Deutsche Bank trader's shipping bet set to help lender rake in US$1b windfall

Frankfurt

MARK Spehn couldn't join billionaire Idan Ofer at his seaside villa north of Tel Aviv for a party on June 8 to mark the initial public offering (IPO) of Zim Integrated Shipping Services. But the 35-year-old Deutsche Bank Group trader still had much to celebrate from his desk in London.

Mr Spehn's long-shot bet on the once-distressed Israeli shipping company has put the German lender on track for one of its biggest wins since its "Big Short" trades against US sub-prime securities more than a decade ago.

With the world's 11th-largest container shipping carrier now riding the wave of record-high freight rates, Deutsche Bank's potential windfall could climb to almost US$1 billion.

Starting in 2016, the distressed-debt trader wagered under US$100 million on bonds and bank loans of Zim that were trading at a heavy discount. He also bought equity in the company for a few million dollars amid depressed shipping rates.

Those investments have now surged and could effectively hand Deutsche Bank a win that would be equal to about a quarter of its 2020 investment banking profit.

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Mr Spehn started building a position in Zim shortly after joining the bank from broker SC Lowy.

Zim, which helped transport Jewish immigrants to their new homeland in the aftermath of World War II, had emerged from a bruising debt restructuring in 2014.

The overhaul had cut its debt and diluted the stake of its controlling shareholder - Israeli tycoon Ofer - but left it struggling amid low rates for maritime transport.

Undeterred, Mr Spehn made it his top conviction trade, banking on the consolidation in the industry, support from Mr Ofer and steps management was taking with digitisation and forging alliances.

The trader criss-crossed the City to try and lure others into joining his bet, people familiar with his pitch said. But it was a tough sell as global rates remained subdued, they added.

Goldman Sachs Group and Fidera, a fund founded by an ex-Deutsche Bank banker, are among firms that invested in Zim in secondary markets at a discount, both for debt and equity, according to people familiar with the matter.

While measures implemented by Zim's management in the past few years helped improve the business, it was the jump in shipping rates that turned the company's fortunes around.

Container rates started to soar in the second half of last year on the back of stronger demand in Europe and the US and the introduction of stricter carbon-emission regulations.

The surge created bottlenecks in the supply chain and pushed rates to record levels. The Shanghai Containerised Freight Index, which tracks freight rates on some of the busiest sea routes out of the Chinese port, have risen 265 per cent in the last year.

Zim, which went public in January, has seen its value triple and has announced it will pay an extraordinary dividend in 2021. Analysts at Jefferies expect the company to generate more cash flow this year and further improve its balance sheet.

"Becoming a public company creates other opportunities for us to grow and our shareholders were very supportive of this initiative," Xavier Destriau, Zim's chief financial officer, said in an interview.

Deutsche Bank has started to cash in: it sold about US$90 million in shares on June 4, according to filings, leaving it with a stake worth about US$645 million.

Some of the lender's gains have already been realised as debt it owned was redeemed at face value. That makes the Zim trade one of the most profitable for the bank since Greg Lippmann's bets against US sub-prime securities yielded almost US$2 billion.

The trade adds to a string of recent successes for Deutsche Bank. The German lender has overhauled its investment bank and says it regained market share as morale brightened and clients returned.

Deutsche Bank isn't the only winner from Zim's rebound. Mr Ofer, who provided financial support to the company over the last decade, saw his investment recover.

The 28 per cent stake owned by Kenon Holdings, Zim's largest shareholder, which is controlled by Mr Ofer, is worth US$1.4 billion.

Danaos Corp, a ship lessor that converted its leases into equity in 2014, got a windfall of at least US$250 million after the IPO, its President John Coustas said in its annual report.

Other investors with positions from the restructuring include investment funds King Street Capital Management and Davidson Kempner Capital Management, according to filings. BLOOMBERG