who will step into the funding gap ... - shipping the...

Eurofin Group of Companies

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Janos F. Koenig, Managing Director

Who will step into the funding gap created by European shipping banks?

EUROFIN: Independent, privately held advisory group

� 28 Years Presence and Commitment in the Ship-Financing Industry

� 200 years Cumulative Ship-financing experience

� Flexibility Tailor made ship-financing structures

� Recognition Representatives of KfW IPEX-Bank in Greece

� Commitment Team of 15 professionals dedicated to the shipping industry

� US$ 20billion Successfully arranged Ship-Financing Transactions (globally)

� Strong Relationships With all major ship-financing Providers and many key Shipowners

� Global Coverage Presence in major shipping centers

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Who we are

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London

AthensSingapore

Eurofin Group is the oldest, largest, specialized ship-financing investment boutique with global coverage

Eurofin Group offices

Shipping cycles are not new. We have been through them before and will do so againOVERSUPPLYLOW FREIGHT RATESDEPRESSED VALUESBut now there is a new killer – More dangerous than before

BANK FINANCE IS NOT AVAILABLE IN ANY SIGNIFICANT QUANTITY

Horseman Number fourTHIS HAS NOT OCCURRED SINCE THE 1930’S, AND IT WILL NOT CHANGE ANY TIME SOON

Mismatch in the global ship-financing industry

The present challenging ship-financing landscape

Mismatch in the global ship-financing industry

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Source: DealogicSource: Clarksons

Estimated Debt Requiredfor the Shipping Industry

(2012 - 2014+: Newbuildings Only)

Global Debt Ship-Financing Advanced[by Volume], (2005 – 2011)

Ship-Finance DEMANDfor Debt remains strong

Ship-Finance SUPPLY of Debt continuously decreases

Orderbook stands at: US$247bn

Debt Requirement (at 60% leverage): US$ 99 bn.

Syndicated and Significant Bilateral Shipping Trans actions

Includes Re-financing

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Source: Marine Money

� Big number of rights issues in 2010-2011(follow on listings / ATMs commonplace), but subject to window of opportunity

� Bond issues served already listed companies, all in the form of non-investment grade with high yields

Capital Markets: considerable help but…not any more …


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9 11 13 15 17 19

Bank internal rating

Ban

k C

apita

l (E

UR

m)

The impact of risk migration on bank capital

6Source: ING

US$m Oct 06 June 08 April 09 Aug 09 Jan 10

Vessel

Value89 95 51 46 40

Rating 9 (BBB) 10 (BBB-) 12 (BB) 14 (B+) 20 (D)

LGD 16.1% 13.5% 25.2% 26.7% 28.6%

Capital

Costs

(EURm)

1.1 1.4 3.8 5.0 16.7

An example: 5,300 TEU containership delivered in 2009 and financed with a US$ 71m loan

� Internal ratings downgrades have an exponential eff ect on bank capital� Reduced collateral values also increases capital re quirements


Pressure on bank finance availability

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EffectPressure

ProvisioningRisk costs increasing as borrowers come under financial pressure.

Internal competition for capital

Other sectors (eg offshore) currently have better risk/reward characteristics

Risk MigrationIncreased capital costs with limited portfolio growth

Poor market outlookOversupply remains; demand recovering from a low base

ExitsWell-known shipping banks have exited the market or scaled back

Several banks still struggling

Moderate demand outlook

Massive orderbook

Limited

availability

for ship-owners


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Top 12 account for 76% of the current global shipping finance portfolio

But how many of them are still lending?

Where funds are available they are reserved for:- Solving Re-structuring problems- Existing clients

Those few banks that can do new business target onl y the best names effectively freezing out most shipping compan ies

The present challenging ship-financing landscapeEuropean banks’ capacity issues

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The price of Credit Default Swaps is a clear indica tionSource – Marine Money – Freshly Minted – 29th Sept 2011

The present challenging ship-financing landscapeBanks have problems funding themselves

Shipping viewed as a non-core business

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The limited financing options currently available for sh ipping was outlined clearly by Jerzy Majewski, Deputy Head, Origination Europe, at HSH Nordbank. He pointed out that several leading shipping banks have indicated they are reducing dollar-denominated lendingto shipping. Banks are currently facing sharply higher liquidity costs, resulting in less bank debt capacity available for shipping and at a higher cost, which are likely to move higher still in the coming months.

