Shipping loans a problem for shrinking banks

Tue Oct 16, 2012 11:08am EDT

* Lloyds sells shipping loan portfolio for half face value -sources

* Many banks want to shrink shipping loan book, but struggling

* Shipping slump one of worst ever on record

By Jonathan Saul and Steve Slater

LONDON, Oct 16 (Reuters) - Lloyds Banking Group has taken a near 50 percent loss on a portfolio of shipping loans as it struggles to reduce its $12 billion exposure to an industry from which banks across Europe are increasingly anxious to extricate themselves.

A four-year slump in shipping, one of the worst on record, and pressure to shrink bloated loan books have forced banks to abandon or scale down lending to the sector.

Lloyds has sold a $750 million portfolio of shipping loans to U.S. private equity firm Oaktree Capital, people familiar

with the matter said. The portfolio was sold at a discount of 45-50 percent, sources said. Lloyds declined to comment on the sale of the portfolio or the price realised.

"Originally they had their portfolio up for sale, about $2 billion worth of it, and they were looking for a number close to 90 cents in the dollar," one shipping trade source said.

Lloyds is one of several European banks trying to slash their shipping loans as they cut their balance sheets to become less risky, and tougher regulations require them to hold more capital, making loans less profitable.

"With economies in a poor state, profit for banks, if there is any, is lousy and does not represent any return on capital," said Joep Gorgels, head of transportation West Europe at ABN AMRO.

Lloyds, Royal Bank of Scotland and Germany's Commerzbank have been ordered to shrink substantially as a cost of being rescued during the financial crisis. Those three banks alone held about $60 billion of shipping loans - and they are proving one of the most problematic areas.

Lloyds, 40 percent owned by the UK taxpayer, has not regularly detailed its shipping market exposure, but it stood at 8 billion pounds at the end of June, not much reduced from before the crisis.

The bank has been more successful in axing other assets - it has cut those not central to its business to 118 billion pounds from 300 billion. It wants to get this to under 70 billion pounds in 2014, hence the pressure to sell more shipping loans.

Its loans stem from both Lloyds and Bank of Scotland, the troubled corporate lending arm of HBOS that Lloyds bought in 2009.

Shipping sources said part of the Lloyds book bought by Oaktree contained some loans related to General Maritime Corp., an oil tanker operator that filed for Chapter 11 bankruptcy protection last November after falling victim to tanker oversupply and soaring fuel costs.

General Maritime emerged from bankruptcy in May with the help of Oaktree, which invested about $175 million and converted a $200 million loan into equity, leaving it owning 98 percent of the firm.

PERFECT STORM?

Shipping companies ordered large numbers of new vessels between 2007 and 2009, when freight rates hit record highs, and the extra capacity arrived just as Europe's recession was deepening other economies were slowing, sending rates tumbling.

New global syndicated lending to the shipping sector was $4.1 billion in the third quarter, down 61 percent from $10.7 billion in the corresponding quarter of 2008, Thomson Reuters LPC data shows.

Norway's DNB Bank was the top ship finance lender in the third quarter with about $800 million in pro rata commitments from syndicated loans. BNP Paribas, ING , Nordea Bank and Citigroup followed, the data shows.

"We believe it is a good and profitable sector in the long term," Michael Rasmussen, Nordea's head of retail and Danish operations, told Reuters last week.

Lloyds was last part of a syndicated loan in 2008, excluding bilateral loans, and in July it said the outlook for ship finance was challenging.

A bank spokesman said its overall shrinking of assets was ahead of market expectations, with 76 billion pounds of assets cut in 2011 and the first half of this year.

RBS, 83 percent owned by the UK taxpayer, still has about an $18 billion exposure to shipping, with about $6 billion of that in its non-core portfolio to be sold or run down, both slightly down from the start of the year.

But RBS said in its half-year results that credit quality in the portfolio has deteriorated this year due to the oversupply of vessels, lower asset prices and lower charter rates.

Germany's Commerzbank, 25 percent state-owned, has been told to cut its balance sheet to less than 600 billion euros, from more than 1 trillion in 2009, and has got it down to 673 billion euros. At the end of last year it still had 21 billion euros of shipping exposure, including 18 billion of ship finance, down a modest 4 billion euros in two years.

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