Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development

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1 Unclassified DSTI/DOT/MTC(2004)13 DSTI/DOT/MTC(2004)13 Unclassified Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development 01-Jul-2004 English text only DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY MARITIME TRANSPORT COMMITTEE SHIP FINANCING AND QUALITY SHIPPING PRESENTATION MADE BY MR DAGFINN LUNDE, DVB BANK NV AT THE MTC MEETING ON MAY 2004 Contact: Division of Transport, Mr Danny Scorpecci tel: ; fax: ; dannyscorpecci@oecdorg English text only JT Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

2 OECD Maritime Transport Committee Industry Seminar Ship Financing and Quality Shipping Presented by Mr Dagfinn Lunde Chairman and CEO of DVB Bank NV Topics page 2 1 DVB Bank Overview 2 How Does a Shipping Bank Work? 3 Do We Really Care about Quality Shipping? 4 DVB s Involvement in Promotion of Quality Shipping 5 Issues around PSC, Paris MOU, Rules & Regulations? 6 Summary & Conclusions 2

3 Topics page 3 1 DVB Bank Overview 2 How Does a Shipping Bank Work? 3 Do We Really Care about Quality Shipping? 4 DVB s Involvement in Promotion of Quality Shipping 5 What s still missing and what do we need from you? 6 Summary & Conclusions At a Glance CORPORATE BANK! Listed on Frankfurt Stock Exchange with equity market cap of 311 million! Offices in New York, London, Frankfurt, Rotterdam, Bergen, Piraeus, Hamburg, Hong Kong, Tokyo and Singapore! 8 billion loan book! Approximately 550 clients worldwide! Approx 200 professionals specialising in Transport Finance page 4 Aviation Shipping Land Transport Transport Infrastructure! Advisory and M&A! Structured Asset Finance! Distribution and Sourcing! Fund Management! Capital Markets 3

4 Customer lending portfolio page 5 in mn Shipping Aviation ,425 2, % -66% ,948 2,055 Land Transport Transport Infrastructure 105% 43% 62% D-Marketing Land Transport % 800 Transport Infrastructure % 469 D-Marketing % 328 Total 8,037-54% 7,601 Aviation 270% 519% Shipping What s So Special about Shipping? Cyclical markets - both cash flow and asset values page 6 Limited community of owners Perceived as high risk Capital intensive International - free competition Commodity nature Mature industry, yet technical obsolescence can still be a factor Low barriers to entry (essentially capital) in major sectors/higher barriers (market expertise/high cost vessels) in specialist areas Influenced by political events and changing regulatory environment Influenced by the general health of the world economy Scrapping of assets is caused by rational behaviour - the ordering of new ships is not! 4

5 Shipping is an extremely diversified industry And sub-sectors Crude Tankers: Panamax Suezmax VLCC/ULCC Shipping Markets Tankers Dry Bulk Container Miscellaneous Offshore page 7 Oil Tankers Crude Products Bulkcarrier Post Panamax Cruise Supply Ships Product Tankers: SR (10-30k dwt) MR (30-50k dwt) LR1 (50-80k dwt) LR2 (80-120k dwt) Chemical Tanker LPG Liquefied Petroleum Gas LNG Liquefied Natural Gas Multi-Purpose Tweendecker Self-Discharger Panamax Sub Panamax Container Feeder Ro/Ro s & Ferries Car Carriers Reefer Floater s FPSO s Specialized Box Shaped Our research department covers 17 sectors and 61 sub-sectors sectors DVB Shipping Portfolio by Sector New!! Terminal Financings 2% Reefers 2% 17 main sectors and 61 sub sectors Ro-Ro Vessels 2% Ferries 4% Cruise Vessels 3% Container Boxes 5% Other 3% B ulk C arriers 10% General Cargo 1% C o m bin ation C arriers 1% Crude Oil Tankers 18% page 8 Container Vessels 12% C ar C arriers 1% Gas Tankers 4% Offshore Vessels 12% F(P)SO 2% Product Tankers 9% Chemical Tankers 8% 5

