Marine Money’s 4th Annual German Ship

Finance Forum

Marine Money’s 4th Annual German Ship Finance Forum got off to a smooth start on Thursday with a very brief welcome from organizers Mr. Torsten Temp of HypoVereinsbank and Marine Money’s Peder Bogen. Chairman Dr. Henning Winter of Deutsche Schiffsbank’s board gave an overview of the topics to be addressed during the conference.

Dr. Martin Hüfner, also of HypoVereinsbank, then opened his macroeconomic discussion with an anecdote comparing the links between illness, diet and nationality. He concluded: “Eat what you like! It’s the English that kills you.” As for the global economy, Dr. Hüfner projects growth rates of 3% in 2005 and 2006, down from 4% in 2004, but he describes this change as “back to normality,” noting that 3% is, in fact, as healthy, sustainable growth rate. This idea of a fall back to normality would emerge as a theme throughout the conference, not only regarding the global economy, but more relevantly across the shipping markets.

Dr. Hüfner also noted that a soft landing in China is both important and likely, and that the EMU’s relative position in the global economy is improving. He anticipates a flattening of commodity price increases by 2006 and looks for oil prices to stay in the realm of $40-$45. Finally, Dr. Hüfner explained that the equilibrium interest rate dictated by economic models (in the 5.5-6% range for the US) is substantially higher than what currently exists. He thus expects interest rates to rise, advising shipowners “if you want to have long term money, you should take it today.”

Next up was a discussion moderated by Mr. Nigel Gardiner of Drewry Shipping Consultants, with Mr. Gardiner asking the question of how long this “unprecedented time” would last. Mr. Jarle Hammer of Fearnleys began his speech by noting that he remembered 1973, which was “even better for tankers.” He also remembered, somewhat less fondly, what happened in the shipping markets just after 1973. He discussed how 2001 vessels were going for 26% more than newbuildings while 10-year-old vessels were at times costing only 4% less due to “the value of being here and now.” Mr. Hammer did note that timecharter rates, like global economic growth, are expected to decrease, but to stay at healthy levels.

Mr. Nick Hubbard of Howe Robinson Ship Brokers opened his discussion of the container market in an interesting way, noting that his colleague who normally would have spoken was instead working on a charitable project in Nepal, demonstrating that “there are more important things than ships and boxes.” As for box ships, Mr. Hubbard lauded double-digit growth across all segments of the market in the past year. However, going forward he drew a firm distinction between the North/South and feeder trades, which he expects to remain under supplied, and the East/West trades, which he expects to creep into over supply. He again asserted that freight rates would and should fall, but that they are still very profitable.

Ms. Eva-Maria Busch of Drewry Shipping Consultants then discussed port congestion in a very different light than shipping analysts tend to see. Instead of the decrease in effective supply, and thus improving fundamentals, she saw the long term problems that could be expected to stem from the constant frustration, delays, and extra costs borne by those hiring ships. She expects that costs will be passed more and more on to shippers, while also causing those in need of transportation to consider alternatives to shipping. Importantly, Ms. Busch wants governments to recognize the need for bigger ports and for ports themselves to invest in better technology and more skilled employees.

After a brief coffee break, Mr. Didier Chaleat of Bureau Veritas discussed technical risk. He argued that Class in many cases has to act on behalf of flag states and went through the gist of new classification rules introduced by Bureau Veritas. Mr. Chaleat also noted the need for more intervention and earlier involvement on behalf of classification societies, and stated that his organization’s primary goals are to reduce risk to a minimum and improve the efficiency and long term quality of assets.

Dr. Albrecht Gundermann of LISCR (Deutschland) GmBH then discussed the burdening cost to shipowners of regulatory compliance – or, more accurately, non-compliance. He noted that in 2004 only 0.5% of standard VLCC operating expenditures go to direct costs associated with a flag state, whatever the state. By contrast, the costs of delays caused if, for example, the flag state cannot provide certain documents immediately can be quite high. He ended with the query to shipowners “what has your flag state done lately for you?”

The morning closed with a briefing by Peder Bogen on the state of the banking markets, drawing the conclusion that spreads are just too low and a lively panel discussion featuring Mr. Ingmar Loges, Mr. Hans Petter Aas, Mr. Jean-Yves Gueritaud, Mr. Tjark Woydt and Mr. Han Verschoor. The panelists discussed the fact that during times of low spreads, they must choose loans to make based on quality in order to protect downside risk.

After a soothing lunch, the crowd was reinvigorated for a review of the equity markets by Craig Fuehrer, now of Deutsche Bank Securities. Mr. Fuehrer said that he felt his prediction from Marine Money Week in June still held true: “Big deals and consolidation will continue!”

