How do Banks Deal with Problem Loans – Marine Money Ship Finance London Jan 2013 Part 2.

Commercial Banking Panel Session

This section addressed how banks dealt with problem loans, what is the level of bank activity at the moment, and advice for shipowners seeking loans.

Moderator: Robin Das, Director Auld Partners Ltd.

Panel;

• Mark Long, Head of Transport, Shipping Services and Offshore, HSBC Bank plc.
• Thor Erling Kylstad, Head of Shipping, London Branch, Nordea Bank.
• Nigel Anton, MD and Head of Shipping, Standard Chartered Bank.
• Stephen Fewster, MD, Global Head, Shipping & Transportation Finance, ING Bank.
• Alex Ryland, Senior VP, Shipping, Offshore & Logistics, DNB Bank ASA.

 Problem loans; what is the solution?

 The panel predictably said a solution was determined on a case-by-case basis and there wasn’t a one size fits all solution. If the owner has money and will put some more into the deal, the bank will try to match it, and maybe grant waivers (this is presumably with a client the bank wants to retain a relationship). Mr Fewster of ING said that they see the shipping industry as a “mean reverting industry” and rates will swing back to the average and that they should give the owner time. (This, of course, depends on when the loan was granted and the average rates used in the loan repayment and cash flow projections). Other solutions include the sale of the loan to a hedge fund or another bank. One bank reported selling a bilateral loan in the secondary market for more than book value – result! However, there is the remote danger that due to “Chinese Walls” between the different parts of the bank, the loan could end up back in the bank, at a higher price!

 The panel admitted that syndicate banks are the major obstacle to achieving a solution (in a syndicated loan). The owner can pick up on this and play one bank against another. It depends on how the bank runs its problem loan book. Does the problem loan stay with the relationship manager, or is it taken away and dealt with by a special solutions group?

But most often it was a question of what is the level of trust between bank and bank and owner? Will the owner with money put more into the deal or are they being dishonest? Of course, the owner knows banks are very reluctant to takeover the ship and realise the loss. An arrest will mean the loss of oil major approval, so reducing the value of a tanker even further.

 Sometimes a loan is doomed, and the panel pointed to certain characteristics that have become evident during restructuring. One is a high chartered-in position with high operational leverage. The second is very high lending rates, for example ships bought at the peak of the market. Another characteristic highlighted by Mr Ryland of DNB is SOS – small, old and specialised! This is where the bank tends to lose money (remember the fees generated are relatively small and writing off a loan can destroy the division profit for that

The panel felt that there will be more restructuring in 2013. The ships are getting older and the restructuring of a few years ago in the expectation of a market upturn may no longer be commercially viable. The so-called “Zombie” companies as Lloyd’s List (David Osler) put it are being supported because the banks do not want to arrest the vessels.

 Going forward several of the banks on the panel expect to do new business in 2013, and have mandates to grow the shipping book. The offshore, cruise and gas (LNG) sectors were mentioned as sectors that meet the banks credit and return expectations. The panel see consolidation among shipping companies as a feature in 2013, and although some banks are growing their books, the overall effect will be less credit available to a smaller group of clients. These clients can be shipping companies with financial investors. Banks will always consider the same factors;

• The management, financial, commercial and technical.
• The business plan
• The initial capital structure
• The mix of employment on the vessels

 The client profile today would be corporate and could include capital private equity with the banks having comfort from recourse to a corporate balance sheet with protection of covenants. There would also have to cross sell to other products within the bank, so that the bank is optimising its use of its capital, which is now a scarce resource. Banks would also like to see evidence of long term commitment to shipping. A typical market clearing transaction today would be:

• 65-70% financing
• 15 year profile
• 5-7 year tenor
• Pricing at plus or minus 300 bps
• Upfront fees 1-1.25%
• Plus the usual covenants.

Mr Ryland of DNB pointed at that LTVs today are checked dynamically every six months to test the banks security, and not historically every twelve months as in the past.

 There was a very interesting question from Richard Greiner of the shipping accountants Moore Stephens. “What is your position about actually having ships on your balance sheet?”

Mr Anton said “Standard Chartered does own ships, we have a leasing division.” The panel said that generally the banks don’t want to own ships on the balance sheet. In the short term banks will warehouse troubled ships with friendly clients or convert loans into leasing deals, and so avoiding taking ships on the balance sheet. Mr Greiner pointed out that the auditors are beginning to scrutinise the warehousing solution and these ships will be treated as being on the balance sheet.