Ship Funding Revives in Landlocked Bavaria Amid Lost Billions

(Bloomberg) -- With the shipping world rattled by its biggest-ever bankruptcy and major players seeking safety through mergers, a family-run company from landlocked Bavaria is braving the turbulence by financing fresh vessels.

With two new ships, MST Mineralien Schiffahrt Spedition & Transport GmbH is reviving a German funding model that the global recession came close to killing off, tapping private investors for the bulk of the money with most banks reluctant to lend. The secret for MST, located in a hamlet more than 600 kilometers (370 miles) from Germany's biggest port city of Hamburg, is to bet on a niche, like a long-term contract to transport clay, rather than rely purely on worldwide trade growth.

That approach is key in an industry that's burned billions of euros in investor money as would-be shipping barons poured funds into new merchant vessels. Those gambits foundered as freight and charter rates tumbled due to overcapacity. Hundreds of single-vessel firms, once a popular funding method, have gone bankrupt since the global economic crisis started about eight years ago. MST is the first to revive so-called Kommanditgesellschaft, or KG, financing since Germany, home of the world's biggest container fleet, implemented tighter rules in 2013.

“Shipping is a volatile business,” said Matthias Ruttmann, 41, the second-generation head of MST. “Investors must be prepared to see a vessel earning nothing for three years, but then generating returns of 10 percent to 15 percent on a market recovery.”

Most of MST's 12 vessels are jointly owned by the company and partners under KG structures. About two dozen investors are involved with the two newest ships, the 185-meter-long (610-foot) Marguerita, which went into service on a Brazil-to-North America route in January, and the Tanja, which set sail in August.

MST, based in Schnaittenbach, is still seeking new participants willing to contribute at least 20,000 euros ($22,000), luring them with a 7 percent return on investment over 20 years. The goal is for outsiders to account for as much as 60 percent of the funds' combined $28 million in equity tranches by March, Ruttmann said.

Single-ship partnerships became popular at the turn of the millennium, particularly in Germany, with the structures raising about 35 billion euros from some 840,000 individuals in the 15 years till 2013, according to FERI EuroRating Services. Flat taxes based on vessel capacity rather than revenue, and double-digit gains in trade in the early 2000s, fueled the boom and turned Germany's seagoing merchant fleet into the world's fourth-biggest, including container, bulk and multipurpose carriers.

A bust came after the collapse of Lehman Brothers in 2008, with more than 500 single-vessel funds going bankrupt since, Hamburg-based shipping lawyer Peter Hahn estimates. The upshot has been about 4 billion euros in losses for investors, according to Tilman Welther, the editor of industry newsletter Fondstelegramm.

Big players have been hit hard too, with Korea's Hanjiin Shipping Co. filing for court protection in August and Japan's three biggest shippers agreeing earlier this week to combine their container operations. MST hasn't been immune to the industry's turbulence. A bulk vessel managed by the Bavarian company went insolvent earlier this year due to a U.S. legal dispute unrelated to financing. “We still have a track record to be proud of, given the 31 years of company history,” Ruttmann said.

The slew of insolvencies prompted Germany to add requirements for more detailed documentation, which has prolonged fund setup times to one year from three months, according to MST. Also, shipping banks that once backed the ventures are tightening credit standards and shrinking their exposure to the industry, said Christian Nieswandt, global shipping head at Hamburg-based HSH Nordbank AG. With issuing houses that manage the funds still closing, MST's approach could be more of an anomaly than a sign of things to come.

“Hurdles are high for luring investors back into shipping and working out a prospectus that meets all regulations,” said Alfred Hartmann, president of Germany's VDR shipowners' association.

Still, MST is confident its strategy will pay off. With the Marguerita and the Tanja, the company has secured revenue with a five-year contract with French mineral processor Imerys SA to carry kaolin clay, an ingredient in glossy paper, from Brazil to mills in Maine and Canada.

“Even if the client decides to pause deliveries for 10 days, the ships would be flexible enough to carry different cargo, such as salt or grain, on their return voyage,” Ruttmann said. “The risk of idling is zero.”

To contact the reporter on this story: Nicholas Brautlecht in Hamburg at nbrautlecht@bloomberg.net. To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Tom Lavell