6 Crude Oil Tankers By Sub Sector page 9 Total Exposure: USD 7902 Single Hull VLCC: USD 1328 ULCC ( ,000 dwt) Double Hull VLCC (200-2% 320,000 dwt) Single Hull 17% VLCC ( ,000 dwt) Double Hull 19% Suezmax (120, ,000 dwt) Single Hull 4% Panamax (50,000-80,000 dwt) Double Hull 5% 34% 17% Aframax (80, ,000 dwt) Double Hull 2% Aframax (80, ,000 dwt) Single Hull Suezmax (120, ,000 dwt) Double Hull Spot L/V > 80% < 90% Spot L/V > 60% < 80% 0% 10% Medium Term TC 13% Long 9% Term TC 68% Spot L/V < 60% DVB Shipping Portfolio By Managing Branch Gross portfolio USD 6,2373 mn page 10 London 10% Hamburg 5% Singapore 22% 100% 80% 60% Piraeus 12% Rotterdam 14% New York 18% Bergen 19% 40% 20% 0% Singapore New York Bergen Rotterdam Piraeus London Hamburg Total Net 706,7 706,2 972,5 745,9 610,6 531,1 269,4 4542,3 Syndicated 667,7 419,7 240,1 147,3 120,0 78,3 21,9 1695,0 Gross 1374,4 1126,0 1212,6 893,2 730,6 609,4 291,3 6237,3 6

7 DVB Shipping Portfolio By Economic Risk Country March 2004 Total Exposure: USD 4,5423 mn page 11 Finland 2% Other <2% 14% Norway 16% Switzerland 2% France 2% India 2% Sweden 3% Singapore 3% Japan 3% USA 14% Hong Kong 3% Netherlands 3% Spain 4% Bermuda 5% South Korea 5% Greece 10% United Kingdom 8% DVB Shipping - Key Figures page 12 We have financed over 1000 ships Number of people involved in shipping: 58 Activity Gross Managed Portfolio $ 5496 mn $ 6124 mn $ 6415 mn Net Portfolio $ 4238 mn $ 4623 mn $ 4608 mn Underwriting $ 1790 mn $ 1723 mn $ 1759 mn Syndicated to third parties 24,5% 31,6 % 18% Average deal size $ 216 mn $ 243 mn $ 193 mn New Transactions Number of Clients Only new clients per year 7-88 clients per Relationship Manager Gross Interest Income* $3512 mn $3724 mn $4235 mn Non-interest fees $2598 mn $1626 mn $1896 mn Gross Income $6101 mn $5470 mn $6131 mn 7

8 Monitoring our clients page 13 V a lue M a inte na nce Cla use (V M C) bre a c Average no Ye ar No of facilities Breaches VMC of days outstanding " We monitor VMC breaches monthly " Watch list " We require our clients to rectify the breaches Noof Noof Year facilities defaults in%total portfolio Defaulted in% ,9% ,38% ,1% ,99% ,2% ,65% ,8% ,63% The Landscape Main Competitors by regional office page 14 New York Office Fortis Nordea DNB London Office Nordea CAI HSH Nordbank DNB Rotterdam Office CAI HSH Nordbank Deutsche Schiffsbank Bergen Office DNB Nordea HSH Nordbank Hamburg Office HSH Nordbank Deutsche Schiffsbank Commerzbank Piraeus Office Royal Bank of Scotland HSH Nordbank Deutsche Schiffsbank National Bank of Greece Hong Kong Office HSBC (HK) CAI BNP HSH Nordbank Singapore Office Fortis DNB DBS 8

9 The Landscape - Competitors by Size page 15 D V B JP M organ Chase A B N A m r o Bank of Nova Scotia Fortis IN G Bank of Scotland BNP Paribas Vereins und W estbank Citibank Deutsche Bank/SHL N o r d L B C re d it S u is s e SE Banken Lloyd's TSB N a t e x is C L /C A I Fleet Bank National Bank of Greece H S H K f W The Royal Bank of Scotland N o r d e a Deutsche Schiffsbank Commerzbank D n B H S B C Danish Ship Finance The 33 largest shipping banks have approximately 150bn USD outstanding to the shipping industry The total outstanding to the industry is expected to increase, due to the finance requirement for the recent ordering bonanza Capital Requirement page 16 Capital Required Newbuildings bn bn bn bn Top-up for unreported contracts Capital Required S&P + 27bn bn + 41bn bn + 682bn bn + 78bn bn Total Capital Required bn bn bn bn Raw data: Clarkson Research / Drewry / MSI 9

10 Where does the finance come from page 17 Sources of Finance: - Bilateral Lending - Internal Equity Finance - Credit Leasing - Shipyard Finance -Venture Capital - Government 39% Bonds/Public Equity 5% KG/KS Schemes 4% Global Ship Finance Loans 10% Syndicated Bank Lending 42% Source:Lloyd s Shipping Economist/DVB What areas does the finance come from 33 largest ship finance banks: 145bn USD page 18 Other 20% US 7% Scandinavian 17% UK10% Dutch 11% 35% Germany Source: DVB 10

