DnB NOR Bank ASA Lam Wai Kay 18 September 2007

Transcription

1 Debt Financing DnB NOR Bank ASA Lam Wai Kay 18 September 2007

2 Agenda Perspective of Shipping Who is DnB NOR? Financing Alternatives How do we do it? 2 September 14, 2007

3 The Shipping Industry Unpredictable earnings Volatility due to quick changes in the supply/demand balance Demand: Transport volumes determined by world economy and world trade, changes in foreign exchange rates, shifts in supply/demand for natural resources, and even weather Supply: Determined by a finely tuned balance of newbuildings, demolition activity (a function of vessel age, newbuilding prices, scrap steel prices, and, in some cases, regulation), and charter rates Competitive Factors Barriers to entry/exit, long lived assets, high fragmentation High operating leverage A large portion of costs are fixed, capital intensity Complex company structures Holding companies with various legislation involved, transparency / disclosure, private companies Regulatory environment The U.S. Oil Pollution Act of 1990, IMO 3 September 14, 2007

4 Rating Agency summing up Generally, the shipping industry's risk profile may be characterized as speculative-grade because of its: Economic sensitivity, capital intensity, and competitive factors, all of which lead to extremely volatile pricing swings in both freight rates and asset values. 4 September 14, 2007

5 VLCC Historical TC Rate Volatility VLCC Historical TC Rates USD per day Year Timecharter Rate 300,000 dwt DH Modern Tanker 3 Year Timecharter Rate 300,000 dwt DH Modern Tanker Date 1/12/ /26/2001 8/9/2002 5/23/2003 3/5/ /17/2004 9/30/2005 7/14/2006 4/27/2007 Source : Clarksons 5 September 14, 2007

6 Baltic Dry Index Baltic Exchange Dry Index Date 4/14/2000 9/28/2000 3/12/2001 8/23/2001 2/7/2002 7/24/2002 1/9/2003 6/24/ /2/2003 5/21/ /1/2004 4/20/2005 9/30/2005 3/17/2006 8/31/2006 2/15/2007 7/31/2007 Baltic Exchange Dry Index Source : Clarksons 6 September 14, 2007

7 Perspective of Shipping Who is DnB NOR? Financing Alternatives How do we do it? 7 September 14, 2007

8 DnB NOR Shipping at a glance Among the world s leading shipping/offshore banks Total shipping commitments approx. USD 25 billion. Approx. 50 % of portfolio consists of exposure to non-norwegian clients and is growing No. 1 Mandated Lead Arranger and Bookrunner of Syndicated Shipping Loans in 2006 More than 25 years of specific focus on shipping/offshore Nearly 80 professionals with long and varied shipping/offshore experience Presence in the major shipping locations: Oslo and Bergen London New York Singapore Shanghai 8 September 14, 2007

9 Top MLA and Bookrunner for Arranging Syndicated Shipping Loans in Mandated Lead Arranger Deal Value USD billions 0.0 DnB NOR Nordea BNP Citi ING Fortis SMBC Calyon SG CIB HSH Nordbank Bookrunner Deal Value USD billions DnB NOR Nordea BNP Citi Fortis HSH Nordbank Calyon SG CIB SMBC ING 9 September 14, 2007

10 DnB NOR Shipping Asia Background Base of major shipping clients with long history & high quality asset base Loan commitment of USD4 billion to Asian shipping Operates in the Far East (north to Japan, south to Indonesia & west to India) Singapore branch established for over 35 years Products & Services Capital (Debt & Equity) Advisory Services Structured Finance Treasury Products Cash Management Guarantees / Bonds Shanghai branch set up in September 14, 2007

11 Perspective of Shipping Who is DnB NOR? Financing Alternatives How do we do it? 11 September 14, 2007

12 Ship Finance in general Investment financing Equity Debt Off balance Private Public Export financing Yard financing Bank Capital Markets Private & Public Investors optimal capital structure will combine flexibility with the lowest total cost of capital 12 September 14, 2007

13 but different split of risk & reward Equity investor Bank / Lender Full upside Full downside No share of upside (principle + interest only) Protection on the downside Ship financing is all about reflecting the risk and reward sharing between the equity investors and the bank 13 September 14, 2007

