Ship Finance Alternatives (Final)


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  • The committee recognizes that several factors could have a greater effect than technology on the competitiveness of the U.S. shipbuilding industry. These factors include financing, subsidies, international reputation, and the inherent difficulty of reentering into the international market. Although the assessment of these factors is beyond the scope of this study, given their importance, the committee has attempted to set this study within their larger context.
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Ship Finance Alternatives (Final)

  1. 1. 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
  2. 2. 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 markets  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 2
  3. 3. 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 opportunities 3
  4. 4. Current Environment Shipping Loans  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. Capital Markets  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. 4
  5. 5. 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 Investments Private Equity 5
  6. 6. What is Mezzanine Financing?  Form of investment:  Debt (usually with equity kicker)  Convertible bond  Preference shares (when necessary to address particular regulatory constraints)  Investment situations:  Mid-market companies seeking additional capital to fund growth through acquisition or expansion  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. 6
  7. 7. 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 7
  8. 8. 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 Different Loans with equity Common Equity Financing kicker Instruments Redeemable Bonds with Shares/Bonds warrants 8
  9. 9. 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 √ Scale √ Clear Strategy √ Robust Business Model √ Market Leadership Position/Potential √ Understandable Corporate Structure √ Understandable Financial Statements √ Successful Prudent Financial Policy √ Good Internal Risk Control √ = Exit 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 √ 9
  10. 10. Pacific Transportation’s Approach Focus on niche shipping Pacific Transportation’s Investment Space companies with: Growth in Asia Pacific & LNG Carriers FPSO Mid East ULCS ULOCs Capesize Bulker Majority ownership VLCCs LR Product Containerships Semi-Sub position to support strong Tankers management teams Panamax Bulker MR Product Capitalisation Tankers Supramax Tender Rigs Suezmax Attractive industry Bulker Tankers supply-demand Handysize dynamics Bulker Feeder ships Aframax Chemical Tankers Tankers MPP/Heavy Lift Vessels Areas where regulatory Small Product Reefers factors are in favor of Tankers Ship Repair shipowners Offshore Supply Vessels Ability to gain dominant Startup Mature market share in niche market 10
  11. 11. Leveraging our shipping expertise to generate strong returns  Investment Situations  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 capital expenditures.  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.  Exit Strategies  IPO when market conditions are favorable  Trade sale back to entrepreneur, competitor, or in a private placement. 11
  12. 12. Hypothetical Case Study  The Situation  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.  Funding required  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.  Our Strategy  Strategic private equity partner, in exchange for controlling stake until exit. 12
  13. 13. Hypothetical Case Study (continued)  Time Line Investment Due Final Board Execution Closing 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. 13