Navigating your way to calmer waters?

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Alannah Thompson
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1 Navigating your way to calmer waters? April 2014

2 The shipping industry has faced difficult times due to depressed demand and structural oversupply. Asset values are at all-time lows and up to 70% below peak market values (2007/2008) significantly impacting loan-to-values. The low asset and debt prices, and improved market conditions make investing in the shipping sector attractive and potentially lucrative if the right type of vessel or operator is chosen. The key challenge is whether longer-term returns will satisfy new investors, and whether the influx of new investors, in itself, will help resolve or exacerbate some of the wider industry issues. Key messages The outlook for shipping in all segments is improving as demand growth and slowing rate of deliveries are expected to begin to ease oversupply However, renewed over-ordering remains a key risk across the industry and could undermine recovery The changing pattern of global trade will affect ship operators in different ways depending on their mix off vessels and geographic spread Given anticipated recoveries assets in the right areas are likely to remain attractive to investors There has been an increasing amount of activity in the market with new and established investors buying in Lenders have a number of options regarding distressed shipping assets

3 1 The worst appears to be over with utilisation forecast to recover across the board Change in utilisation by vessel type, Forecast change in utilisation (Ppt. change 13-18) 30% 25% 20% 15% 10% 5% 0% Utilisation forecast to be lower in 2018 than in 2007 Utilisation forecast to be greater in 2018 than in 2007 Cape/VLOC Handy/Handymax Post/Panamax Clean Tankers Dirty Tankers Historical decline Containers Containers Historical growth (35%) (30%) (25%) (20%) (15%) (10%) (5%) 0% 5% Key: Dry Bulk Tankers Bubble size = 2018 capacity Historical change in utilisation (Ppt. change 07-13) Source: Drewry, Government of Australia, Broker reports, PwC Analysis 2 Over-ordering remains a key risk In spite of declines in the relative size of the order-book Orderbook as % of total fleet, % Bulker Tanker Container 60% % of total fleet 50% 40% 30% 20% 10% 0% Source: Drewry, PwC Analysis There are a number of factors that may encourage over-ordering Demand for more efficient/larger vessels New capital invested in the industry Chinese government intervention to protect ship-yards

4 3 Shipping companies will be impacted by changes in global trade patterns Growing oil production in North America Persistent low growth in Europe Widening of Panama Canal Mix change from crude to product in the Middle East Africa as emerging consumer Chinese shift from investment to consumption 4 Assets in the right areas could do well Container Smaller independent operators not in alliances and operating smaller vessels could struggle on some of the larger trade routes Bulker Larger vessels could benefit from continued demand for iron ore and coal in China, but the demand outlook remains unclear Tanker the future shape of tanker trade is uncertain given patterns driven by shale. Large dirty and clean tankers may be better placed 5 Private Equity and funds have been active across the sector making the most of low prices Distressed funds and portfolio purchases (e.g. Commerzbank s portfolio sale to Oaktree Capital Management) Operator and equity partnerships (e.g. the joint venture between Augustea Atlantica, Bunge Limited, and York Capital Management) Development on innovative lender solutions (Navios and HSH Nordbank deal) Funds have the capital and appetite to invest in the sector at the right price. As asset and debt prices start to increase, interest could start to fade.

5 6 Options available to lenders with underperforming shipping loans Sell debt Likely to be at a discount (particularly given current asset values) Off the books and no exposure to possible future downside Enforce and sell asset Selling at possible low point in the market Distressed discount would further impact value Sell debt Enforce and sell asset Alternative solutions Combining nonperforming assets Strategic alliances with operators solutions Alternative Lender options Take equity and improve performance Take equity Take equity Retain access to future upside May not have knowledge of running shipping operations Take equity and drive improvement in financial performance Retain access to future upside Could maximise short term cash through operational improvements Overview of key segments Containers We forecast a slow recovery in liner profitability, but do not expect margins to reach cyclical peak levels until 2016/17 While global GDP growth is recovering, decreasing trade multipliers mean that container volume growth will be low compared to historical levels Charter rates may take longer to recover, with liner operators feeling the benefit of recovery before owners Smaller operators may benefit from focusing on niche operations to become attractive acquisition targets for larger liner companies Dry bulk 2013 could prove the nadir for Bulkers as utilisation and rates are forecast to recover from 2014, driven by slowing supply growth. However, utilisation and rates are likely to remain below peak levels Underlying the recovery is the assumption of a continuation of strong Chinese demand for iron ore and coal driven by infrastructure investment and high energy demand Fleet growth is expected to slow from 2014 due to cancellations and slippage of orders in 2013 and a more modest orderbook for 2014 and 2015 There are key risks associated with the forecast recovery: Orderbook growth could worsen supply/demand balance Slowdown of Chinese demand for iron ore or coal would impact demand Tankers There are likely to be significant changes to routes and demand patterns driven by new oil production in North America and a shift of refining capacity and demand to emerging economies Estimating the shape of these changes is challenging and there is divergent opinion how they will impact shipping demand there are likely to be winners and losers The overall demand outlook is positive and larger tankers may benefit Slowing supply growth is likely to lead to improving utilisation for tankers, although this assumes significant slippage in the large product tanker orderbook

The team Brian Lochead E: brian.lochead@uk.pwc.com T: +44 (0)113 289 4888 Chris Temple E: chrisopher.j.temple@uk.pwc.com T: +44 (0)20 7213 4601 David Smith E: david.

com T: +44 (0)20 7212 4148 Antonia Robertson E: antonia.robertson@uk.pwc.

You should not act upon the information contained in this publication without obtaining specific professional advice.

extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care

6 The team Brian Lochead E: T: +44 (0) Chris Temple E: T: +44 (0) David Smith E: T: +44 (0) Antonia Robertson E: T: +44 (0) This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details AR-OS

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