14 Capital Sources Export financing Leasing Government credit schemes Repayment to zero over 12 years (OECD terms) Yards co-operate with governmental credit agencies Financial leases are a financing source Lease is an alternative to buying a rental scheme Tax benefits through use of depreciations by lessor Bank Financing Most commonly used Known to be flexible & cheap Capital Markets (Bonds) Long-term financing, up to years One drawdown, one repayment Few, but though financial covenants Often unsecured Limited flexibilty, prepayment penalties 14 September 14, 2007

15 Bank Financing Senior Term Loan Revolving Credit Facilities Primarily one drawdown of the loan Repayment through instalment Instalments paid can not be redrawn Several drawdowns under the loan Repayment through reduced availability Amounts paid are available for new drawndowns Bridge Facilities Shorter term financing to bridge a time gap Both 'legs' of the bridge to be solid Acquisition Financing Mezzanine Financing Not allowed to finance against assets in target comp. Often high profile transactions Normal bank debt with lower security coverage Higher cost due to higher risk Quasi equity, right to convert or 'equity kicker' 15 September 14, 2007

16 Perspective of Shipping Who is DnB NOR? Financing Alternatives How do we do it? 16 September 14, 2007

17 Main Considerations Client Investor Cash flow Ship-owning company Charterer Collateral Vessel 17 September 14, 2007

18 Management track record Operational skills and financial track record Historical performance versus that of the industry peer group Innovation and flexibility in reacting to changing market conditions Timing of equipment acquisitions and divestitures in relation to industry cycles and availability of attractive prices Certain companies, particularly in the tanker trade, buy and sell assets or newbuilding contracts primarily to profit from industry price swing. Not all do well.. Line of succession and management strength and depth Management is extremely important in the volatile and fiercely competitive ocean shipping industry. The depth and breadth of a company's management must be evaluated, especially for private companies or companies that are controlled by their founders or immediate family members (Corporate Governance) 18 September 14, 2007

19 Cash Flow 20,000 15,000 Will cash flow (EBITDA) cover interest and instalments in a Low Case scenario? USD ,000 5,000 Cash Flow Stability Interests Instalments EBITDA Base EBITDA Low The length of charters Time for renewal (all at the same time?) The charterer's financial position How firm is the contract (charter party)? 19 September 14, 2007

20 Collateral Secured lending still most common though, unsecured lending to first class names has increased The most common securities Mortgage assignment of earnings/charter party assignment of insurances incl. MII/AP Parent company/personal guarantees Collateral should be the "second way out", and not justify an otherwise bad credit Loan Covenants Covenants assist Lenders to reach an understanding with a borrower regarding how the borrower will conduct its business and financial affairs The stronger the covenant package is, the greater the degree of control the lender can exercise over the investment/borrower Borrowers typically seek the least restrictive covenant package they can negotiate and maximum flexibility to conduct their business in the way they see fit Covenants do not play a significant enhancing role in determining credit quality of a company 20 September 14, 2007

21 Summing up so far Client who is behind and what may they do with the money? Cash flow are you comfortable with the debt service? Collateral do you have a second way out? 21 September 14, 2007

22 DISCLAIMER The presentation is based on information believed to be reliable, but DnB NOR Bank ASA ( DnB NOR ) does not represent that the information in the presentation is accurate or complete, and it should not be relied upon as such. Any opinions expressed reflect DnB NOR Bank ASAs' judgment at the time the presentation was prepared and are subject to change without notice. The presentation is not to be construed as a representation or solicitation to buy or sell any financial instrument. No liability whatsoever is accepted for any direct or consequential loss or expense arising from the use of this presentation. DnB NOR Bank ASA and/or its affiliated companies and/or its officers, directors and employees may be a market maker or hold a position in any instrument or related instrument discussed in this presentation, and may seek to perform financial advisory and banking services related to such instruments. 22 September 14, 2007

23 SHIP FINANCE 18 September Cheong Chee Tham -

24 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

25 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

26 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

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

28 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

29 Equity Financing Business Times 12 September

30 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)

31 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

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

33 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

34 MARITIME INSURANCE

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

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

37 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

38 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

39 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

40 Appendix

41 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

42 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

43 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

44 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

45 THANK YOU