Ship Finance Alternatives
“The Global Financial Crisis & the Shipping Markets”
Teddy H Tsai – Head of Research,
CLSA Capital Partner, Pacific Transportation Asia Pte Ltd.
November 18, 2008
CLSA Capital Partners
CLSA Capital Partners is the alternative asset-management arm of CLSA Asia-Pacific
Markets, Asia’s leading, independent brokerage and investment group and part of
Credit Agricole, the world’s seventh-largest bank by Tier One capital and the sixth-
largest by assets
Approximately US$2.5 billion under management in a group of dedicated funds that
are structured to take advantage of the best investment opportunities in Asia
Specialist teams have the capital, knowledge base and Asian experience necessary to
execute a wide range of transactions
Our portfolio companies are active and successful players in the financial and M&A
Strong track record since inception in 2000 that leverages the CLSA’s platform and
regional network to invest in long term demand-driven growth opportunities
CLSA Capital Partners
CLSA Capital Partners
Domestic Asset Japanese Capital Regional Environment Domestic
Demand Reflation Recovery Markets trade Degradation Demand
Aria MezzAsia Pacific CRA
Fudo CLSA Sunrise Alcor Investment
US$513 Million US$112 Million Transportation Management
US$430 Million US$350 Million US$300 Million
US$212 Million US$300 Million
•Pan-Asian private •Opportunistic real •Japan private •Pan-Asian •Regional shipping •Focusing on mega •Asian absolute
equity funds estate investments equity fund mezzanine fund and transport growth trend in return equity fund
•Provides expansion with value added •Capitalise on •Invests in mature opportunities fund Asian resource targeting 15-20%
capital to well- proposition opportunities businesses with •Direct play on efficiency annual returns
established •North Asian focus arising from predictable cash Asian regional •Invest in listed •Bottom-up stock
companies with primary rebound in Japan’s flows trade equity shares and picking using
•Value added emphasis in Japan, economy •Provides leverage •Focus on near IPO positions fundamental
approach China, Hong Kong, •Focus on growth finance to buyout exploiting long- •Clean Resources research and
•Domestic demand Singapore and capital and mid- transactions and term transport Asia launched 2006 company meetings
focus Taiwan market buyouts mid-cap companies trends •Clean Water Asia •Focus on both long
launched 2007 and short stock
Shipping Banks are closed for business
Syndicated loan volumes have declined substantially
Margins have widen significantly (from 30bps to in excess of 200bps)
Loan tenors are shortening, or aggressive repayment schedules are demanded.
Gearing levels have declined from 80-90% to 50-60%.
Covenants and loan clauses are becoming more strict. e.g. market disruption
clauses, residual value guarantees, loan to value clauses.
The primary markets are closed. IPOs that have been pulled includes Maritime
Capital Partners, Wah Kwong, etc.
Secondary offerings requires existing listings, and are becoming uneconomic.
Debt market transactions, such as convertible bonds, high yield bonds, are
becoming more difficult to execute as well.
Sources of Capital for Ship Owners
Ship Loans / Mortgages
Traditional Sources of
Corporate Debt / Syndicated Loans Capital
KG / KS Partnerships
Public Equity Markets – IPOs
Shipping Trusts / Sale & Leasebacks
Mezzanine Financing Alternative
What is Mezzanine Financing?
Form of investment:
Debt (usually with equity kicker)
Preference shares (when necessary to address particular
Mid-market companies seeking additional capital to fund growth through acquisition or
Sponsored transaction (Buy-out / PE) where there is a need to fill in
a funding gap
Listed companies looking for alternatives to dilutive share placements
Secondary trades, share financing and distressed on an opportunistic basis
Risks / Downsides:
Require predictable cash flows
Higher cost of capital than traditional forms of debt.
Mezzanine Debt Investment Matrix
Return Profile Mode of Investment
• Capital preservation • Customized solutions
• Current income • Debt & Equity features
• Equity upside • Downside protections
Tenor and Exit Investee Profile
• Typically 2-5 years • Management track record
• Bullet or Balloon • Defensible market position
• Built-in exit • Reasonable debt gearing
What is Private Equity?