11 Topics page 19 1 DVB Bank Overview 2 How Does a Shipping Bank Work? 3 Do We Really Care about Quality Shipping? 4 DVB s Involvement in Promotion of Quality Shipping 5 Issues around PSC, Paris MOU, Rules & Regulations? 6 Summary & Conclusions Coverage of DVB Shipping page 20 America New York Curacao Europe Bergen Hamburg London Rotterdam Frankfurt Piraeus Asia/Pacific Tokyo Hong Kong Singapore 11

12 Organisational Structure D Lunde; CEO Executive Secretariat Risk and Rasp departments are based in Rotterdam Relationship Management Risk Management Research & Strategy Rotterdam Bergen New York Hamburg Hong Kong London Piraeus Singapore Curaçao Insurances Portfolio Management & Reporting Risk Manager " We target clients in 8 regions " We are close to our clients " We know our clients client fact sheets, research, media coverage Other Risk Factors from Shipping Being close to our customers! page 22 Our moto is: know your customer " Only 5-10 new customers per year " 7-8 per Relationship Manager " Conteniously updated Client Fact Sheets " We can keep track and master our clients Source: OECD Maritime transport Committee: Security in Maritime Transport - Risk Factors and Economic Impact July

13 Sector Strategic Good Prospects Caution Limited Opportunites Bulk Carriers Car Carrier Container Crude Tanker LNG VLOC's PCC / PCTC Post Panamax Ulcc LNG Capesize Vlcc but long-term employment Panamax Sub-Panamax Suezmax Handymax Handy Aframax Handysize Feeder Panamax not below 500 TEU market caution: top of market market caution: top of no spot market caution: top of page 23 Cruise Ro-Ro / Ferries Reefers Product Tankers LPG In General Ro-Ro In General LR (50-120,000 dwt) Vlgc Ro-Pax Main Players MR (30-50,000 dwt) Lgc Fast Ferries SR (10-30,000 dwt) Mgc Small LPG Large orderbook below 3,500 cum Tugs & Barges FPSO OSV Chemical Tankers Others Dry Bulk Barge In General PSV: 3k+ dwt In General General Cargo Container/ro-ro Barge PSV: 2-3k dwt (Pure Chemical Carriers) US Tank Barge PSV: below 2k dwt Conbulkers/Probos bottom of cycle? (with long term contracts) AHTS: 15k bhp Bulk Cement Carriers AHTS: 10-15k bhp AHTS: below 10k bhp How a deal is underwritten page 24 Business originates from close contact with present and potential customers " We prioritize our clients & wind-down smaller ones Financing request Analysis: market, company, financials, syndication prospects Negotiation: terms, security, pricing, duration Proposal to credit committee Term sheet Execution legal documents Draw-down 13

14 Transaction Structure page 25 Current Standard Terms for Ship Financing Loan Tenor: 7 years with a balloon reflecting a 15 year repayment profile Jurisdiction: English or Dutch law Norwegian law also acceptable Transaction size: USD 20m or above Interest Margin: 1125% to 175% (average margin these days is approximate 15%) Arrangement Fee: 05% to 075% Agency Fee: Grid based on Number of Participating Banks (averaging $30,000 per annum) Process of a Credit Application RaSP = Research & Strategic Planning Start Business Identification Acc Manager Discuss Opportunity with Customer Acc Manager informs Risk Dept and discuss with Distribution Risk Dept checks info Business Identified and developed with support of RaSP Credit Application Draft Acc Manager performs: Client Analysis Credit Analysis Org Chart Risk Rating Valuation B/S analysis Projection Cashflow borrower Projection Cashflow Corporate Guarantee Syndication opinion Risk Dept checks/discuss Credit Application Final Version prepared Market analysis supported by RaSP Dept Y Credit Committee Discussions Delegated Authority? Y N Vorstand Competence? Signature Feedback system with RaSP Dept N Implementation page 26 Kreditausschuss 14

15 What does the Credit Committee look for in a transaction page 27 Focus on risk analysis three ways out : - Cashflow the primary source of repayment from operating cash generation; - Recourse - proceeds of a guarantee, employment or purchase obligation from a corporate (always guarantee on demand) - Collateral - proceeds from the sale of vessels (Our ultimate way out) General overview - Calculations / earnings-projections - Market outlook - Financial Condition and Reputation of borrower and corporate guarantor Compliance with Lending Policy and Divisional Lending Guidelines Topics page 28 1 DVB Bank Overview 2 How Does a Shipping Bank Work? 3 Do We Really Care about Quality Shipping? 4 DVB s Involvement in Promotion of Quality Shipping 5 Issues around PSC, Paris MOU, Rules & Regulations? 6 Summary & Conclusions 15