Glen Oxton of Heally & Baillie LLP then discussed International Shipping Enterprises and the whole idea of a “blank check” company.  While the format used by ISE for their offering is usually reserved for “penny stock” offerings of under $5 million – contrasted to ISE’s $180 million plus – Mr. Oxton was able to explain the protection mechanisms for shareholders in the company in a way that made the deal sound much more reasonable than it first appeared, though he did note that ISE “probably have a business plan, they just haven’t disclosed it yet.” He also attributed their success to the strong demand for shipping issues and the credibility of the company’s management.

Bote de Vries of Navigation Finance Corp. then gave a discussion on Islamic Finance, explaining rules like the prohibition of interest, as well as how these deals can still be worked in a way that can be very attractive to those involved. He noted that Sharia’h compliant deals can be very competitive as they have ROE requirements less than the 15-20% typically required of Anglo-Saxon funds while the fees are marginal compared to a German KG alternative.

The last briefing was by Mr. Stephen Hackett of Global Capital Finance who discussed the incredible array of leasing options available. Two final panels closed out the afternoon. The first, moderated by Dr. Winter and composed of Mr. Tobias König, Dr. Axel Schroeder, Mr. Chiristian Freiherr von Olderhausen, Dr. Torsten Teichert and Mr. Axel Steffen, discussed how to cope with high asset prices and a strong euro. A key theme was that asset prices had to be looked at in the context of the lifelong earning prospects of a vessel. In other words, a lucrative 5-year charter does not necessarily justify an overpriced vessel.

This was followed by a lively discussion among Dr. Klaus Meves, Mr. Günther Casjens, Mr. Bertram Rickmers, Mr. Claus-Peter Offen, and Dr. Bernd Kortüm. The three looked at the current high market, and were in relative agreement about some things, like the idea that “just-in-time” service by liners is no longer really feasible. However, they disagreed heartily about the near term future of the container market. Several of the panelists were optimistic that rates would fall softly to profitable levels, while Mr. Rickmers in particular was adamant that prospects for containerships over the next few years are not very good.

Dr. Winter and Mr. Bogen then closed a fascinating day for ship finance. Afterwards, attendees moved into the next room with great windows overlooking the port in Hamburg to enjoy some well-deserved cocktails and some good German beer.

Marine Money’s 4th Annual German Ship Finance Forum got off to a smooth start on Thursday with a very brief welcome from organizers Mr. Torsten Temp of HypoVereinsbank and Marine Money’s Peder Bogen. Chairman Dr. Henning Winter of Deutsche Schiffsbank’s board gave an overview of the topics to be addressed during the conference.

Dr. Martin Hüfner, also of HypoVereinsbank, then opened his macroeconomic discussion with an anecdote comparing the links between illness, diet and nationality. He concluded: “Eat what you like! It’s the English that kills you.” As for the global economy, Dr. Hüfner projects growth rates of 3% in 2005 and 2006, down from 4% in 2004, but he describes this change as “back to normality,” noting that 3% is, in fact, as healthy, sustainable growth rate. This idea of a fall back to normality would emerge as a theme throughout the conference, not only regarding the global economy, but more relevantly across the shipping markets.

Dr. Hüfner also noted that a soft landing in China is both important and likely, and that the EMU’s relative position in the global economy is improving. He anticipates a flattening of commodity price increases by 2006 and looks for oil prices to stay in the realm of $40-$45. Finally, Dr. Hüfner explained that the equilibrium interest rate dictated by economic models (in the 5.5-6% range for the US) is substantially higher than what currently exists. He thus expects interest rates to rise, advising shipowners “if you want to have long term money, you should take it today.”

Next up was a discussion moderated by Mr. Nigel Gardiner of Drewry Shipping Consultants, with Mr. Gardiner asking the question of how long this “unprecedented time” would last. Mr. Jarle Hammer of Fearnleys began his speech by noting that he remembered 1973, which was “even better for tankers.” He also remembered, somewhat less fondly, what happened in the shipping markets just after 1973. He discussed how 2001 vessels were going for 26% more than newbuildings while 10-year-old vessels were at times costing only 4% less due to “the value of being here and now.” Mr. Hammer did note that timecharter rates, like global economic growth, are expected to decrease, but to stay at healthy levels.

Mr. Nick Hubbard of Howe Robinson Ship Brokers opened his discussion of the container market in an interesting way, noting that his colleague who normally would have spoken was instead working on a charitable project in Nepal, demonstrating that “there are more important things than ships and boxes.” As for box ships, Mr. Hubbard lauded double-digit growth across all segments of the market in the past year. However, going forward he drew a firm distinction between the North/South and feeder trades, which he expects to remain under supplied, and the East/West trades, which he expects to creep into over supply. He again asserted that freight rates would and should fall, but that they are still very profitable.