• An asset class consisting of various financing instruments in operating companies
not publicly traded on a stock exchange.
• Strategies for private equity ranges from leveraged buyouts, venture capital, growth
capital, distressed assets, real estate, infrastructure, energy, mezzanine, etc.
Convertible Bonds Preferred Equity
Loans with equity
Common Equity Financing kicker
Redeemable Bonds with
The Value-add of a Private Equity investor
Qualities Market/ Strategic/Financial Investor seeks What we look for initially What we can add
Strong Sector √
Clear Strategy √
Robust Business Model √
Market Leadership Position/Potential √
Understandable Corporate Structure √
Understandable Financial Statements √
Prudent Financial Policy √
Good Internal Risk Control √
Corporate Governance Culture √
Management Team with Depth √
Management able to embrace change/learn √
Management with Integrity √
Management with Ambition √
Demonstrated ability to cope with competition/consolidation √
Communicates Message Clearly and Consistently √
Brand Name Endorsement √
Strong Non Executive Directors √
Institutional Shareholders √
Pacific Transportation’s Approach
Focus on niche shipping
Pacific Transportation’s Investment Space
Growth in Asia Pacific &
LNG Carriers FPSO
Mid East ULCS
Majority ownership VLCCs
LR Product Containerships Semi-Sub
position to support strong Tankers
management teams Panamax Bulker
Tankers Supramax Tender Rigs Suezmax
Attractive industry Bulker Tankers
dynamics Bulker Feeder ships Aframax
MPP/Heavy Lift Vessels
Areas where regulatory
Small Product Reefers
factors are in favor of
Tankers Ship Repair
Ability to gain dominant
market share in niche
Leveraging our shipping expertise to generate strong returns
Joint venture with entrepreneur to set-up & build an asset-owning, operating company in
a targeted niche market.
Mid-market companies seeking additional capital and expertise to fund growth and
Listed companies (Buy-out / PE) where growth and restructuring would be more
favorable as a private company.
Undervalued ship assets and an identified management team, which can be used as a
base to build an integrated asset-owning operating company.
IPO when market conditions are favorable
Trade sale back to entrepreneur, competitor, or in a private placement.
Hypothetical Case Study
Entrepreneur funding costs have changed. Deposit placed at shipyard for
newbuilding, ship loan terms are being renegotiated by the banks due to credit market
conditions. Entrepreneur gearing levels has declined from 70-80% to 50-60%, and must
come up with additional equity at delivery in 2009.
Post-delivery - Loan with gearing levels of 50-60%
Pre-delivery - Equity provided for remaining 40-50%.
20% already paid as progress payments by the entrepreneur
20-30% to be funded via alternative methods
Options available to the entrepreneur
Obtain better terms at an alternative bank? – NOT in today’s market
Raise funds from public markets? – NOT in today’s market
Gear up corporate balance sheet? – Maybe, but difficult for small companies
Sale & leaseback? – asset light strategy is not favorable in a downturn, where cost
cutting options are important.
Strategic private equity partner, in exchange for controlling stake until exit.
Hypothetical Case Study (continued)
Investment Due Final Board
Proposal Diligence Approval
CLSA/PTA meets Entrepreneur CLSA/PTA board of CLSA/PTA Once all
with entrepreneur to opens up the managers meets investment team documentation are
discuss possible books to allow with entrepreneur. works with in-order, all parties
opportunities. accounting, legal, entrepreneur to finalizes the equity
and operational Investment team obtain required investment and
Agrees on initial due diligence on makes final financing. asset purchase.
terms – Controlling the company. presentations and
stake, direction of obtains final board CLSA/PTA works As a portfolio
the company, CLSA/PTA works approval. with lawyers, company, the
potential exit, etc. in conjunction accountants, entrepreneur can
with entrepreneur CLSA/PTA and regulators, to leverage the
CLSA/PTA puts to get comfort in entrepreneur agrees obtain required resources of the
together initial the business on final business approvals & CLSA/PTA team.
business plan / plan. plan / investment documentation.
investment proposal. proposal.