16 Legislation and the environment page 29 The operation of all ships, but especially tankers, is becoming subject to much stricter enforcement of recognised standards by a whole range of different organisations EU and USA have their own legislation concerning single-hull tankers Other countries such as Spain, France, Italy, Norway are either implementing their own legislation or are considering such action Norway Italy Spain EU USA Nation States Classification Societies Insurance Underwriters IMO Flag States Marpol / IMO SOLAS ISM Code P&I Clubs OCIMF-SIRE/Charterers Port States Banks Our focus is our client and his ship!! page 30 We are in the business of Ship Finance >> Asset Finance Often it will be Non-Recourse financing First way out Cashflow The Loan will be repaid out of the cashflows generated by the vessel Hence, we want a profitable owner who can generate cash!! The more money he makes the safer our investment is! Regulations create costs and may reduce our clients profitability y! Revenues Opex Debt repayment interest = Cash Cushion 16

17 Our focus is our client and his ship!! page 31 We are in the business of Ship Finance >> Asset Finance Often it will be Non-Recourse financing First way out Cashflow The Loan will be repaid out of the cashflows generated by the vessel Hence, we want a profitable owner who can generate cash!! The more money he makes the safer our investment is! Regulations create costs and may reduce our clients profitability y! Revenues Opex Debt repayment interest = Cash Cushion More regulations, more maintenance and opex, more costs!! Trouble for us Is there really any problem with rusty overaged tonnage? The bottom line is always more important it makes money!! page dwt tween decker Built 1964 Speed 13 4 tons Asking price: $150,000 Required to renew class: $ 150,000 Financing available for 50% ($150,000) Trading black sea in today s market t/c equivalent: $2,000 per day Opex: $700 per day Int+principal: $200 per day Free cashflow: $1,100 per day A bit old a bit rusty but a damn good deal 17

18 So do we really care about quality shipping? page 33 No, not per se` However We believe that a good and well maintained ship is a profitable ship and a good collateral and a crew that feels safe and well taken care off is a good crew We need the ship to be a never-stopping money earning machine Where are our mutual interests? If the rules & regulations reduce the risk of off-hire days, then we have a mutual interest page 34 Reduce the burden on Quality Operators mutual interest with our clients Efficient performance! No detentions! No delays! No problems! No liabilities! Tighten scrutiny over sub-standard operators, to create a fair competition environment eg Under OPA 90 US authorities have the right to arrest a ship, whereby undermining our 1 st priority mortgagee status, as security to the unlimited liability Our mutual interest lies in preventing those liabilities 18

19 Our ultimate way out page 35 Our ultimate way out Our Collateral Security The Vessel And that is our real focus so, we have set guidelines to insure the quality and value of our collateral Lending Policy and Divisional Guidelines Implicit and Explicit references to Safety & Maintenance (S&M) page 36 Criterion Policy relevant to S&M Explicit ref Security 1 st preferred mortgage on asset financed Naturally value of security directly linked to its technical condition Age at maturity Limitations on age at maturity Implicit ref Initial advance in proportion to vessel value Flag We reward value, which is assessed by valuers and technical inspections Flag must be acceptable, mainly due to mortgage procedures but also S&M standards Pre-approved list with criteria: legal structure, reputation of existing fleet, technical supervision x 19

20 Lending Policy and Divisional Guidelines Implicit and Explicit references to Safety & Maintenance (S&M) page 37 Criterion Policy relevant to S&M Explicit ref Class Only IACS members No cutting corners Insurance & P&I Clubs Minimum value covenants To protect our interests, but 1 st class insurance will require high level of S&M Again, emphasis on collateral value Implicit ref Credit review policy and monitoring page 38 Criterion Policy relevant to S&M Explicit ref Valuations Frequent intervals encourages owner to well maintain the vessel Monitoring our collateral Review frequency Criteria for defining Risk Quality Deterioration Insurance guidelines Lower ratings (smaller owners, less corporate structure, older vessels) entail more frequent reviews Detention, arrest, seizure, etc Withdrawal of class Failure to maintain insurance Insurance to be maintained at highest level throughout the loan period Management We can restrict change of management Implicit ref 20

