Cruise Ships a Beacon for Germany’s KfW in Dire Shipping Market

The world’s largest cruise ship, Harmony of the Seas (Oasis 3), leaves the STX Les Chantiers de l’Atlantique shipyard site in Saint-Nazaire, France, May 15, 2016. REUTERS/Stephane Mahe

By Nicholas Brautlecht for https://gcaptain.com

(Bloomberg) — The call of the Caribbean is proving irresistible for Germany’s KfW IPEX, the development bank that funds the shipbuilding industry.

After lending 1.1 billion euros ($1.2 billion) to finance pleasure ships last year, including part of the funding for two new Royal Caribbean Cruises Ltd. vessels built in Germany, KfW IPEX is preparing to fund yet more cruise liners, earmarking a total 2.8 billion euros in new shipping loans this year. More than half of its 16 billion-euro maritime loan book is now devoted to cruise ships.

With passenger numbers rising at an annual rate of 4.5 percent, the global cruise industry is one of the few bright spots in a shipping market awash with debris after eight years of crisis in the container segment. It also offers European shipbuilders an opportunity to steal a march on Chinese competitors, who are still several years behind technologically in this corner of the market, Carsten Wiebers, the global head of KfW IPEX’s maritime industries business, said in an interview.

“We don’t expect the Chinese to reach a standard in the next five to six years that can rival international cruise ship companies in existing markets,” said Wiebers, 53, who has led KfW’s maritime funding for 18 years. “There’s little risk that the cruise industry will see overcapacity, which is a very heavy burden for other shipping segments.”

KfW IPEX’s large exposure to the cruise industry is unique among German shipping lenders, which have traditionally focused on container ships and bulk carriers. By the end of March, Wiebers had increased the cruise share of the bank’s maritime-loan book to 51 percent from 32 percent in 2009, when the global financial crisis had sent the shipping market into a slump from which it has yet to recover.

By contrast, at Norddeutsche Landesbank, which is seeking to diversify while shrinking its 18 billion-euro shipping loan book, cruise ships and ferries have just a 1 percent-share.

At KfW, which boosted its maritime loan book by 10 percent over the past seven years, cruise ships accounted for 30 percent of new shipping loans last year. Commitments included two new liners for Miami, Florida-based Royal Caribbean, which controls about one-quarter of vessel capacity in the North American and European markets. Those contracts are for 12-year terms with a “considerable portion” syndicated with an international banking consortium, according to Frankfurt-based KfW, which declined to disclose further details.

Industry Booming

The industry is booming in Europe, where top shipyards including Germany’s Meyer Werft GmbH and Italy’s Fincantieri SpA are working to capacity to fill orders similar to Royal Caribbean’s $1 billion Ovation of the Seas that has been cruising around Asia, Australia and Europe since its delivery in April.

To lure as many as 4,180 passengers on board, the super-cruiser boasts a capsule on a swivel arm from which guests can view the ship from 300 feet in the air, while others can try the world’s first simulated skydiving experience offered at sea.

“Investment activity has shrunk drastically in all segments of shipping except the cruise industry,” said Wiebers, who is set to take up a new role as KfW’s head of aviation and rail financing next month.

Much of the wider industry’s demise stems from the fact that ship financiers ignored technological advances, lending clients too much money too long for vessels that aged rapidly, Wiebers said. With this in mind, KfW has changed its focus to companies with bigger fleets and corporate structures.

“We practically don’t take any asset risks,” Wiebers said. Almost two-thirds of KfW shipping loans are covered by export credit insurers like Euler Hermes Group, he said.

Chinese Competition

Still, competition for new business from top-tier clients like Danish shipping giant A.P. Moeller-Maersk A/S is getting stiffer, with Chinese peers including Industrial & Commercial Bank of China Ltd. and Bank of China entering the fray, he said.

“The Chinese are financing with terms that are unbeatable for European banks,” in some cases offering loan-to-value ratios of 90 percent and above and repayment periods as long as 18 years to large maritime companies, said Wiebers. European banks typically grant loans with a maturity of 10 years.

Norwegian tanker operator Frontline Ltd., which counts billionaire John Fredriksen as its largest shareholder, secured $328 million from China EXIM Bank in the first quarter to finance eight new vessels with the Asian lender, the company said in May.

With funding opportunities for banks in the wider shipping market still scarce, KfW’s 2016 financing target is ambitious, Wiebers said.

“The industry is undergoing massive structural changes on the shipping and the financing side,” said Wiebers. “All clients are very cautious, even in segments doing well like car carriers.”