Anatomy of Ship Finance Singapore 27-31 May 2013
Organised by
Cambridge Academy of Transport 48 Whittlesford Road Little Shelford Cambridge CB2 5EW Tel: +44 (0)1223 845242 Fax: +44 (0)1223 845582 Email: enquiries@catz.co.uk Website: www.catz.co.uk
Anatomy of Ship Finance
27-31 May 2013
Cambridge Academy of Transport 路 48 Whittlesford Road 路 Little Shelford 路 Cambridge CB22 5EW 路 Telephone: 01223 845242
Seminar Programme Anatomy of Ship Finance – Singapore 27-31 May 2013 Seminar Adviser Dr Martin Stopford President Clarkson Research Services Ltd UK Monday 27 May Welcome and Preview of Seminar 1500-1515 During this introductory session, the aims of the programme will be reviewed leading into the scene setting session that follows. The Ship Finance Business Game and the week’s lectures will be previewed. INTRODUCTION & PRINCIPLES OF SHIP FINANCE Session 1 Introduction to Ship Finance 1515-1645 The aim of this lecture is to provide a broad overview which will "set the scene" for the many detailed lectures provided by experts during the week. It will be divided into the following three parts: 1. Characteristics of ship finance and shipping risk: this section will discuss the characteristics which make financing shipping companies so different from other industries. It will identify the distinctive features of the business including the type of companies operating in it; the capital intensive nature of the business; and the distinctive characteristics of shipping risk, including economic risk, operating risk and market risk. This part will end with a brief overview of the characteristics of shipping market cycles and their implications for shipping risk. 2. How ship finance fits into the world financial system: the second part of the presentation will focus on a the broad framework of the world financial system, including the major sources of funds; the three markets where funds are traded (money markets; capital markets; and equity markets); and the various institutions which arrange finance, including commercial banks, investment banks, finance houses and leasing companies. It will also mention the role of credit agencies. 3. Options for financing merchant ships: in this final section the presentation will provide a "bird's eye view" of the various methods currently used to finance ships, including commercial bank finance; Capital markets, including public equity offerings and bonds; and various transactions tailored around "packages" of ships, including funds, limited partnerships, leases and securitisation. Session 2 Ship Finance Business Game: Part 1 – Briefing Session 1700-1730 The Ship Finance Business Game will be introduced during this session, and the teams given their assignments for Part 1 – credit appraisal.
Cambridge Academy of Transport · 48 Whittlesford Road · Little Shelford · Cambridge CB22 5EW · Telephone: 01223 845242
Anatomy of Ship Finance
27-31 May 2013
Session 3 Ship Finance Business Game Part: 1 - Group Work 1730-1830 The Cambridge Ship Finance Game will be explained and the first part dealing with credit appraisal will be initiated. This first part of the Game will take the form of a workshop session where groups of participants, will evaluate the financial strength of a capital market investment proposal with particular regard to its risk and reward profile. Groups will be asked to “sell” their project to a panel of investors who will rate the success of each group on the quality and persuasiveness of their presentations. Teams will meet to analyse the company which has been assigned to them, appoint a chairperson and presenters, prepare audio-visual material and structure their presentations. Tuesday 28 May CAPITAL MARKETS & FINANCIAL RISK Session 4 0815-0830 Session 5 Shipping & the Capital Markets: A Rational Marriage? 0830-0915 Whether or not shipping has made a rational coupling with the capital markets can only be judged after a suitable period of time has elapsed, but some of the lessons learned from the early beginnings of the relationship can be told. This session will highlight the main features of capital market funding and draw some specific conclusions based on recent experiences, including the period of freight market frenzy up to May 2008 and its subsequent collapse. Along the way, the following will be covered: Daily Review
Historical development of access to capital markets by shipping companies Sources of capital Investment grade versus "junk" bond funding High yield finance and what it offers shipping Convertibles and preference share instruments Public equity
Business Game - Group Work
Session 6 0915-1045
Business Game - Group Work Final Preparation
Session 7 1100-1230
Business Game Part 1 - Presentations
Session 8 1330-1430
Business Game Part 1:Feedback
Session 9 1430-1445
Session 10 Valuing Ships in the Wake of the Credit Crisis 1515-1630 Any public offering or debt finance requires a valuation to be placed on a ship or fleet. This valuation is particularly important in a major placing where the value of the fleet will appear in a “prospectus”, the accuracy of which is covered by numerous stock exchange regulations in the major financial centres. Although important, it is not only for major stock market flotations that ship valuation is sought. This session will:
review the many uses to which valuations are put show how a valuation is undertaken highlight the factors that need to be taken into account in preparing a valuation
Cambridge Academy of Transport · 48 Whittlesford Road · Little Shelford · Cambridge CB22 5EW · Telephone: 01223 845242
Anatomy of Ship Finance
27-31 May 2013
point out the many pitfalls that threaten the accuracy of a valuation, and discuss the problems which may arise during and as a consequence of the valuation of a ship or fleet.
