HOW TO FINANCE A SHIP A Practical Guide to debt, equity & - PowerPoint PPT Presentation

HOW TO FINANCE A SHIP A Practical Guide to debt, equity & leasing

Matt McCleery President, Marine Money International Matt joined Marine Money in 1996 and is now its president and a partner in the business. He is also Managing Director of Blue Sea Capital an advisory firm specializing in the financing of vessels. Matt has has arranged debt, equity and lease financing on approximately 200 vessels, including tankers, bulk carriers, container vessels, MPPs, cruise vessels, dredges and one yacht. He has also been involved in the listing of several IPOs and high yield bond offerings, various restructurings and was on the board of directors of two NASDAQ-listed shipping companies. Matt was a founding director of a New York-based distressed private equity fund that bought a fleet of tankers and bulk carriers and has since sold them. He is the author of the novel The Shipping Man.

What We Cover in This Course: A bad financing can • Basic Economics and Finance • Key Terms destroy a business, • The concepts of “Debt” and “Equity” • Where to Source Debt for Ships a good financing • Where to Source Equity for Ships • Costs, Terms and Conditions can create one • Structuring Considerations

Debt Characteristics… • Capital that is borrowed and must be repaid • ‘Guaranteed’ repayment, but typically without any upside • Repayment is comprised of “Principal and Interest” (AKA “P&I) • Primary source of financing for most shipping companies • Debt can have different levels of security – from Secured Ship Mortgage to Unsecured • Principal Repayment – can vary from fully amortizing to balloon • “Investment grade deal in every asset.” • LINGO ALERT: Credit, Leverage, Spread, Bonds, Notes, Revolver, Term Loan, Swap, Senior, Junk, Unsecured, Mezzanine (“Mezz”), Preferred (“Pref”)

Equity Characteristics… • The “Down payment” on the house • “Enjoys” Ownership and Control • Has most upside, but…. • Equity is the “first loss” source of capital • All other sources of capital have priority of repayment ahead of equity • Equity earns its return from free cash flow and residual value (Hopefully) • LINGO ALERT: Common, financial sponsor, watermark, hurdle rate, secondary, primary, carried interest, Pari Passu, preferred, dilution, Private Equity

Debt and Equity - Baseline • $20mm purchase price • 50% Debt (red) • 50% Equity (green) Capital Structure 50% 50% At Acquisition 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6 Equity Debt

UPSIDE Scenario • Vessel’s market value increases by $5mm from $20mm to $25mm • Debt balance remains $10mm • Mark-to-market equity value now equals $15mm ($25mm asset - $10mm debt = $15mm equity value) Capital Structure Upside Case 50% 50% 50% 50% At Acquisition 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% Equity Change in Value Debt 7

DOWNSIDE Scenario • Vessel’s market value decreases by $5mm from $20mm to $15mm • Debt balance remains $10mm • Mark-to-market equity value now equals $5mm ($15mm asset - $10mm debt = $5 equity value) Capital Structure Downside Case 25% 50% 50% 50% At Acquisition 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Equity Change in Value Debt 8

Ships as “Assets" Positive Characteristics Challenging Characteristics • Hard Asset (Collateral) • Capital intensive • Unrestricted mobility • Low returns = Temptation for Financial Leverage • Low obsolescence risk • High operating leverage • Fungible • Wasting assets • USD denominated • Volatile • Operating leverage • Unpredictable • Volatile • Cyclical • Cyclical • Chronic overcapacity • Liquid secondary market (50 vessels sold each week)

“Happy Happy” – Benefits of 50% Leverage OWNER HAPPY LENDER HAPPY • Uses someone else’s money All the same reasons as owner • • Conserves precious liquidity (cash) Security of asset • • Debt Capital Cheaper than Equity Big ticket • • Boosts Return on Equity Generates a return + fees • • Creates Manageable daily breakeven Low risk if done properly • • Allows free cash for maintenance Participation in great industry • • Allows free cash for weak markets Consistent annual need for capital • • Make money selling ship (hopefully)

Estimated Value of World Fleet ($ billions) $900.00 $800.00 1 BILLION + $156 $700.00 PER WEEK $600.00 $391 $500.00 • Newbuildings $400.00 $781 • Secondhand $625 $300.00 • Refinancings $200.00 $391 $100.00 $0.00 Total 50% Debt Financed 80% Debt Financing Debt Implied Equity Total