Lloyds List – 25th Oct 11

German ship finance giant HSH Nordbank will have to shrink its shipping business by a further €4bn ($5.8bn) by the end of 2014, according to an agreement with the European Commission, the bank announced today.

Lloyds List 26th Aug 2011



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The aggregate shipping portfolios of European banks are likely to continue to fall because there are fewer banks able to engage in new loans, costlier funds and tighter lending conditions.Dagfinn Lunde at DVB Bank told Lloyd’s List there were now only a handful of European banks actively undertaking new lending to shipping.

Lloyds List - 20th Sept 2011

Kjartan Bru, DnB NOR Senior Vice-President Shipping, Offshore and Logistics, DnB Nor…..“lending volumes in the first half of 2011 were high, but activity has stopped abruptly in the third quarter. We came back from our summer holidays and everything had almost stopped. And it is still getting worse.”….

Lloyds List – 29th Sept



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Lloyds Banking Group in the UK has confirmed that its head of ship finance ………is leaving the bank amid speculation its shipping portfolio is up for sale. Lloyds List – 20th Jul 11

“We will not rule out that market participants will execute vessel workout measures to a larger extent than in the past,” says Holger Janssen, head of ship financing at UniCredit/Hypovereinsbank.

Lloyds List – 7th Oct 11


13Source: FT (November 2011)

30 Biggest Banks (by market cap, $ billion)

Financing alternatives from Asia/Australia

Financial institutions from Asia/Australia

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Bank of ChinaICBCChina Construction BankBank of CommunicationsMinsheng Banking CorpThe Export Import Bank of ChinaChina Development BankSinosure

Busan BankSolomon Financial GroupKorea Export Import BankK-Sure

MizuhoBTMUSMBCJBICNEXIA

Affin BankAmBank GroupCIMB GroupRHBMaybank

CHBChinatrustMega BankLand Bank

Axis BankBank of IndiaBank of BarodaState Bank of IndiaICICI

Bank of AyudhyaKasikornbankKrung Thai BankThanachart Bank

PT Bank ICBCPT Bank OCBCPT Bank UOB

Financing alternatives from Asia/AustraliaFinancial institutions from Asia/Australia

What happens next?

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Ship financing environment

• Financing alternatives from Asia/Australia

Is it a lifesaver?

Or an empty promise?

Asian governments’ actions to aid shipping in 2009-1 0

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Asian economies Comments on Shipping sector

� IFS scheme – Government took 80% share of default risk for loans of up to SGD50m ($40M) extended to Sgp based companies (overseas acquisitions or working cap)

� Withholding tax exemption for shipping companies extended by 5 more years

� Korea Asset Mgmt and KDB set up US$ 4.8bn fund for distress ship acquisitions

� KDB Shipping fund acts as additional buffer on top of senior and junior loans� Hanjin and HMM were the first beneficiaries of government intervention

� Provide more financial support to shipowners (with buyer’s credit and incentives)

� Introduce policies to expedite vessel replacement via competitive bank loans� Encourage state owned enterprises to pick up cancelled shipbuilding orders

Source: Marine Money

� MYR 3 bn ($! bn) shipping fund, managed by Bank Pembangunan

� BP disbursed MYR 800 million ($267M) of loans in 2009 and remaining in 2010

� Ships had to be managed by Malaysian companies and carry national cargo

� Plans for new tonnage tax system in 2010� Results in a decrease in tax burden by up to 90%


Malaysia

Taiwan

China

Korea

Singapore

Export Credit Agencies’ role in ship-financing

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JAPAN� NEXI: Nippon Export and Investment Insurance

� JBIC: Japan Bank for International Cooperation

KOREA� K-sure: Korea Trade Insurance Corporation

� Korea Exim Bank

CHINA� Sinosure: China Export & Credit Insurance Corporation� China Exim Bank


Chinese Banks, an emerging ship financing power?

