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Banks begin cautious return to lending as markets settle

Banks begin cautious return to lending as markets settle

• Tuesday 04 May 2010, 11:02
• by Steve Matthews

Ship finance remains limited and deals are smaller than in the past but new activity is starting to reappear

THERE are some tentative signs of a cautious partial recovery of bank lending to shipping as markets and values stabilise and perceived risk is reduced, though it will take a long time before loan finance returns anywhere close to its earlier volumes.

Some new activity is starting to appear, at least by those shipping banks that are still intact and not struggling with restructuring and rebuilding capital ratios. Some banks are reporting improved loss provisions in shipping. Asian commercial and Exim banks continue to increase their exposure to the sector.

Reports for the first quarter of 2010 published last week by the two leading Nordic shipping banks, Nordea and DnB NOR, indicate a slightly more optimistic outlook for this year even though actual shipping loan activity was down in the first three months. However, they remain concerned about the impact of overcapacity in shipping markets.

Nordea said that its lower income from the shipping, oil services and international division in the first quarter reflected a slow start to the year, but was cautiously optimistic about the rest of 2010. It commented that “positive signals that confidence is returning to the market include increased activities among shipping banks. However, transactions are still executed on conservative conditions.”

DnB NOR reported net lending of its shipping, offshore and logistics division at NKr133m ($22m) in the first quarter little changed from the fourth quarter of 2009 and lower than earlier quarters in 2009. But it commented: “Relatively strong freight rates and higher vessel values in the first quarter 2010 have led to a somewhat reduced risk in the shipping portfolio.”

Recent deals include Nordea agreeing an increased revolving facility of $150m to Crude Carriers. DnB NOR provided a facility up to $150m for Saga Tankers, supporting a $120m private placement to finance acquisition of four very large crude carriers. However, in common with other new shipping loans the terms and covenants are tightly drawn, with interest at 300 basis points above London Interbank Offered Rate, a far cry from the spreads that were on offer a couple of years ago.

Another significant recent loan deal involves Navios Maritime Acquisition, which has secured a pair of loan facilities of $150m and $75m to part-finance purchases of a total of two chemical and seven medium range two product tankers, as part of a larger vessel-acquisition programme mainly financed by debt, including bank loans. Deutsche Schiffsbank is arranger for the larger loan, and Alpha Bank in Greece is a contributor, while Fortis Bank and DVB Bank are involved in the other loan.

Deutsche Schiffsbank was also involved in the restructuring of KG fund Lloyd Fonds.

DVB Bank is continuing to do steady ship finance business, while another German entity, Deutsche Bank, has indicated that it will increase its lending activity to shipping this year, saying that it is not as exposed to the KG market as some of its German shipping bank rivals. But they are all maintaining a cautious policy with tight terms and capacity remains limited.

Some of the gap is continuing to be filled by Asian banks stepping up their shipping portfolios. Standard Chartered in Singapore recently concluded its first loan in the UK, providing £34m ($51m) to Bibby Offshore to fund the purchase of an offshore support vessel.

Chinese banks including China Exim Bank, Bank of China and ICBC are also actively increasing their shipping lending activity and increasing their portfolios, primarily supporting newbuildings at Chinese yards, but some involving western shipowners. Bank of China and Cexim each have shipping loan portfolios of about $10bn, while ICBC’s is slightly less but growing quickly.

In the Middle East, Gulf Bank in Kuwait has loaned United Arab Shipping some $87m in addition to an earlier $275 loan from other Middle East banks to part-finance newbuilding orders. UAS is believed to be seeking further loan facilities for the newbuilding project. Its reliance on several moderate-sized loans from regional banks indicates the continuing challenge for owners with major projects to obtain some of the large, syndicated loan deals that were on offer in the past from traditional shipping banks.

Figures for syndicated lending to shipping in the first quarter of 2010 confirmed that volumes remain limited and that deals are smaller than in the past, with individual banks restricted in the amounts they are prepared to underwrite. Banks have generally had to downgrade internal ratings for shipping projects in meeting Basel II requirements. Mooted Basel III rules could lead to even tighter requirements.

However, the latest indications from some shipping banks suggest that the worst may be over and that they are beginning to take a more positive view of risks in the sector provided that freight and charter markets continue their recent improvement and values remain relatively stable. But they are aware that risks are still there, especially from overcapacity, and there is still work to be done in restructuring existing shipping loans and adjusting to lower ship values.