21 The Rating System and the Technical Committee Criterion Policy relevant to S&M Explicit ref Implicit ref Soft Score Considers qualitative issues such as: management quality, average age of fleet, size of fleet Client type Quality of management Collateral rating Loan to Value Technical Approve surveyors committee In-house Comment/Inspect/ newly financed vessels technical inspections Review instructions to surveyors Inform on phase out rules, regulations, technical developments and obsolescence Advise CC on technical aspects of fleet Approve technical ship managers page 39 An other word about our Technical Committee page 40 Unique for a financial institution Any vessel on our portfolio with a risk rating 1-3 (low!!) will be randomly inspected by in-house surveyors Vessels will also be inspected on specific request from CC (based on age/type/client/history/records) Technical Committee consists of a Master Mariner and Technical Shipping experts DVB 21

22 So, do we really care about quality shipping? Yes, we do!! Less detentions, more efficiency >>> better cash flows Less off-hire >>> higher earnings Look for alarm signals deterioration of S&M usually signals problems We often check the off-hire history of a ship Lower probability for pollution >>> less risk for consequential liabilities We monitor Port State Control reports, arrests, detentions, deficiencies through daily search of electronic data (eg Equasis, Paris MOU) Negligent S&M implies value destruction of our collateral Standardization of S&M issues suggests that the good operators among our clients are rewarded vis-à-vis the competition However, this leads as to the problem of consistency and uniformity in policies, regulations and enforcement page 41 Topics page 42 1 DVB Bank Overview 2 How Does a Shipping Bank Work? 3 Do We Really Care about Quality Shipping? 4 DVB s Involvement in Promotion of Quality Shipping 5 Issues around PSC, Paris MOU, Rules & Regulations? 6 Summary & Conclusions 22

23 What have we done to promote quality shipping?! Apart of our lending guidelines and credit process! We are on the advisory board of Equasis! We regularly correspond with the board of Paris MOU page 43 We have made the following short-term proposals:! Standard and uniform training of PSCO access to new technology to enable efficient, uniform, real-time reporting! Standardization of forms to create accessible online databases! Raise the proactive profile of Equasis, sponsor fund raising And for the long-run:! Establish training centre incl electronic training moduls! Promote the long-term employment of high profile PSCO s! Add charterers that encourage sub-standard shipping to the shame list (next phase to incl Insurers and possibly banks) At the moment info suffers a time lag of 2-3 months Topics page 44 1 DVB Bank Overview 2 How Does a Shipping Bank Work? 3 Do We Really Care about Quality Shipping? 4 DVB s Involvement in Promotion of Quality Shipping 5 Issues around PSC, Paris MOU, Rules & Regulations? 23

24 What are the main problems with PSC / Paris MOU model? Lack of uniformity and standardization harmonized criteria We should seek a risk-based approach where quality operators are rewarded vis-à-vis sub-standard Flag states cooperation Corruption of PSCO s in some regions hampers to whole cause Corrupted PSCO s should be pinned down!! Do charterers/shippers/receivers truly support the cause? Confidentiality vs transparency Equasis, being a non-profit organization, is reluctant to provide data to 3 rd parties Argument: Data may be used to generate commercial benefit Result: The industry is deprived of information that can ultimately improve quality and transperancy Unilateral reaction of governments/legislators may have counter-productive outcomes page 45 Long term objectives require sufficient funds! Fund raising via Paris MOU network via planned and coordinated media blitz - planned for October this year! We have offered our network to promote fund raising and awareness! Who will contribute? Owners for a start Why? Uniform Standard inspections are in their interest! Classification societies as at will contribute to SOLAS! P&I Clubs, Insurance companies??! And local MOT s, flag states, etc We need you to put pressure on finance ministers to prioritize the cause and provide the funds!! page 46 24

25 A few points to think about Interests meet on occasion: efficient engines reduce costs and pollution Who should regulate? Government intervention often suffers from inaccuracy, subjective judgements, bureaucracy and political influence The situation so far seems to suggest that (maritime safety and environment) problems are technical when looking at their nature, economic when looking at the consequences and political when looking solution (Shuo Ma, 2002) The total benefit in the USA in double-hull tankers preventing oil pollution would be USD370 million per annum, while the total cost USD16 billion (Kit-Powell et al, 1997, similar findings by Brown et al, 1996) Is regulatory control accident and politically driven? page 47 And some theories page 48 The profit-safety argument: There is a positive relationship between profitability safety in shipping That is to say, adverse financial condition in the industry are expected to lead to an increase in vessel accidents Thus, the argument opposes the market solution and favors regulatory control and stringent enforcement The market-response argument: Shipping companies anticipating a deterioration in their financial conditions following a vessel accident will take safety precautions in a market environment Thus, the argument favours less regulation and public-sector enforcement (Loeb, Tally and Zlatoper, 1994) 25