Germany’s top banks step up efforts to offload toxic shipping debt

LONDON/FRANKFURT (Reuters) – Top national lenders Deutsche Bank (DBK Gn.DE) and Commerzbank are stepping up efforts to offload distressed shipping loans, finance sources said, as the German banking system grapples with $100 billion in toxic debt from the sector.

While the shipping sector is showing signs of recovery after a near-decade long downturn, it is still struggling with an excess of ships and sluggish growth in global trade, which has led to some shipping companies going to the wall.

German banks, once global leaders in ship financing, have written off billions of euros in loans to shipping companies, while other European lenders – facing capital pressure from regulators – have quit the business.

Two finance sources with knowledge of the matter said Deutsche Bank, Germany's flagship lender, is looking to ringfence at least $250 million of distressed shipping loans and package them in a unit within the group, with a view to selling the debt going forward.

"The idea is to package them together in one part of the bank - given how many units there are in Deutsche - and then look to sell them off at a discount. This appears to be a new approach by them," one of the sources said.

It was unclear how long the process would take, but the source said further tranches of loans could also be transferred. A third finance source said Deutsche had been looking at warehousing distressed shipping loans for some time. The bank declined to comment. In its quarterly results last month, Deutsche said its loan exposure to the shipping sector was approximately 5 billion euros ($5.90 billion). "A high proportion of the portfolio is sub investmentgrade rated in reflection of the prolonged challenging market conditions over recent years," it said.

In July, 2016, sources told Reuters that Deutsche Bank was looking to sell at least $1 billion of shipping loans.

However, Deutsche's 2016 annual report showed its loan exposure to shipping was still around 5 billion euros - indicating little movement to date.

German banks are estimated by shipping finance sources to be holding at least $100 billion in distressed shipping loans and shipping finance sources say much of this debt is unlikely to be recouped in full, meaning heavy losses on investments.

Banks in Germany were particularly exposed to container shipping, a market that has been weak for years.

In a separate move two finance sources said Commerzbank, Germany's second biggest bank, had in recent weeks sold over $300 million of shipping loans to Germany's Berenberg Bank and investment fund Cross Ocean Partners.

Berenberg told Reuters it had purchased "middle three-digit shipping loans from Commerzbank in conjunction with a US private equity/debt fund," without providing further details.

Commerzbank declined to comment, while Cross Ocean did not respond to requests for comment.

Commerzbank said this month it had reduced its shipping portfolio by more than 30 percent - or 1.5 billion euros - in the first nine months of this year to 3.3 billion euros, and the bank was on track for a year-end target of around 3 billion euros.

It added that it was considering running down its shipping portfolio "even faster than planned."