GERMAN KG MARKET
The strong container shipping markets over the past few years have benefited the German KG sector, where shipowning companies have been able to invest in new tonnage, pay down debt ahead of schedule, and pay better than expected dividends. The KG’s, limited liability companies funded by a “general partner” and by individual German investors (who are considered “limited partners”), became a force in ship finance during the mid 1990’s- when equity in excess of €1 Billion was raised annually for shipping projects. Carriers gain control of capacity (without burdens of ownership), while the traditional owners have an opportunity to gain 100 percent finance. The companies, with their requisite German locus typically being the ship management function, own vessels (generally newbuildings) that are chartered out on multi-year deals ranging from five years out to 12 years, or longer. Originally, the investors would see their returns through the actual operating cash flows coupled with a big tax shield as new tonnage was depreciated. At present, the depreciation tax shield is combined with an application of the increasingly prevalent tonnage tax- where taxes are at lowered flat rate, tied to the tonnage of the vessels, rather than their actual profitability. Beginning in 2007, those KG’s that choose to be taxed based on tonnage must apply this treatment from the inception of actual trading. As the companies moved beyond their familiar ground in the small containership sector, annual capital raises took off during 2003 and 2004, when equity of more than €2 Billion and €3 Billion, respectively, was raised for shipping deals. The KG companies have used debt to complement the equity, in order to fund their vessel purchases, which have gravitated into the realm of expensive post Panamax container vessels, chemical / product tankers and crude oil tankers. Estimates for the year 2004 suggest that KG’s acquired maritime assets of nearly € 8 Billion (with the equity complemented by approximately €5 Million of debt sourced from the large community of German banks). One poster child for the recent prosperity among the German companies has been Nordcapital, an integrated investment group (with ship management and money management services all in-house) closely tied to Hamburg based shipowner E Rickmers, concentrating o n container tonnage in the feeder sizes up
including two newbuildings coming out of a Korean yard onto charters with CMA CGM. all owned through single ship companies.” Nordcapital’s transactions include individual vessels (where maybe 800 investors might contribute equity of €27 Million towards the purchase of a 5700 TEU post Panamax container vessel costing roughly €72 Million). nearly 2500 investors contributed €70 Million of equity toward the €232 Million value of the fleet. a chartering and management company for 33 vessels (23 container and 10 product/ chemical tankers).usually set at between 8 and 12 years. Schiffahrt. Hanseatic Lloyd is also the 50 percent owner of shipping company Hansa Mare. above the prospectus estimates. Nordcapital (like other KG packagers) is also arranges property deals in both Germany and abroad.R.through post-Panamax behemoths exceeding 8200 teus . Trautmann pointed out that KG’s “…are not in the business of buying and selling assets. Hanseatic concentrates on
. Unlike the larger integrated packagers.with an aggregate capacity of 350. Mr. Its “Schiffs Portfolio Global 1” owns five container ships acquired since late 2003. are chartered out to about a dozen major lines. Maersk Sealand. Nordcapital’s recently announced results are impressive. whose ships are on charter to the major lines. which were managed by the Nordcapital Group shipping company E. Bank debt of US $151 Million composed the lion’s share of the capital funding the balance. will hold the asset for the life of the KG.” Mr. In this fund. These were even better than the overall results for Nordcapital shipping funds. Dirk Trautmann. if the KG is able to sell the asset at the termination of the KG for a level above the often low assumed residual value.” There are a number of ways that returns to investors could exceed the original targets. this will support such an extra distribution. The ships. According to Nordcapital. based in Bremen. for a total of $183. “Particularly good earnings were achieved in the shipping funds. Payouts to investors in existing Nordcapital funds doubled from the previous years. Included here was a cash dividend of 4 %. having taken in some €556.4 Million into its shipping funds during 2004. made up by the cash flow plus a hefty tax shield. it controls 58 existing container vessels and is building another 20 units. told JTF “ Of course.” JTF spoke with Hanseatic Lloyd. Rose law firm. Indicative of the frothy market with various indices of charter rates for containerships peaking in late 2004 and early 2005.reduced operating costs.000 TEUs. and repayments $81. or groups of vessels packaged together. with accumulated cash flow for these 34 funds exceeding budget by 33% at year end 2004. Munich based Partner of the Norton. and $/ € exchange rate variations. a recent report states: “Nordcapital funds paid out $38 Million more than the amounts stated in the various prospectuses.6 million.6 million above budget. Cosco and Zim. Operating through its in-house ship operating company ER Schiffahrts. The initial return to investors was pegged at approximately 27%. including P& O Nedlloyd. NOL/ APL.