18Source: BoC

* Estimate of BoC 2009:(includes shipping, shipbuilding, as well as refund guarantees)

Market Share to finance ship owner and shipbuilder

ICBC, 25%

BOC, 25%

CEXIM, 25%

Others, 25%

� Total Portfolio estimated* at:RMB 600 bn�700bn(US$ 88bn -102bn)

� Leaders: BoC, CEXIM, ICBC

� CDB, CCB, CMB, MB, SPDB, ABC

� and…SINOSURE


Past transactions with Chinese Financial Institutio ns

Borrower Arrangers/BuyersAmount

(US$ M)Pricing/Purpose/Remark

Toisa Limited Citigroup, CExim 127 10 year loan 3 x AHTS & 1 PSV

AngelicoussisGroup

DnB NOR, CExim 111 3 x Chinese Mini Capesize vessels

Diana Shipping DnB NOR, CExim 83

70% financing for 2 x 206,000 Dwt dry bulk carriers (China Shipbuilding Trading Company and Shanghai Jiangnan-ChangxingShipbuilding)

Costamare DnB NOR, CExim -3 x 9,000 teu newbuildings (Contract price

$95 million per unit - Shanghai Jiangnan)

DanaosCitigroup, CExim, Sinosure

2033 x 8,530 teu newbuildings (Shanghai Jiangnan Changxing Heavy Industry)

Cardiff Marine CDB , Sinosure 741 x VLCC newbuilding, (Shanghai Jiangnanyard)

Safe Bulkers Citi, JBIC, NEXI 122 3 x 95,000 Dwt post-Panamax bulkers

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Borrower Country Arrangers/Buyers Amount Purpose (where applicable orders in

CHINESE shipyards)(US$ M)

NWS Transport HK BoC, Calyon, HSBC & SC 168 3 year club deal

OSG USA China Exim Bank 389 12 year loan for 5 x tankers

Noble Group HK Agricultural BoC, CDB & other

Non-Chinese banks

2,400 Secured & Unsecured Revolving credit

facilities

Schulte Group Germany Bank of China 149 Credit Line for 9 x Tankers

STX Pan Ocean Korea Bank of China 180 3 x 176,000 Dwt Chinese Bulkers

FH Bertling Germany Bank of China,Sinosure China 40 2 x GC Newbuilding orders

NITC Iran CExim & other Chinese Banks 1,112 90% financing for 12 VLCCs

Bourbon France CExim 400 12 year loan (Sino-Pacific yard)

InterOrient Cyprus CExim, Sinosure 65 2 x Chinese built Mini Capes

Ethiopian Lines Ethiopia CExim, Sinosure 235 80% loan for 7 x MPP & 2 x Tankers

J. Lauritzen Denmark BNP Paribas, Societe Generale,

Bank of China, Sinosure

267 5 x MR Tankers and 2 x LNG tankers

ordered in China

Peter Döhle Germany China Development Bank 1,000 Cooperation framework agreement for

vessels to be built at Yangzijiang

Shipbuilding


Past transactions with Chinese Financial Institutio ns

Requirement of Asian/Australian lenders

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� When considering a European shipping client, it is very challenging to assess counterparty risk, requiring therefore:

� “Best in Class – Household name” (note that big is not necessarily beautiful)

� Easily credit scored

� Local links: Shipyards, Charterers� Security: Time charter long enough to cover loan term

� If successful…

� Non preferential terms and conditions

� More expensive pricing


Significant slowdown & increased pressures (1)

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• Substantial inflationary pressures: 4.1% (yty in December)– Continuous wages increases / Labor force shortages

– Strong bank lending in 2009-10 from the PRC Banks

and a rising money supply– Despite the visible drop in official figures

on net new loans from PRC Banks,

in reality lending has not moderated;

it was diverted into/through other channels

Source: National Bureau of Statistics of China (February 2012)


Chinese CPI Index (%)2010-2012


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• Gradually tightened monetary policy to curb excessive lending through…12 increases and one decrease of reserve requirements over the past 24 months



