German tanker operators and the new normal of mergers and acquisitions

German tanker operators and the new normal of mergers and acquisitions
Craig Jallal 09 Jul 2018 http://www.tankershipping.com/news/view,german-tanker-operators-and-the-...

German tankers owners were reluctant to join the KG party, which in hindsight proved a prescient decision. But now a lack of scale leaves them vulnerable to takeovers

The German-owned tanker fleet currently stands at 264 vessels, but had numbered over 300 vessels with a collective value of over US$6Bn as recently as 2015.

“German interest in shipping investments in most segments has been waning since 2015,” said VesselsValue analyst Court Smith. “The number of ships attributed to companies in this country has fallen across all major vessel classes.”

Around 45% of the tanker fleet owned by German companies falls into the small chemical tanker sector, with another 3% listed as small clean tankers. The next largest sector is MR1 tankers at 21%, and LR1s at just over 11%.

Essberger has the largest fleet by number, operating 9% of the German tanker fleet, exclusively in the small chemical sector. Claus-Peter Offen and TB Marine have the next largest fleets by number, at 6% each.

TB Marine has two of the six tankers listed on order to German owners. These are two 22,000 dwt chemical tankers due for delivery from Huatai Heavy Industries later this year. Sloman Neptun has two slightly smaller chemical tankers on order from fellow Chinese shipyard Jiangzhou. Reederei NSB has two LR1 on order from Chinese shipyard, Jiangsu Hantong.

Reederei NSB was behind the first sale of a ship through the online auction website VesselBid.com. The website is a joint venture between German auctioneer NetBid Industrie-Auktionen and Hamburg shipbroker Toepfer Transport. Reederei NSB managed the containership Buxharmony, owned by Nord LB. The Buxharmony was sold to SITC International Holdings at what brokers report was a premium price. Currently, the containership Dora Oldendorff is for sale on VesselBid.com.

German sale and purchase activity has been muted so far in 2018. Only four tankers have been brought into the German fleet; GEFO purchased four 4,100 dwt chemical tankers from Turkish operator Besiktas.

Sales for further trading all involved vessels nearly, or older than, 10 years out of the German fleet. Claus-Peter Offen sold three MR1 tankers, in what VesselsValue terms bank sales. These sales were symptoms of the collapse of the German Kommanditgesellschaft, (limited partnership) or KG funding scheme.

The change in fleet size is not due to any particular German government policy, but rather is a direct result of the failure of the KG initiative.

The concept behind KG funding is relatively simple; any high value purchase, such as a commercial bakery oven, requires two sets of financing: money from the owners (equity), and a loan (mortgage) from the bank. Under the KG, individuals could invest in the equity portion. The incentive was a complicated formula that could be summarised as receiving tax breaks now on the future yield of the scheme. At the height of its popularity, KG houses (the conceivers and organisers marketing the schemes) offered KG funds to support investments in office blocks, film production, fine wines, Cuban cigars, and ships.

These KG schemes were marketed to raise equity for containerships, and for many years produced double-digit yields. However, investors in KG schemes failed or ignored two crucial points: firstly, the funds paid a profit up front to the promoters of the funds. This was clearly set out in the prospectus, usually under the heading of promotion or marketing, and some schemes raised 120% or more of the amount required to fund the vessel.

Second, the investment was in the equity and in 99% of the schemes, a German bank provided the loan. Therefore, should the loan breach the loan-to-value ratio, then the KG fund and individual investors could be called upon by the banks to support the loan. This was just the tip of the iceberg; some of the mortgages were in yen/US$ splits, leaving the banks exposed to currency risk, while the scheme’s yields for investors were calculated on the containerships’ future earnings.

The collapse of the KG scheme and that of vessel values left German banks holding loans that were not being serviced and with unsupported collateral. In the new era of capital requirements, banks had to unload these poorly performing loans if they were to survive. This opened the door for alternative finance funds.

Several alternative funds have stepped forward to buy the loans at a discount. The latest sale was in 2018, when Oak Hill Advisors and Värde Partners entered into an agreement to acquire a US$1Bn portfolio of shipping loans from Deutsche Bank. The transaction is expected to close in the Q3 2018, pending regulatory approvals. This represents the second sale of shipping loan portfolios from European banks that alternative finance providers Värde and Oak Hill Advisors have acquired together.

“We view this investment as part of our long-term commitment to provide alternative capital to the shipping industry, as traditional participants reduce their exposure and change tack following a challenging period for the sector as a whole,” said Värde Partners managing director Stephen Seymour.

“We are pleased to partner with Oak Hill Advisors again as we continue to find compelling investment opportunities as banks divest out of legacy loan portfolios.”