Key Sources of Debt for Ships • Commercial Banks (Funding: depositers, other banks, bonds) • Non-Banks (Credit Funds) – (Funding: Private equity, Investors) • Institutional Investors – (Funding: Pension Funds, Endowments, Insurance companies) • Leasing Companies – (Funding: Equity Investors, Commercial Lenders) • Governments – (Funding: Export Credit guarantees exports)

100% Chinese 90% Leasing 80% Credit Funds Preferred 70% US Equity Credit & Norwegian Bonds 60% Alternatives: Commercial Leverage Banks “Happy, Happy ” 50% Leverage and Investment 40% Grade Cost 30% 20% k s i R 10% 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Cost

The Commercial Banking Landscape New Kids on Block Old Reliables Exiting or Exited the Business

Total Outstanding Shipping Loans $400.0 $375.6 $358.6 $355.4 $355.5 $349.9 $350.0 $321.1 $321.8 $297.6 $300.0 $259.3 $250.0 $229.4 $200.0 $150.0 $100.0 $50.0 $0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2018 Shipping Loan Portfolios by Bank (Billion USD) $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 s M k k B O a B E g B i ) g M e k h k B g d g C g t a k k s g * g O k k C B g g e g C t k i a n n e n n c n c n n n n n n n i n n a t n n n I N R L i B E I e c B d I n R l C C C n C C b I a a i / I n a n a n a a i i n d U M i S i i i r i C i i a s i a a X M D s X s s s s s e s M a s s s i D a e B e b B B B e r B y B a r b a r E S a a E n a a a a I a a r a a B t o n L C m a - R S t n d g z C l A e e K e e e e e e e s e e A t - e l r a e X o N r P K O i a i i r s L Z L l G L L L a L L L u e L L K F F n h e e d E c k l E u N i w D i h A P N c c g B p g g i C m s r B O C C U B m a P p p r r B C k N ( n r r o a T B n S I S l n r I g i e M C i D k C m e V A n m A h a S h - n T B e S n o B W A C d C C M m S a i D A V S h C S C B a r M I o r a o m O b t m m a V a f D h s B i C C K A C o u u d n d a H o s r o S e f o . H d i i n o m u B n M i C r r a l o B E a e C a m t g f D S n t t s r o r i u h m C o b C p A m a H

Selected Non-bank Lenders $100M+ Large Transaction Size $25-100M Middle $5-25M Small 4% - 7% 7% - 10% 10%+ Cost of Capital

The Bond Markets High Yield (non-investment grade) Bonds: • LIBOR +, NIBOR +, or Fixed Rate • 3 to 5 year maturity • Secured or Unsecured • Public or Private Offering • Rated or Unrated • Little to Zero Amortization • More Expensive than Bank Loan

Export Credit Agencies Government institutions • Mandate to support domestic • industries (shipbuilding or trade) Primarily available to finance • newbuildings Direct lending • Sovereign Guarantees on • performance of commercial loans

The Term Sheet – Summary of Key Terms & Conditions Approximately 10-page document produced by Lender/Arranger • Good News: Someone took time to draft a term sheet • Bad News: Doesn’t represent a commitment • Generally used as basis for negotiation on specific items • Key Economic Terms: Loan Amount - Expressed as lesser of % and dollar amount. • Spread – Expressed as “Base Rate” + Margin • Amortization Profile – Expressed as schedule of repayment of principal • (Lingo: “Amort” or simply “Am”) Liquidity Reserve – Expressed as an amount of cash in “rainy day fund” per vessel • (Lingo: The “LR”)

Term Sheet - Senior Loan FACILITY TYPE: Senior Secured Loan COLLATERAL: M/V Big Papi BORROWER: Big Papi LLC (SPC formed to own M/V Big Papi) GUARANTOR: Fenway HoldCo LENDER: Name of lending entity (Official name) LOAN AMOUNT: Lesser of $12 million or 60% of Vessel Value TERM: 60 months (5 years) INTEREST RATE: 5-year LIBOR swap + 350 basis points = total interest payment AMORTIZATION: 20 quarterly payments to a balloon repayment of [$1,000,000] FEE: 1.5% of draw down COMMITMENT FEE: 1.00% EMPLOYMENT: UPON DRAWN DOWN, VESSEL SHALL BE TIME CHARTERED FOR NO LESS THAN 24 MONTHS CHARTER RATE: $14,000 per day, net SECURITY: Mortgage recorded in ship registry, assignment of earnings, assignment of insurance INSURANCE REQUIREMENTS: Borrower shall at all times ensure…. COVENANTS: Value Maintenance Clause (“VMC”), Liquidity Reserve, Debt Service Coverage Ratio LAW: Transaction shall be governed by New York Law