SHIP FINANCE. 18 September Cheong Chee Tham -

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Beverly Parrish
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1 SHIP FINANCE 18 September Cheong Chee Tham -

2 Equity Financing Global maritime shipping industry is capital and asset intensive in nature. Shipowing and financing of ships are critical components within the international maritime industry. Conventional financing mortgage/debt financing -- secured borrowings combined with owners equity. 2

3 Developments Equity Financing Since Rise in asset price, charter rates many ship owners begin to use alternative sources of equity capital eg. public offerings & leasing (ie using third party equity) Employment of professional CFOs Understanding cost of capital (WACC) Also ship owners are beginning to realise ownership and control of vessels need not rest with same party 3

4 Tonnage providers Ship operators Shippers Value chain Bareboat charter Own vessels Do not operate the vessels Lease vessels to third parties under fixed rate Bare boat charters Time charter Own vessels Operate vessels under fixed-rate charters with third parties Own vessels Operate vessels May lease-in vessels under BBC or TC Require movement of materials and finished goods through supply chain 4

5 Equity Financing What constitute Equity Financing? Raising of capital via offering of shares from private/public domain. 5

6 Recent IPOs May 2007 Rickmers Maritime Trust US$175M (SGX) April 2007 Akebono Shipping Fund 1 Closed end fund March 2007 First Ship Lease Trust - US$342M (SGX) May 2006 Pacific Shipping Trust US$99.9M (SGX) October 2006 Danaos Corporation - US$204M (NASDAQ & SGX) April 2006 Omega Navigation Enterprise US$204M (NYSE) August 2005 Seaspan Corporation $600M (NTSE) 6

7 Equity Financing Business Times 12 September

8 OVERVIEW EQUITY FINANCING/LEASING Leasing Finance & Operating (incl. Tax leases) Initial Public Offering ( IPO ) Raising Equity Nowegian KS Market (Primarily bareboat charters) Business Trusts Private/ Closed-end Funds 8 German KG Market (Time charters)

9 Why Equity Financing? Everyone knows debt is cheaper Lower overall cost of financing Diversify funding sources/ reach out to other markets Public Profiling subject to regulatory requirements 9

10 Business Trust Structure UNITHOLDERS Periodic distributions Lease rentals TRUST Ownership Trust Deed Fees Ownership TRUSTEE- MANAGER VESSELS Lease LESSEES 10

11 Overview of Business Trusts Requires registration of of Business Trust (by MAS) Business Trust Act Requires a single Trustee-Manager that is is a company cannot carry out other businesses other than managing and operating the BT At least half of of the directors of of the Trustee Manager must be independent Governed by the Trust Deed between the Trust and Trustee-Manager Advantage Ability to to pay dividends out of of cash profits rather than accounting profits Why BT Suited for structures with large stable income generating assets 11

12 MARITIME INSURANCE

13 MARITIME INSURANCE Hull & Machinery Protection & Indemnity War Risk 13

14 Marine Disasters Oil Spills, environment mishaps MARITIME INSURANCE Mechanical Failure Operation of Vessels Collision Business Interruptions Loss of Cargo Damage 14

15 Maritime Insurance Normally taken up by the Operators of the vessels rather than the financiers: Lessor Bareboat charters insurance taken up by lessee Lessor Time charters insurance taken up by lessor for those related to the vessel; and lessee for those related to cargo. 15

16 Maritime Insurance Typically, a financier would require: (i) An assignment of insurance policies (ii) Named as a co-beneficiary/co-assured H&M & War insurance typical requirement for each vessel to be covered up to at least Fair Market Value or 110%-130% of the SLV Protection & Indemnity insurance third party liabilities. 16

17 Maritime Insurance Passive Investor s Interest Insurance ( PII ) A type of policy to cover situations where (a) the relevant operator s primary policy has declined a claimed (b) fails to to respond within the designated time allowed. Mirrors the vessel s primary insurance (H&M, War Risks and P&I); secondary coverage Taken up mainly by Lessors or Lenders 17

18 Appendix

19 Residual Value Insurance ( RVI ) What is RVI? What is the role of RVI in ship finance? An RVI provider indemnifies the policy holder against a loss (in value of the vessel) that might occur if the sale proceeds/value of the vessel is less than the insured residual value at a specific point in time (normally at the maturity of the financing period). 19

20 Residual Value Insurance ( RVI ) An RVI provider indemnifies the policy holder against a loss (in value of the vessel) that might occur if the sale proceeds/value of the vessel is less than the insured residual value at a specific point in time (normally at the maturity of the financing period). Original Vessel Cost Maturity Forecasted RV Insured RV Indemnity Fair Market value Time 20

21 Residual Value Insurance ( RVI ) Shipping is cyclical RVI is one method of managing this risk Reluctance of lenders & investors to assume residual risk of the vessels because of the volatility of the market RVI provider is in effect acting as a third party guarantor to secure a minimum residual value 21

22 Residual Value Insurance ( RVI ) Advantages Transfer of risk Provides downside protection Lenders: lower the repayment profile for borrower May be costly No consistent providers of such RVI 22

23 THANK YOU

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