developing the shipping deals. has only recently begun financing vessels through KG structures. it will likely result in a stronger credit. one year in advance of the expiry of the K-Line deal.which has two 2740 teu vessels (each costing US $47. through 2013. offers an illustration of “opportunity”where returns may exceed budgets. one of Hanseatic Lloyd’s 4700 box units. and voicing a concern that “… the risk in the KG deals will come when long-term charters must be renewed. Its tanker fleet includes four clean product tankers trading under ten year charter to Singapore based Mega Chemical Tankers. where he said “…the fusion of two companies.” Mr. the need to recharter the vessel provides either risk or opportunity. JTF asked Mr. the same word is used for “risk” a nd “opportunity”.is in the process of acquiring French stalwart Delmas.500 per day. extending eight years out. the charter carries on. Where the tenor of a charter is less than the 8 -12 year lifetime of most KG’s. the owners agreed on a charter with APL/ NOL.125 per day. In the heated market of late 2004. and the KG company bears the risk of changes in the
.CGM. The case of “HLL Atlantic”. and relies on a network of financial consultants throughout Germany to market its investments. in December 2002. at US $28. controlling some 500 ships. the KG also put interest rate hedges in place. Hanseatic Lloyd has been operating two Korean built 4700 TEU vessels in KG’s. charterers of its two newbuildings. thus enabling future dividends to investors. Struan Robertson. Christian Salamon. for his views on consolidation in the container shipping sector. Zim was recently privatized and is now controlled by the Ofer Group. In addition to a stable of 1000 – 4000 teu vessels.7 M teu containership charter market. Salamon framed his comments by pointing at the strong shipping markets (across sectors) over the past three years. Partner at London based lawyers Stephenson Harwood echoed some of the same sentiments. expose it to a rapidly shifting landscape of charterer financing structures. fi nanced through a KG fund with a profit split above a fixed minimum charter level. the CEO of packager Salamon AG. where “…owners with ships facing renewal of charters will have a smaller universe of acceptable credit worthy charterers.” Mr. at US $25. to lock in cash flow. Consider that COSCO. which is better for shipowners…” versus the long term. with another handful now under construction in China. noting that "when there is a merger. and was consistently rumoured to have been looking at CP Ships. players and league tables. typically 8 – 10 years out in the future. He distinguished between the short term. as well. According to its report to investors. COSCO launched an IPO earlier this summer. In some languages. while P& O Nedlloyd is being acquired by Maersk. which claims to control some 8% of tonnage in the 3.8 Million) on order. HLL Atlantic was delivered from the Hanjin yard into a K-Line charter (trading under the name “Delaware Bridge”). How will the ongoing merger and finance activity in the container trades impact the KG’s? The activities of Nordcapital. commencing October 2005. CMA.
Dr. Christian Salamon of Salamon AG was previously the Managing Partner) has invested in numerous tankers chartered. One innovative tanker deal in the pipeline. Salamon AG’s portfolio includes a VLCC on charter to NYSE listed Overseas Shipholding Group (recently added to the Dow Jones Transportation Average). Mr. to be placed on 5 year charters to Maersk at $24. Peters cites returns between 13% and 17. or the acquiring company. with expansion into sectors beyond containers. most notably to Frontline.9 Million) will come in from a German ship mortgage bank. notably tankers. added: "Nor do the KG charter agreements contain covenants typically found in debt deals . when the vessels would be sold.4 % for a number of modern VLCC’s into ten year deals placed in 2004 with China-based Pacific Star International and .organization of the charterer. The packager Dr. The KG will be capitalized with € 115. which are very much based on the name and the standing of the charterer. Suezmaxes on charter to OMI Corporation and Dynacom. whereby the buyer. Salamon AG contracts out technical management to German offices of managers such as Columbia or V Ships. and other Tsakos. the future is now.fixed on multi-year charters to acceptable owners. The deal takes advantage of the “combination model” where initial returns are enhanced by the tax shield. and other tankers chartered to Glencore (the same trading entity having a major relationship with financial owner Top Tankers) and Hellespont (Papachristidis). states that it will carry on existing contracts. by undertakings typically found in merger deals.such as financial coverage ratios. as does Dr.5 and $62 Million respectively. minimum net worth. In addition to the two container newbuilds (acquired from German owner Schoeller). Oldendorff).500 with a profit split above this level. Peters (where Mr. Debt of € 66. Peters (who draws on the technical expertise of firms such as Reederei "Nord" Klaus E." He said that the KG's agreement with their charterers. For the maritime part of the KG market. The calculations use a residual value of $5 Million per vessel in 2022. involves two Chinese built Aframax tankers (built 1999 and 2000) being purchased by the KG company for $59. Peters. Unlike integrated organizations such as Nordcapital. of which € 44.2 Million comes in as equity in two tranches that could possibly yield an aggregate of 220% over a 17 year time horizon.tied to an in-house ship manager. “DS Fund 111”. or will not compete with sellers in certain areas. assembled by Dr. albeit implicitly. with a shift over to the tonnage tax – typically as
. Robertson.with a stronger company.with the retur ns generated from the front year tax shields.7 Million.7 Million (US $81." Robertson also said that KG’s are impacted. Teekay and Euronav. the result may actually be better. or asset value to loan outstanding. MT Torm. and traded in the LR2 pool. typically do not provide language regarding a change in control of the charterer. with decades of ship finance experience in Hong Kong and London. and with more creative structures. In the case of the current consolidation wave.
Stephenson Harwood’s Robertson said that "the high asset values of LNG's. According to analyst Jurgen Dobert. Peters. and another tied up for 24 years on charter to Repsolmentioned as a potential takeover target (due to its ties to Gas Natural). nearly 77% of KG newbuilding deadweight tonnage during 2000. The ability to create market responsive chartering structures. together with long term charters to large stable entities tied to particular geographic areas (and therefore less likely to be involved in mergers and combinations) makes this sector an obvious target. with 29% going into tankers. suggested that 61% of equity went towards container vessels. whose work was quoted in a Salamon AG presentation.
. paradoxically. there are “risks”. supplied by analysts Stefan Loipfinger. Norton Rose’s Mr. Where charters must be renewed during the course of a KG (as in the medium term charters seen in DS 111 and others with “short” tenors of as little as five years). Figures for 2004. The next frontier for the KG’s may be LNG’s. which have already proven to be suitable for Master Limited Partnerships. Teekay LNG Partners has one existing vessel on for 18 years to Spain’s Gas Natural.2001 was containerships. with just under 6% being comprised of tankers." Interestingly. should enhance the penetration of KG’s into the tanker sector.initial depreciation benefits reduce after two or three years. Trautmann stressed that the new tonnage tax rules do not favor one type of vessel over another. “renewal rate risk” is a very real consideration. as those developed by Hanseatic Lloyd and Dr.whose bid for power company Endesa has put it into acquisition mode. even in the strong market. As with other forms of ship finance.