Ms. Eva-Maria Busch of Drewry Shipping Consultants then discussed port congestion in a very different light than shipping analysts tend to see. Instead of the decrease in effective supply, and thus improving fundamentals, she saw the long term problems that could be expected to stem from the constant frustration, delays, and extra costs borne by those hiring ships. She expects that costs will be passed more and more on to shippers, while also causing those in need of transportation to consider alternatives to shipping. Importantly, Ms. Busch wants governments to recognize the need for bigger ports and for ports themselves to invest in better technology and more skilled employees.

After a brief coffee break, Mr. Didier Chaleat of Bureau Veritas discussed technical risk. He argued that Class in many cases has to act on behalf of flag states and went through the gist of new classification rules introduced by Bureau Veritas. Mr. Chaleat also noted the need for more intervention and earlier involvement on behalf of classification societies, and stated that his organization’s primary goals are to reduce risk to a minimum and improve the efficiency and long term quality of assets.

Dr. Albrecht Gundermann of LISCR (Deutschland) GmBH then discussed the burdening cost to shipowners of regulatory compliance – or, more accurately, non-compliance. He noted that in 2004 only 0.5% of standard VLCC operating expenditures go to direct costs associated with a flag state, whatever the state. By contrast, the costs of delays caused if, for example, the flag state cannot provide certain documents immediately can be quite high. He ended with the query to shipowners “what has your flag state done lately for you?”

The morning closed with a briefing by Peder Bogen on the state of the banking markets, drawing the conclusion that spreads are just too low and a lively panel discussion featuring Mr. Ingmar Loges, Mr. Hans Petter Aas, Mr. Jean-Yves Gueritaud, Mr. Tjark Woydt and Mr. Han Verschoor. The panelists discussed the fact that during times of low spreads, they must choose loans to make based on quality in order to protect downside risk.

After a soothing lunch, the crowd was reinvigorated for a review of the equity markets by Craig Fuehrer, now of Deutsche Bank Securities. Mr. Fuehrer said that he felt his prediction from Marine Money Week in June still held true: “Big deals and consolidation will continue!”

Glen Oxton of Heally & Baillie LLP then discussed International Shipping Enterprises and the whole idea of a “blank check” company.  While the format used by ISE for their offering is usually reserved for “penny stock” offerings of under $5 million – contrasted to ISE’s $180 million plus – Mr. Oxton was able to explain the protection mechanisms for shareholders in the company in a way that made the deal sound much more reasonable than it first appeared, though he did note that ISE “probably have a business plan, they just haven’t disclosed it yet.” He also attributed their success to the strong demand for shipping issues and the credibility of the company’s management.

Bote de Vries of Navigation Finance Corp. then gave a discussion on Islamic Finance, explaining rules like the prohibition of interest, as well as how these deals can still be worked in a way that can be very attractive to those involved. He noted that Sharia’h compliant deals can be very competitive as they have ROE requirements less than the 15-20% typically required of Anglo-Saxon funds while the fees are marginal compared to a German KG alternative.

The last briefing was by Mr. Stephen Hackett of Global Capital Finance who discussed the incredible array of leasing options available. Two final panels closed out the afternoon. The first, moderated by Dr. Winter and composed of Mr. Tobias König, Dr. Axel Schroeder, Mr. Christian Freiherr von Olderhausen, Dr. Torsten Teichert and Mr. Axel Steffen, discussed how to cope with high asset prices and a strong euro. A key theme was that asset prices had to be looked at in the context of the lifelong earning prospects of a vessel. In other words, a lucrative 5-year charter does not necessarily justify an overpriced vessel.

This was followed by a lively discussion among Dr. Klaus Meves, Mr. Günther Casjens, Mr. Bertram Rickmers, Mr. Claus-Peter Offen, and Dr. Bernd Kortüm. The three looked at the current high market, and were in relative agreement about some things, like the idea that “just-in-time” service by liners is no longer really feasible. However, they disagreed heartily about the near term future of the container market. Several of the panelists were optimistic that rates would fall softly to profitable levels, while Mr. Rickmers in particular was adamant that prospects for containerships over the next few years are not very good.

Dr. Winter and Mr. Bogen then closed a fascinating day for ship finance. Afterwards, attendees moved into the next room with great windows overlooking the port in Hamburg to enjoy some well-deserved cocktails and some good German beer.