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By Jonathan Saul and Steve Slater
LONDON Feb 13 Lloyds Banking Group is looking to sell $500 million of shipping loans as the British bank accelerates its exit from the sector, trade finance and banking sources familiar with the matter said on Thursday.
The sale is likely to be the final large divestment of loans from its ship finance portfolio as the British bank cuts the size of its balance sheet to reduce risk.
Lloyds accelerated the run-down of its shipping portfolio last year and sold 2.7 billion pounds ($4.5 billion) of loans, contributing to a 35 billion pound reduction in its non-core assets to 64 billion pounds.
Lloyds, its British rival Royal Bank of Scotland and Germany's Commerzbank and HSH are among European banks seeking to sell shipping loans to investors including private equity funds to strengthen their balance sheets.
"This is expected to be the last slice of the portfolio that is up for grabs," one trade finance source said.
Lloyds' sale of shipping loans last year left it with 965 million pounds of net ship finance loans at the end of December, down from more than 7 billion pounds at the peak of the financial crisis.
"This portfolio still suffers some stress due to volatile asset values and ongoing financial restructures," the bank said in its annual results on Thursday, adding that impairment charges were still running at similar levels to those experienced in 2012, but last year's sales had materially reduced its risk exposure.
The bank declined further comment.
There has been a flurry of deals in recent months for ship finance loans or portfolios. Forecasts of a pick-up in world trade in goods, after the worst slide in decades pushed some major shipping firms to the wall, are driving interest from hedge funds and other investors who are betting on better times for the sector.
"The situation has changed dramatically in the last two, three months: the secondary market for (shipping) loans ... has gone up in price dramatically," said Peter Hall, director, distressed debt trading, at Citigroup Global Markets.
"I find that at 90 percent of the value of any loan, automatically the bank will be willing to sell and all the hedge funds are willing to buy. We have seen whole transactions, billion dollar transactions, turn over in a matter of weeks when you find that magic price," Hall told a Marine Money ship finance forum in London last month.
A ship finance source said separately that selling at 85-90 percent would be attractive to Lloyds.
"If you look at what has happened recently it seems that private equity funds or whoever is investing is paying rather good money for shipping portfolios," the source said.
Lloyds, which is 33 percent owned by the UK government, has shed 170 billion pounds of assets it deemed as non-core in the past four years, as part of a plan that its Chief Executive Antonio Horta-Osorio on Thursday said had reduced risk, cut costs and simplified the bank.
The bank had 25 billion pounds of non-core assets that were not from retail banking at the end of last year, and it said on Thursday it expects to reduce that by another 10 billion this year. (Editing by Rosalind Russell)