Chinese Reserve Requirements Ratio


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• Gradually tightened monetary policy to curb excessive lending through…5 increases of interest rates over the past fifteen months



Chinese Basic Interest Rate for 1-year’s Loan


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• Individual reserve requirement ratio– CBRC(China Banking Regulatory Commission) ended its decades-old practice

of announcing an overall annual system-wide credit lending quota and rather than operating within the constraints of an annual, industry-wide quota,

– Each bank will have its lending limits prescribed by regular reviews of its individual reserve requirement ratio

• Hedging against expected increases in bad loans– Losses from bank loans to Local Governments (LGIVs)

– From US$ 220bn (FT) to US$ 400bn (WSJ) to US$ 600bn (The Economist)



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• Continuous volatility in Global, Chinese, and Shippi ng Markets– Closer examination of loan books

– Re-evaluation of recent transactions across segments and asset classes

• Continuous intervention from CBRC – Purchase of foreign exchange with RMB in order to hold down its value has as a

result the foreign exchange to end up in CBRC’s reserves

– Sterilisation of much of the newly-issued Rmb by selling special bills to banks and requiring banks to hold more of their deposits on reserve with the central bank in order to manage liquidity in the Chinese economy

• Appreciation of Renminbi– Shortage of USD– Preference in Renminbi denominated loans



Downgrading of credit rating of Australia's 'Big Four' banks

• Standard & Poor's put the credit rate to AA minus (December, 2011)

• Fitch ratings agency placed Australia's four major banks on review for possible downgrade (January, 2012)

However:

• Australia is a country with large import/export requirements vital to their economy

• This may provide the stimulus for their banks to finance shipping

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What do we do next?

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Back to Reality

� Chinese banks may be relevant, but let’s not hold ou r breath in the short term.

� In the meantime Banks do not have capacity to fund the industry’s normal capital requirements.

� They will not return in the near term. They have no t left because of the shipping downturn – All the major shipping banks have a proud history of supporting clients through the cyc les.

They have left because of external pressures – e.g. Eurozonecrisis; BIS II & BIS III increases in regulatory c apital requirements; continuing industrial world economic stagnation

� If the Banks sell portfolios, it is likely to be to short term buyers with ‘vulture fund’ mentality, which is of no help t o the shipping industry. Banks are reluctant to accept the discou nts that thisimplies

What is happening now?

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Back to Reality

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What if the funding deficit is not resolved?

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Back to Reality

� Capital adequacy pressures on banks may mean they cannot continue to support owners through the cycle More distressed, unfunded assets will increase and prolong downward pressure on ship values

� Even top drawer shipping companies will struggle to renew and modernise fleets

� Future investment in modern, fuel efficient and environmentally improved ships will be curtailed – (There may be too many orders now, but this is part of a normal cycle and will not last)

� But there may be some benefits:

� We may see greater transparency and more consolidation (but consolidation also requires funding)

� Small, inefficient owners with old ships may be forced out of business

� Most marine transportation does not need shiny, expensive new ships. Medium size owners with mid-aged units will be starved of vital loan capital for fleet replenishment, forcing older, unsafe vessels to continue trading beyond safe operating limits

What Can Be Done?

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Back to the Future

� Nature and Wall Street (Not a combination of words usually seen in the same sentence) hate a vacuum - air, and money should flood in when demanded

� At this low point in the cycle, lending and investment downside risk is limited, upside is enhanced

� Ship mortgages are tried and tested securities, enforceable quickly and easily in most jurisdictions globally. Lenders have priority over most creditors.

� Loan to value ratios are at historically conservative levels and are expected to remain so. A safer profile than an outright equity investment

� Loan pricing for solid, professional medium and large size shipping companies is at record highs

� Mortgaged backed ship loans provide a secure and predictable cash flow and are self liquidating – The exit route is written into each deal!

� TIME FOR SOME NEW LENDING INSTITUTIONS� Ship financiers are real sector experts and over ma ny decades have a

strong track record of profitability and excellent risk management

Eurofin Group of Companies

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Janos F. Koenig, Managing Director

Thank You

who will step into the funding gap ... - shipping the...

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