy 25% return on equity on shipping loans and is ready to grow its book to reflect the current surge in profitability in the container and dry bulk segments, as well as an anticipated pick-up for tankers.

But many new loans are being front loaded, with higher repayments in the first year or two, in the expectation that things will cool off later in the 2020s, its head of shipping has revealed.

Even so, the situation represents a remarkable turnaround for HCOB, the privatised successor to publicly owned HSH Nordbank, which was effectively felled by the shipping downturn of the 2010s, after an extended period as the world’s biggest lender to the industry.

Jan-Phillip Rohr confirmed that HCOB had secured €1.9bn gross in new shipping business last year, more than half as much again as the initial €1.2bn target.

The target this year has been grown to €1.6bn, although Mr Rohr is ready to top that if opportunities arise.

His comments amplify reports that European shipping banks — having spent the last decade remorselessly downsizing shipping exposure and selling off non-performing loans at deep discounts — are once again ready to release cash, especially for owners able to come up with a decent equity tranche.

“It [2021] was a successful year and the market is booming in the container and dry bulk markets. We haven’t seen such good rate developments for a long period in these two asset classes,” he said.

Most of the lending so far has been on the secondhand side, but the bank now has increased confidence to lend on newbuildings for delivery in two to three years’ time.

However, HCOB will remain cautious rather than gung-ho, as no one can say where the market will be in 2024, he went on.

The book is weighted towards container shipping on 42% and dry bulk on 26%, sparing the bank the worst recent pain endured by tanker operators, down to 18%. Other vessel types make up 14% of exposure.

Being a German bank, most of the container tonnage financed is comprised of tramp vessels that will have benefitted hugely from the recent explosive rate surge.

“The good thing is the liners are generating high profits as well as the shipowners. Charter rates have moved upwards into areas we have not seen before. Also, secondhand values have dramatically grown, with a lot of old ladies sold to liner companies. The lines have bought quite a lot of vessels from our clients,” said Rohr.

That has had the felicitous consequence of reducing leverage, with borrowed money making up a far smaller proportion of overall vessel values.

There have also been some down payments, with owners taking advantage of big profits to reduce loan burdens.

Another beneficial trend has been the switch to longer-term contracts, which lock in rate improvements several years ahead.

“This is a big change on two years ago, when charter duration for secondhand vessels or smaller vessels below 8,000 teu were just 12 to 18 months. Now liner companies are taking them from three to five years, at very high rates.”

Despite the upbeat current picture, Mr Rohr warned against boosterism, arguing that rates cannot stay at the present pitch and that a downturn will come sooner or later.

In recognition of this, much lending last year was based on front-loaded repayments to take advantage of market conditions. That minimises HCOB’s risk position, especially where there is multi-year charter backing.

What is dampening Mr Rohr’s optimism is the orderbook, with lots of new tonnage booked for delivery in 2023 and 2024.

“I wouldn’t say it is going to kill things, but it will bring the market back to normal levels. On a mid-term view, I think rates will stabilise or even reduce, but liner companies will still earn a lot of money. A nice level for liners and also tramp owners, at attractive rates for banks.”

Tankers may have had a torrid time in 2021 but were money-spinners from October 2019 to June 2020 before Covid-19 hit home. Mr Rohr expects recovery later this year, most likely in the fourth quarter.

The orderbook is low and scrapping rates are high, given current scrapping rates of $600-$700 per ldt.

“We consider the balance between supply and demand is improving for the tanker market and there will be recovery for time charter and spot market rates.”

Taking everything into consideration, HCOB is ready to expand its shipping balance sheet, albeit not dramatically.

“We had a long time to suffer in the past, so we are very cautious about the risk structure. We see that more banks are stepping into the market and providing relatively cheap money. Well, not cheap money compared with the years of 2006 or 2007, but with margin reductions depending on the risk profile and improved credit quality.”

Many liner companies — including Maersk and Hapag-Lloyd — now find themselves with more cash than debt. 

Indicative lending rates for HCOB are 250 to 350 basis points over London Interbank Offered Rate, with perhaps 190 bp extended to the best credits.

MPC Containerships, for instance, last October secured a $180m ticket with a gross margin of 335 bp.

HCOB is in the process of switching from Libor to the Secured Overnight Financing Rate, which will necessitate rewriting contracts and making interest rate adjustments as appropriate.

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