1 Ships, Banks and the Credit Crunch Intertanko Intercargo 25th June 2008 Page 2 Contents 1. DVB – A brief introduction 2. The Credit Crunch – a digression… 3. The Ship Finance Market 4. Vessel Values - Optimism and Experience 5. Terms and Conditions in a lender’s market 6. The strange business of LIBOR 7. Conclusions
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1
Ships, Banks and the Credit Crunch
Intertanko Intercargo25th June 2008
Page 2
Contents
1. DVB – A brief introduction
2. The Credit Crunch – a digression…
3. The Ship Finance Market
4. Vessel Values - Optimism and Experience
5. Terms and Conditions in a lender’s market
6. The strange business of LIBOR
7. Conclusions
2
Page 3
DVB Bank
1923
1988
1995
1997
1998
1999 / 2000
2002
Foundation of Deutsche Verkehrs-Kredit Bank (DVKB) in Berlin
DVKB shares (24.9%) introduced to official trading on the FSE and BSE; Deutsche Bundesbahn retains 75.1%DG BANK takes a majority share of 50.1% in Deutsche Verkehrs-Bank
Strategy of the bank focuses on the transportation industry
Internationalisation through the acquisition of the Global Aviation and Shipping Finance division of the Long-Term Credit Bank of Japan
Change of corporate name: DVB Bank AG
Acquisition and integration of Nedship Bank N.V., closing of all German branches and establishment of four Transport Finance divisions
We are the unique asset expert in Transport Finance
DVB at a glance | 1. Key facts
Asset & Market Research
Structured Asset Financing
Equity Sourcing and Investments
Risk Distribution
Advisory Services
Loan Participations
Shipping Aviation Land Transport
Page 6
Shipping division – 10 global sectors
DVB at a glance | 1. Key facts
Three existing and seven new sectors
Container Box Group11
Cruise & Ferry Group22
Crude Oil & LNG Tanker Group33
Chemical & LPG Tanker Group44
Container Vessel Group55
Dry Bulk Group66
Floating Production Group77
Offshore Drilling Group88
Offshore Support Group99
Product Tanker Group1010
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Page 7
Mission Statement
We are the leading specialist We are the leading specialist
in international transport financein international transport finance
Page 8
The Credit Crunch
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Page 9
What is Subprime?
The US Mortgage Market is worth USD10 Trilllion
Of this USD7.2Trillion has been issued in the capital markets as Mortgage Backed Securities.
12% of the Mortgage Market is classified as Subprime. A further 10% is Alt-A. That’s about USD2.2 Trillion in total. Most of this has been “Securitised”, ie: Pooled, Tranched and sold to the capital markets
Subprime borrowers are typically low credit scoring with high gearing and low incomes.
Market forces have made this market more and more aggressive in recent years:
Interest Only – 37% of new loans
No deposit – 38%
No proof of Income – 43%
ARM - Low introductory interest rate, “exploding” after 2 years – c. 80%
BBB paper can be still further pooled and re rated up to AAA
Rating Agencies made most of this paper, or up to 95% of the value of the underlying property valuation appear very safe indeed, and it attracted a wide investor base.
“The empires of the future are the empires of the mind”
Winston Churchill.
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Page 11
Housing decline – An accident waiting to happen?
Event, Venue, Date 2008
Source: Irrational Exuberance (2nd Edition, Robert Shiller)
US Real House Price Index since 1890
Page 12
Housing decline
Event, Venue, Date 2008
US House Price Movements since 1988
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Page 13
Subprime Lending - …
Event, Venue, Date 2008
Source: Bloomberg - May 2008
Subprime delinquency as % of total subprime loans
0123456789
10111213141516171819
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Page 14
0
20
40
60
80
100
120
7/19
/06
8/2/
068/
16/0
68/
30/0
69/
13/0
69/
27/0
610
/11/
0610
/25/
0611
/8/0
611
/22/
0612
/6/0
612
/20/
061/
3/07
1/17
/07
1/31
/07
2/14
/07
2/28
/07
3/14
/07
3/28
/07
4/11
/07
4/25
/07
5/9/
075/
23/0
76/
6/07
6/20
/07
7/4/
077/
18/0
78/
1/07
8/15
/07
8/29
/07
9/12
/07
9/26
/07
10/1
0/07
10/2
4/07
ABX 2006-2 AAA ABX 2006-2 AA ABX 2006-2 A ABX 2006-2 BBB ABX 2006-2 BBB-
Financial Turmoil – The Decline of Securitised Products
Event, Venue, Date 2008
Source: ABX, DVB Analysis – May 2008
ABX Index: Implied Value of Asset-backed Bonds Issued July - 06
Its got worse:AAA 72.5cAA 22.48cA 9.47cBBB 5.53cBBB- 5.40c
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Page 15
Financial Turmoil – Halfway through?
Event, Venue, Date 2008
Source: Bloomberg – May 2008
Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital
Cheap in historical terms, but margins are up by 40-60 bp
Page 28
The strange story of LIBOR
•British Banker’s Association sets interbank interest rates for 10 currencies.
•Quotes are provided by 16 banks based on their own cost of funds and the average of 8 median quotes is used.
•The question is – are they telling the truth?
•The suspicion is that the panel is keeping rates artificially low:• to suggest they are less desperate for liquidity than they are• to reduce their borrowing costs on existing LIBOR based deals
•BBA is investigated, but many banks are still unsatisfied by its remedies
•In the meantime non bank borrowers are getting a great deal on short term money
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Optimism or Experience? …and where will the money come from?
Page 30
Shipping Finance’s biggest challenge: Optimism or Experience?
Opex 10,000$ Swap 4.50%Margin 1.25% Day Rates (USD)Interest Cost 5.75% Historic Average 1 yr TC 30,233$
Current 1 yr TC Rate 80,000$ Repayment Profile (years) 16.15 Spot YTD 102,325$ Book Value Year 5 144,000,000 Spot Rate 57,374$ Balloon o/s Year 5 78,000,000