Session 11 Cashflow Analysis 1645-1745 This lecture will review how a cashflow analysis is carried out and how financial risks can be quantified, focusing on the practical use of cashflow analysis in support of loan/investment decisions. It will review cashflow forecasting methodology and the practicalities of developing input assumptions including: 1. 2. 3. 4. 5.
OPEX - Operating Expenses Freight rates Scrap values Operating days per annum Repair and maintenance costs
One of the most important reasons for a cashflow analysis of a transaction is to be able to undertake “what if” assessment of the deal. Shipping is a volatile business and few financial deals are immune to the vagaries of the spot market. The better deals, however, are robust enough able to withstand these fluctuations without threatening the fabric of the transaction. Session 12 Ship Finance Business Game: Part 2 - Introduction 1745-1815 This session introduces the second part of the Cambridge Ship Finance Business Game, describing the roles and responsibilities of ship owning and banking teams. The Game is divided into five rounds, each representing consecutive years in the evolution of the Game, with the current year being Year 1. During each round the Bank or Shipping Company will enter into loan agreements with an opposite Owner or Bank, and have the freedom to choose whichever opposite team they so decide. Following the conclusion of a mutually acceptable loan agreement, Teams will complete the Loan Term Sheet and enter the data in the Game spreadsheets within which are contained the business model upon which the Game is based. In the case of shipowners, any sale and purchase transactions and chartering decisions will also have to be recorded. At the end of the session, with these details correctly entered, the Game model will provide an accurate summary of all the bank and shipowning companies finances. At each of these successive stages, the model will have incorporated the latest "Market Factors" provided by Martin Stopford. Market factors for each successive year include freight rates, vessel values, interest rates and scrap prices. On the basis of each year’s results, banks and owners will then decide what actions they wish to take in the following year. After all five rounds of the Game are completed, the final position of the banks and owners will be revealed, with the winner in each category being the team that has achieved the best return on (starting) equity. Wednesday 29 May Session 13 Daily Review 0800-0815 Session 14 Key Factors Regarding Security in Loan Contracts 0815-0930 Any debt transaction is accompanied by a wealth of documentation which is intended to clearly spell-out the relationships between the parties and to provide protection for the lender. This session will review recent developments, highlighting the following: 1. 2. 3. 4. 5. 6.
Structure of security Implications of flag for mortgagees Mortgage requirements and registration; dual registration problems Insurances, reinsurance’s, brokers and captives Earnings, charter-parties, pooling Covenants; subordination of second mortgages; events of default
Cambridge Academy of Transport · 48 Whittlesford Road · Little Shelford · Cambridge CB22 5EW · Telephone: 01223 845242
Anatomy of Ship Finance
7. 8. 9. 10.
27-31 May 2013
Priority of maritime liens; pollution claims Impact of insolvency laws; risks for owners and mortgagees Work-outs and enforcement Asset sales
Session 15 Forward Freight Agreements and other Derivatives 0945-1145 Shipowners face many different types of risk ranging from the financial to operational - the most obvious of which is total loss of the ship. This extreme risk is covered by hull and machinery insurance. Many of the other types of risk have been difficult to cover or "hedge" until recently. Other important types or risk - such as the level of the freight market - have been covered with time charters, contracts of affreightment, etc. But such contracts are often not available for the period desired or from acceptable counterparties when they are available at all. New techniques of hedging freight price risk are becoming more widely used and may provide an important tool for ship finance in the future.
This session will consider the shipowners risk exposure and elaborate on the following: the types of risk that shipowners constantly face freight hedging instruments including the Biffex market, freight swaps and OTC (over the counter) transactions.
