Container Freight Swap Agreements

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1 Container Freight Swap Agreements Hamburg 23 rd February 2011 Marine Money Workshop

2 ICAP ICAP plc formed 1999 Voice and Electronic Interdealer Broker FTSE 100 member staff in 32 countries o o o o Interest Rates, FX, Equity Derivatives Shipping Commodities Post Trade Risk & Information Services Co operation with Martini Chartering, Reederei F. Laeisz, Hamburg

3 The Container Market is Changing Construction of ultra large vessels => theoretical unlimited slot capacity Panama Canal locks extended by 2014 (New Panamax size rd. 12,500 TEU instead of 4,500 TEU) Agricultural / traditional bulk cargoes (chrome, scrap, nickel, magnesium get containerized) Extended offshore warehousing Liner Conferences (Europe) are history, antitrust immunity in the US under discussion New players entering the market Container industry in fact commoditized

4 Price Risk Management Physical volumes agreed separately from future prices Two parties agree on (standard) contract Priced against benchmark index

5 Example I (SWAP) Freight Forwarder (Buyer) is concerned about rising rates: January: Physical price level: Opinion of rising markets Contract over 100 TEUs each 1,500 USD / TEU 1,750 USD / TEU March: Spot rate: Seller will pay Buyer: Total freight cost for Buyer: 1,900 USD / TEU 1,900 1,750 = 150 USD / TEU 1, = 1,750 USD / TEU

6 Example II (SWAP) Shipping Line (Seller) is concerned about falling rates: January: Physical price level: Opinion of falling markets Contract over 100 TEUs each 3,000 USD / TEU 2,500 USD / TEU March: Spot rate: Buyer will pay Seller: Total freight income for Seller: 2,400 USD / TEU 2,500 2,400 = 100 USD / TEU 2, = 2,500 USD / TEU

7 Additional Uses Index Linked Container Contracts Volumes agreed separately from prices Price risk eliminated through corresponding paper position First tenders in the market Options Buyer acquires right, but not the obligation, to buy (a call option) or sell (a put option) underlying instrument at a specified price (Premium) Put option = floor Call options = cap E.g. an owner buys a put option from Bank A on index for May 2010 at a strike price of $1,200 per box for 100 boxes. If index is settled at $900 per box, owner will exercise option and Bank A will pay owner * 100 = $30,000

8 Opportunity Cost of Certainty SELLER (Shipping Line) BUYER (Freight Forwarder) Cargo (TEU) 1500 Physical downside paid by the FFA market Physical upside paid to the FFA market 1500 Slots (TEU) Physical upside paid to the FFA market Physical downside paid by the FFA market USD Freight 1450 Rate 1500 Locked in income USD Freight Rate Locked in costs

9 Shanghai Containerised Freight Index Shanghai Shipping Exchange (SSE) Launched October 2009 Redesign of the 2005 index Composite index of weighted average USD per TEU / FEU for 15 ex Shanghai routes Reporting Panel of 15 liner companies and 15 shippers / freight forwarders KPMG audited

10 Two Deal Types Bilateral Deals Cleared Deals Two parties agree on a contract Commonly standard contracts are used; e.g. International Swaps and Derivatives Association ( RISK: The counterparty Out of the money might be unable to pay on settlement date 4 main shipping routes: NWE, MED, USWC, USEC Clearing Houses is risk taker Access via General Clearing Members Should one counterparty fail, the Clearing House would step in

11 Ship Finance Limited underwriting capacity Still stressed EQT markets Tighter regulatory environment Unsure macro economic outlook Uncertain fleet development High volatility Demand for flexible & competitive financing solutions Shorter time horizons required Share freight rate risk with a professional risk taker

12 Cash Flow Security Hedging container freight prices secures operating cash flows Secured cash flows Provides confidence to lender Lender Improved confidence Increased availability to finance and reduced cost of debt Equity Less investment from the equity investor Improved return on equity Possibility to upgrade charter counterparty Derivatives can be integrated at different levels of a project financial structure

13 Smoothed Revenue Vessel Revenue $ Cleared swap or option Bilateral swap or option 0 Y1 Q1 Premium / Brokerage Y1 Q2 Y1 Q3 Y1 Q4 Y2 Q1 Y2 Q2 Y2 Q3 Y2 Q4 Y3 Q1 Y3 Q2 Y3 Q3 Y3 Q4 Y4 Q1 Y4 Q2 Y4 Q3 Y4 Q4 Y5 Q1 Y5 Q2 Y5 Q3 Y5 Q4 Vessel Life Span (Hedging costs can be absorbed by reduced invested capital) Initial Investment

14 T/C Paid Using Derivates 5,000 TEU (3,200 $23,000 $8.3m p.a. Cal 12 Container Swap: $1,525 Charter Rate x x Cal YY FFA Contract Price Shipping Line sells 450 boxes (per month) of Cal 12 Swaps: 12 x (450 x $1,525) 12 x $700,000 $8.4m Contractual assignment for security Brokerage + Clearing $8,000 per month ( 1 % of charter income)

15 Monthly Direction of Cash Flows Low freight rates: Physical Market $600,000 Shipping Line 450 Cal 12 $1,525 each $700,000 Ship Owner Paper Market High freight rates: +$100,000 Physical Market $900,000 Shipping Line $700,000 Ship Owner Paper Market $200,000

16 Status of Container Derivatives Approx. 400 TEU traded weekly 3PLs, BCO s active Smaller shipping lines stepping in Alliance members still in evaluation processes Logistics sector focused on by the financial industry Containerized Freight Derivatives Association (CFDA) Risk management through independent daily forward curve

17 Produced by ICAP Securities Ltd. Kai Miller ICAP Securities Limited, 2 Broadgate, London EC2M 7UR United Kingdom ICAP plc All information contained herein and any opinions expressed in it, have been derived from sources believed to be reliable and in good faith they are not to be relied upon as authoritative or taken in substitution for the exercise of your own commercial judgment. The Information is directed to Eligible Counterparties and Professional Customers only and is not intended for Retail Clients (as each term is defined by the rules of the Financial Services Authority ("FSA")) and is the intellectual property of ICAP plc, and/or one of its group companies ( ICAP ). This information has no regard to specific investment objectives. Any opinions expressed in it are subject to change without notice and may differ from opinions expressed by other areas of the ICAP group. This information is not, and should not be construed as, an offer or solicitation to sell or buy any product, investment, security or any other financial instrument. ICAP does not make any representation or warranty, express or implied, as to the accuracy, completeness or correctness of this information. ICAP does not accept any liability for any loss or damage, howsoever caused, arising from any reliance on any information or views contained in this material. ICAP and the ICAP logo are trademarks of the ICAP group. All rights reserved. ICAP Securities Limited is authorised and regulated by the Financial Services Authority. For further regulatory information, please see

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