GCD Shipping Finance LGD Study 2017

Abstract

The shipping industry is the backbone of global trade as most exported goods are transported by ship. More than almost any other sector, it benefits from globalization and economic upturn. This also makes the industry vulnerable to economic downturns. The world of shipping banks has radically changed in recent years. After a decade of boom, the industry was hit very hard by the global economic crisis after 2008. GCD loss data confirms this general observation, showing few defaults in the early 2000’s but high default levels starting in 2009. Upcoming regulatory changes put more pressure on the financing banks, who face the possibility of much higher capital requirements currently under discussion by the Basel Committee, especially for Specialised Lending exposures. Other requirements like IFRS9/CECL or stress testing/CCAR create the need for more detailed default and loss modelling, especially in respect of term structure and macroeconomic dependency. The long timespan of the GCD database and the detailed cash flow data allow for dedicated LGD time series analysis. This report shows an excerpt of the work performed on the shipping finance loss data provided by members to the GCD LGD/EAD loss database. Following our motto “by banks for banks” more detailed analytics as well as the raw data set are available to GCD member banks. In particular, this report provides insights regarding four major questions: Does the data tell the story of why selling the ship is the option of last resort? Different workout scenarios such as cures, rescheduling or sale of collateral can be analysed with the GCD data set, indicating that selling the ship leads on average to higher loss and is therefore not the preferred or indeed usual course of action taken by banks. What is the impact of collaterization on LGD? The loan to value ratio (LTV) is one of the main drivers for LGD modelling. The GCD data confirms a strong positive correlation between LTV and LGD. Can you link macroeconomic developments to the LGD curve over time? The impact of the macroeconomic downturn after the financial crisis is clearly visible in the GCD database, explaining both banks’ recovery strategies as well as external economic developments. Is specialised lending actually riskier than corporate finance? No evidence can be found in the data for a significant difference between the average outcome of Large Corporate Defaults and Specialised Lending defaults, after controlling for similar collateralization.