January 1, 2013 6:34 pm

Shadow banks tap into distressed shipping

Leading private equity and hedge fund investors are increasing their bets on the distressed shipping industry, pursuing strategies that range from buying ships to purchasing loans from European banks that have financed the sector in the past.

The activity underscores the increasingly important role that “shadow” banks – non-depository institutions that invest in loans and other debt instruments – are playing in providing credit to companies.

It also represents a high-risk wager by investors struggling to find places to put their money to work. Tanker, container and dry-bulk groups have been hit hard by the global economic slowdown, and alternative investors have a mixed record on such ventures in the past.

“Nothing is more volatile than shipping,” said Wilbur Ross, a veteran “vulture” investor who has been buying ships and shipping companies. “I’m assuming the industry will turn around in 2014. If it [the downturn] goes on longer, my return on investment will not be so good.”

Alternative investors putting capital to work in the sector have included Apollo, Blackstone, Centerbridge, Fortress, Oaktree Capital and WL Ross, people familiar with the matter say. Banks selling shipping loans in recent months have included HSBC, Lloyds and Royal Bank of Scotland, they said.

In one recent deal, Oaktree bought $800m of shipping loans from Lloyds in November at a substantial discount, according to people familiar with the matter. Private equity firms including Apollo and TPG also bid. Lloyds declined to comment.

Centerbridge, meanwhile, bought bank debt in Overseas Shipping Group before and after the New York-based tanker operator filed for bankruptcy protection in November.

Blackstone’s new tactical opportunities arm acquired tankers with an enterprise value of $200m from a German seller. Blackstone is also thinking of selling credit insurance to banks on shipping loans, which would enable the lenders to keep the assets and pare back the amount of capital they set aside against their holdings.

Alternative investors are being tempted by shipping despite past reversals. The private equity arm of Oaktree invested $200m into General Maritime just before the container line filed for bankruptcy protection a year ago. It later had to inject another $175m.

Investors reckon the industry is due for a rebound and see an opportunity because so many banks that have financed shipping are looking to reduce their exposure.

“Shipping was a classic bubble,” said Wes Edens, founder of Fortress, which owns a listed container leasing business and ships. “It was financed under terms that were too easy, like housing. Ships were built everywhere, often for reasons that were not economic.”

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