To help in understanding how these tools can be applied in the day-to-day running of a shipping or freighting company, several practical examples will be provided. Session 16 Credit Officer’s Guidelines for Teams in Business Game Part 2 1200-1230 The importance of sound covenants that form part of a loan agreement was explained in an earlier session. As covenants will be required to support the loan structures that teams enter into during Part II of the Game, the speaker will highlight which ones are most essential, which ones banking teams should include, and which ones owners should resist if possible. Session 17 Ship Finance Business Game: Negotiating a Loan 1330-1600 The teams of owners and bankers must now negotiate amongst themselves to produce a loan agreement and accompanying “term sheet”. Emphasis during the negotiation should be on the covenants sought and agreed. Details from the loan agreements and term sheets will be entered into a spreadsheet for each team and these will be updated at each annual interval of the Game. Each successive stage in the Game will bring the teams back together at the 1st January to decide on their next years’ investment strategy. The Game Organisers will produce each team’s year end results as at 31st December based on the evolution of a simulated market. DEBT FINANCING STRUCTURES A Commercial Banker’s View of Lending to the Shipping Industry This session is designed to be interactive and will follow these key points:
Session 18 1615-1730
What are the Industry's characteristics? Risk areas and shipping A review of values and cashflow drivers Why do some banks lose capital? - an overview of Bank Strategy Why do banks finance such a volatile industry? Risk Management - How do the top banks manage the risks ? Strategic tips for successful financing of the Industry
Cambridge Academy of Transport · 48 Whittlesford Road · Little Shelford · Cambridge CB22 5EW · Telephone: 01223 845242
Anatomy of Ship Finance
A Commercial Banker’s View of Lending o the Shipping Industry - continued
27-31 May 2013
Session 19 1730-1845
Thursday 30 May Daily Review
Session 20 0815-0830
Business Game: Investment Decisions - 1 January 2014
Session 21 0830-1000
SHIPPING DERIVATIVES Session 22 Headline Issues of Marine Insurance 1015-1200 Credit enhancement facilities might better be known as “alternative risk transfer” as it is the passing off of some of the risk of a financial transaction that is relevant. The various products which come under the heading of Alternative Risk Transfer facilities include:
Ship Mortgage Indemnity Residual Value (or Future Value) Insurance Credit Wrap / Credit Enhancement Revenue Guarantees Buy Back Guarantees
How each of these can be applied to a shipping transaction will be studied during this session. Business Game: Investment Decisions - 1 January 2015
Session 23 1200-1315
PRACTICAL ASPECTS OF SHIP FINANCE Daily Review
Session 24 0815-0830
Business Game: Investment Decisions - 1 January 2016
Session 25 0830-1000
Session 26 Anatomy of Loan Failures 1015-1230 All loans carry with them a risk, and it is to the covenant package that a banker looks for protection in the event that the transaction turns sour. What actually happens before, during and after a creditor exercises any lien or other authority is a mystery to most borrowers and lenders - and most hope never to go through such an experience. Over the years, their have been a number of high profile “work-outs” of problem loans in addition to failures of shipping companies. The speaker has been at the centre of one of the more recent events, acting on behalf of creditors who were trying to seize their security in the case of Adriatic Tankers. Her first hand know-how was applied both to the enforcement of the mortgage and the subsequent commercial deployment of the seized fleet. The experience of this event will be offered as a case example of what happens when things go wrong. Business Game: Investment Decisions - 1 January 2017
Session 27 1330-1445
Cambridge Academy of Transport · 48 Whittlesford Road · Little Shelford · Cambridge CB22 5EW · Telephone: 01223 845242
Anatomy of Ship Finance
27-31 May 2013
PERSPECTIVES ON THE LENDING SCENE Session 28 View from a Capital Market Player 1500-1545 Global Ship Lease is a containership charter owner which commenced operations in December 2007. The business is based upon owning and chartering out containerships under long-term, fixed rate charters to world-class container liner companies. Listed on the New York Stock Exchange since 15th August 2008, the “on-the-water” Fleet had grown to 16 vessels by end 2008, with a further five vessels scheduled for delivery during 2009 and 2010. This session will review the progress of GSL from a subsidiary division of a major container liner operator to an independent, publicly listed company on the Stock Exchange following its merger with Marathon Acquisition Corp. The Technical Revolution in Shipping – a perspective
Session 29 1600-1645
Session 30 View from a Deep-Sea Reefer Shipowner 1700-1745 In the world, the Indian subcontinent is a geological wonder. In the south of the country it has the vast Indian Ocean with no hindrance to wind flow, which provides all the moisture needed to sustain itself, and in the north it has more than 2000 km of Himalayan mountain range with average height of 20,000 ft above sea level. The Indian Ocean precipitates moisture on the subcontinent, as the Himalayas act as a great wall to prevent its escape. This “monsoon” rains gives India a unique opportunity for economic growth but at present only a part of it is being harnessed. India’s future growth will impact greatly on the economic well-being of the World, and also influence the need for ships to meet its expected seaborne trade growth. These issues will be considered during the session to reveal the importance of India’s future to that of the World generally. Friday 31 May Business Game: Results
Session 31 0845-0945
THE FINAL PERSPECTIVE Session 32 Shipping Market Outlook 1000-1215 Forecasting shipping markets plays a crucial part in analysing ship finance risk. It is however, notoriously difficult because the vagaries of international politics combine with a complex web of economic factors to determine the demand for goods which in turn stimulates the demand for shipping services. One major commodity, grain, is further influenced by weather and agricultural practices, and in recent years export volumes have varied by as much as 30% over a six month period. The supply-side of ships may be easier to predict during boom periods as ship-yards are in full production, and order book product is essentially predetermined. During slack periods as seen during much of the late 70's and 80's, the decision of owners to invest are more difficult to predict and are influenced as much by psychological factors (the hunch that the market is turning) as by econometric analysis. In this session, the lecturer will look at a number of shipping market sectors highlighting the driving forces which will determine the demand-supply balance in the coming years. These indicators will serve as a basket of market fundamentals which need to be observed and understood in order to more confidently take decisions in the decade ahead. Conclusion
Session 33 1215-1230
Cambridge Academy of Transport · 48 Whittlesford Road · Little Shelford · Cambridge CB22 5EW · Telephone: 01223 845242