July 9, 2013
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Bloomberg Businessweek
Blackstone Treasure Hunt Under Way for German Tankers: Freight
By Nicholas Brautlecht on July 09, 2013 - https://www.bloomberg.com/businessweek
The decline of German private investor funding for ships and the exit of domestic banks from shipfinancing are opening a door to U.S. private-equity firms, which have begun to enter a marketpreviously closed to international asset managers.
Blackstone Group LP (BX:US), J.P. Morgan Asset Management, Oaktree Capital Group LLC(OAK:US), Tennenbaum Capital Partners LLC and Delos Shipping are among firms buying new andused German vessels and taking stakes in German shipping companies that need financial backing.They are replacing mostly private investors that for decades participated as limited partners inGerman ships.
Last year alone, investors lost about 2.3 billion euros ($2.96 billion) of equity as the number ofinsolvencies by shipping companies surged in the crisis-hit industry, according to estimates byHamburg researcher Fondsmedia. Decisions by Commerzbank AG (CBK) and HSH Nordbank AG toexit or scale down ship financing as bad loans taint balance sheets makes it worse.
“In the past, shipping companies were reluctant to make deals with foreign lenders, but this ischanging significantly,” said Claus Brandt, a shipping analyst at PricewaterhouseCoopers AG inHamburg. “I expect foreign investors to have the biggest market share in three to five years.”
Before the collapse of Lehman Brothers Holdings Inc. sent the industry into turmoil in 2008, Germanshipping companies had the support of domestic lenders and private investors when buying new shipsand covering cost to maintain existing ones.
Even now, domestic investors and lenders provide 90 percent of the capital borrowed by Germany’smostly small- and medium-sized shipping firms, which on average own nine vessels, according to theVDR ship owners association.
“About 3,000 vessels are financed by banks and private investors in Germany, so this is the size of themarket we are looking at,” said Brian Ladin, the founder of Delos Shipping. The Dallas-basedcompany in May took over 80 percent of Hamburg-based shipping group Koenig & Cie.
A partner in the transaction was Tennenbaum, a Santa Monica, California-based firm that since itsfounding in 1999 has invested more than $11 billion in about 250 companies with one focus being thetransportation and logistics industries.
Germany’s merchant fleet, which comprises 3,700 ships, is the third-biggest in the world with a 9.4percent share of the market. That includes the biggest fleet of container ships, with almost one in threevessels German-owned, according to VDR, based in Hamburg.
Private-equity firms typically pool money from pension plans and endowments with a mandate to buycompanies within five to six years, then sell them and return the money and a profit after 10 years.The firms usually charge a management fee and keep a portion of the profits from investments.
According to analyst Brandt, foreign investors can expect an annual return rate of about 10 percent ifthey sell ships at the right time.
For Delos’s Ladin, the key to success is not being confined to a schedule. At a previous firm, he wasthe lead investor in a $21-million investment in shipping group Euroseas Ltd. (ESEA:US) before itsinitial share sale on the Nasdaq in 2007. Planning on getting in and out in two to three years is amistake, he said.
“An investment time horizon has to at least be in sync with a shipping cycle from peak to trough,which usually takes eight to 10 years,” he said in a phone interview. “Depending on the vessel type,the last peak was between 2006 and 2008, and we are somewhere in the trough right now.”
Delos and Tennenbaum recapitalized Koenig to buy new and used vessels on the market, Ladin said.Koenig’s managing directors, Tobias Koenig and Jens Mahnke, together still hold the remaining 20percent stake. They will stay on to manage the assets, which are valued at 4.2 billion euros, accordingto the company’s website.
Oaktree, the world’s largest distressed-debt investor, made a different type of investment withRickmers Group, commissioning the Hamburg-based company to supervise the construction of eightnew container ships, with an option for eight more.
The first ships have entered the construction phase, Sebastian Bucher, a spokesman for Rickmers, saidon June 26.
Under the agreement, announced in December, the German firm with a 179-year shipping traditionwill also technically and commercially manage the vessels with a capacity of 5,000 to 7,000 standardcontainers, or TEU, Bucher said.
The carriers, scheduled for delivery from the middle of next year to the middle of 2015, will cost $45million to $50 million each, according to estimates by Rickmers, which in June also sold 175 millioneuros in five-year notes to service debt and maintain its vessels.
Michael Behrendt, president of the VDR shipping association, indicated traditional, family-ownedfirms may be loath to open up their books or give up control over strategic decisions even afterfinancing deals are sealed.
“It is impossible to predict how private equity firms will behave,” Behrendt told reporters in Hamburgon June 14. He is also chief executive officer of Hapag-Lloyd AG, Germany’s biggest shippingcompany. “Their business is very different from the traditional ship-owners’ model.”
“For private equity firms, it might be a smart move to dive into the market during the crisis, but wedon’t need new ships before supply and demand reach a balance, which we expect between 2014 and2015,” he said.
The container shipping industry is suffering from a glut after a boom in ship deliveries coincided withthe worst slump in freight demand since the 1970s. Vessel supply exceeds demand by about 30percent and much of the boxed freight being shipped is unprofitable, according to Bagsvaerd,Denmark-based BIMCO, the world’s biggest international shipping association.
Commerzbank, which had been the world’s second-biggest financier of ships with the 2009acquisition of Dresdner Bank, decided a year ago to exit ship financing as it suffers from the bad debtit holds from the industry. Norddeutsche Landesbank Girozentrale and Nordbank, the world’s largestshipping lender, are also scaling down portfolios.
To plug the financing gap in Germany some U.S. investors are focusing on the container shippingfleet while others are looking at specialized cargo ships or tankers.
Blackstone, the world’s largest manager of alternative assets, in August took over the controllingstakes in nine refined-product tankers from Hartmann AG with the technical and commercialmanagement staying with the Leer, Germany-based company.
“It’s like a marriage -- it’s not easy to find the right partner,” said CEO Niels Hartmann in an e-mailedstatement, adding that it took several months of negotiations to seal the partnership.
“Blackstone is an interesting partner, as they have realistic expectations,” said Hartmann. “The timeframe of the investment is rather long-term,” he said, referring to yield and a ship’s usual life cycle ofabout 25 years.
New York-based Blackstone spokeswoman Christine Anderson declined to comment.
Institutional investors advised by J.P. Morgan Asset Management - Global Real Assets operate a jointventure with family-owned Harren & Partner Group, which holds and manages 54 vessels from itsbase in the city of Bremen, southwest of Hamburg.
Their alliance, called Sumo-Shipping, was founded in February 2012. It invests in a fleet of vesselswith cranes that can lift more than 500 tons.
“Both partners remain committed to the project”, Nicholas E. Meer, executive director at JPMorganAsset Management Maritime Group in London, said in an e-mail on June 26.
To contact the reporter on this story: Nicholas Brautlecht in Hamburg at Email Nicholas.
To contact the editor responsible for this story: Angela Cullen at Email Angela.
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