Overcapacity continues to eat away at global shipping and that spells billions of dollars in non-performing loans. The Hanjin bankruptcy supplied ample evidence of what happens when banks finally pull the plug. The Hanjin bankruptcy sent “a warning shot, big time, across [the bow of] the financial community,” said Paul Slater, managing director of the consultancy group Qorval, and a veteran in maritime financing. Yet, reaction to the collapse of Hanjin has been anything but uniform. It’s not as if the bankruptcy triggered a worldwide freeze in ship-related finance, or even a major time-out. In late October, the South Korean government announced it would create a state-owned ship financing company, with initial capital of almost $900 million. This is designed to underwrite the acquisition by South Korean shipping lines of new ships made in South Korean yards, which remains a massive part of the country’s economy. Or take a hedge fund-type operation called Northern Shipping, which is based in Stamford, CT. In December, it announced that it closed on a new alternative finance fund aimed at shipping and offshore oil services. It was able to raise more than $500 million, $100 million more than its initial target. Northern Shipping joins dozens of private equity firms and hedge funds attempting to cash in on cheap shipping assets and even cheaper debt. Those efforts are horribly risky. Hanjin’s woes were well-chronicled months and years before it was forced into bankruptcy. What’s really scary are the many ship owners who are teetering as well, but whose finances are hidden from public view. One of the biggest concerns is Germany. Last September, a Reuter investigation concluded that German financial institutions and funds hold as much as $100 billion in ships-related debt, or about 25% of the global total. It’s believed that much of that debt is non-performing and held in part by banks and in part by investment funds called KG Houses. These are limited partnerships that acquire one vessel and then lease it to a shipping company. At the height of KG Houses popularity, some 440,000 investors had put money into these partnerships, according to a paper produced by the German law firm Kravets & Kravets. In 2007, KG Houses accounted for 26% of global order book tonnage. The investors were attracted to tax advantages and what they thought would be a guaranteed return. Not only has that return evaporated, but investors could be on the hook for more. Under German law, if the investments fail within the first ten years, investors must cover any losses. What’s more, their debt ranks behind bank debt so the chances of recovery are extremely slim. These KG Houses “are dead but not buried,” said Slater.