With over 40 loans secured against 70 vessels, the loan portfolio has underlying exposure to a diversified pool of shipping sectors and borrowers. The split of the acquired portfolio among vessel types and values has not been revealed.

Oak Hill Advisors portfolio manager and managing director Alexis Atteslis said: “We believe the structural changes in the shipping finance industry present an opportunity for flexible capital providers, and we are uniquely positioned given our platform, expertise and relationships in the sector to underwrite and manage these investments.”

Tankers - a lucky escape

Fortunately for some, the tanker sector had not proven popular among German KG investors. The continuous growth in demand evident in the prospectuses of the containership ships schemes was absent among tankers variants, and even the naivest investor realised that demand for tankers hinged on the crude oil price, at the time controlled by OPEC.

Overall, tankers were seen as a riskier investment. Only a few KG houses offered funds in the sector.

Perhaps the best known KG tanker fund was Dr Peters, which launched funds under the brand Dynamism and Security (DS).

Dr Peters offered schemes to fund VLCCs, and by 1998 it was the largest operator of tankers in Germany. With the collapse of the shipping KG market, Dr Peters switched to aircraft leasing, but still manages the VLCC fleet through its own technical and commercial management company, DS Tankers GmbH & Co. KG.

Today the group operates 11 tankers, comprising six VLCCs, two Suezmax, one Aframax and two Panamax tankers. The fleet is not the youngest, with an average age of 15-years. So far this year, DS Tankers has sold three VLCCs for recycling, with one on the market (DS Tina) at the time of writing. Dr Peters declined to comment.

Today, the bulk of the German-owned tanker fleet is in the sub-Panamax sectors. “A deeper look at tanker ownership shows that most of the value that German owners hold in the tanker markets is focused on smaller, clean product tankers,” said VesselsValue’s Smith.

The German emphasis on this sector has proven attractive to larger international tanker groups looking to diversify their portfolios. In January this year, Evangelos Marinakis' Capital Ship Management opened a joint venture with German-based Liberty One.

The newly formed Capital Liberty Invest is looking for investment opportunities in the crude and product tanker segments of the German shipping market, and a statement announcing the move said Liberty One chief executive Dietrich Schulz, who is heading up the new venture, was “delighted” about the partnership.

“This joint venture will provide us with an expanded capability to offer a range of services to stakeholders in the German shipping market and across different shipping segments and sizes,” Mr Schulz said.

Marinakis' Capital Ship Management dwarfs Germany's Liberty One in terms of fleet size, valuation and diversification

"Liberty One operates a fleet of small, multi-purpose dry vessels which are primarily engaged in stable trading across European trading activities,” said VesselsValue’s Smith. “These smaller vessels offer a significantly different market exposure than the much larger Capesize ships currently in the Capital Maritime fleet. The expansion should enhance commercial relationships in smaller trading hubs around the continent and may facilitate some new trades for Capital’s fleet of Ice Class Handysize tankers."

Essberger expands with Crystal Nordic acquisition

German shipping group John T Essberger/Deutsche Afrika-Linien has finalised a purchase agreement that will see its Essberger Tankers acquire Crystal Nordic from joint owners Nordic Tankers and Embarcadero Maritime.

The Essberger Tanker fleet stood at 23 chemical tankers ranging in size from 2,800 to 8,700 dwt prior to the takeover of Crystal Nordic. The deal adds more than a dozen chemical tankers and increases the tonnage of the group's portfolio from 142,900 dwt to more than 240,000 dwt, according to the VesselsValue database. Crystal Nordic fleet also adds four vessels between 9,500 and 11,300 dwt to the Essberger portfolio.

Essberger and Crystal Nordic have elected not to disclose the financial details of the deal, and there is relatively little market data on rates and earnings for chemical tankers in the size range of the combined fleet. However, market conditions in the tanker sector were challenging in 2017, with rates falling significantly from 2016.

Analysis provided by brokers and tanker analysts at VesselsValue show Essberger Tankers moving from the eighth to the fourth-highest valued tanker owner in Germany with the takeover of the Crystal Nordic fleet.

Crystal Nordic's fleet had a market valuation of US$96.34M, down from US$134.64M in June 2016, making it a “good time to buy the company/fleet, looking at historical market value” depending on how much was paid, according to Vessels Value.

Crystal Nordic is a combined private equity venture involving Nordic Tankers and Embarcadero Maritime, itself a joint venture between UK-based shipowner and asset manager Borealis Maritime and private equity firm Kohlberg Kravis Roberts & Co.

“We are of the opinion that John T Essberger will be a very good owner of Crystal Nordic and thus enhance the service and flexibility offered to customers,” said Crystal Nordic chairman Per Sylvester Jensen.