While shipping losses worldwide have continued to rebound from years of slide, the global container shipping market still has a way to go to beat the current rout. The impact of the slowdown has been felt in economies all over the world, far beyond the shipping and logistics companies and their customers, even in countries not known for a robust shipping industry.
According to The Wall Street Journal, one of the more surprising victims of the global container shipping slowdown has been German investors. Germany has made significant investments in the world’s container-ship capacity, and positioned it as a cornerstone of its economy — which makes the current predicament a highly precarious situation.
Central to the issue is that German investors reportedly own 29 percent of the world’s total container-ship capacity — more than any other nation. This has been driven by the rise of Kommanditgesellschaft funds, also known as KG funds. These are closed-end funds offered by banks and asset managers, designed to appeal to wealthy private investors.
“German banks account for close to $100 billion of shipping debt out of a world total of around $400 billion,” Dagfinn Lunde, former head of shipping at Germany’s DVB Bank, told Reuters.
With the onset of the slowdown, banks have found themselves struggling to recoup whatever they can on the tens of billions of dollars of outstanding shipping loans. With nearly one-fifth of the 2,200 ships owned by KG funds insolvent, this has plunged many firms into uncertainty as previously bold investors abandon the KG market.
“The number of emergency sales and/or insolvencies will rise,” research firm Deutsche Fondsresearch manager Marcel Wodrich told WSJ. “Fresh money from banks or investors is not in sight.”
How KGs Operate
The key to the rise of KGs is that they are designed to operate like a small company. The funds raise equity from investors — often as much as $112 million — and borrow money from local banks to purchase ships. Ship income is then channeled back to investors, allowing them to recoup and profit in a market with strong shipping demand and high confidence. To help boost interest and make KGs more appealing, the German government suspended its usual 27 percent tax rate on income related to these expenses, instead opting for a much reduced tax rate.
For a time, shipping KGs represented one of the strongest investments on the market: The Lloyd Fonds shipping KG fund was forecasting a whopping 229 percent return over its lifetime for its customers. This optimism has since be dashed as the fund’s share value fell 95 percent, becoming essentially a dud investment for consumers and a toxic asset for the funds themselves.
End in Sight?
Further spooking KG investors is the recent filing for recievership by South Korean shipping power player Hanjin Shipping Co. Without Hanjin in the mix, the short term global market outlook seems uncertain.
“For German shipowners, Hanjin is bad news as for them a large company falls away with which they can charter their ships,” Oliver Faak, global head ship and aircraft finance at NordLB, told Reuters.
An end to the freefall, however, remains in sight: With the market rebounding slowly and the European Central Bank seemingly preparing to step in and mitigate losses, investors may be able to escape the turmoil relatively intact. However, the long term prospects for the currently risky KGs remains uncertain.