Dr. Demos Petropoulos Head of Shipping SFS Group...

Dr. Demos PetropoulosDr. Demos PetropoulosHead of ShippingHead of Shipping

SFS Group PCLSFS Group PCLSFS Group PCLSFS Group PCL

Growth of Islamic Finance

• Islamic banks comprise of more than 300 institutions spread over 51 countries, as well as an additional 250 mutual funds that comply with Islamic principles. utua u ds t at co p y t s a c p c p es

• Conservative estimates suggest that over US$800 billion of assets are managed according to Islamic investmentassets are managed according to Islamic investment principles.

120,00

80,00

100,00

Growth of Islamic Banks' Assets (%)

Growth of Islamic Banks' Financing (%)

Growth of Conventional Banks' Assets (%)

Growth of Conventional Banks' Credit (%)

40,00

60,00

0,00

20,00

01 02 03 04 05 06 07 08 09 10

Shipping Department - Research2

200

200

200

200

200

200

200

200

200

201

Bloomberg, Bankscope

I t f i M li t i ith

Shariah Funding : The alternative source of Capital

• Increasement of presence in non-Muslim countries with manyInstitutions in the Middle East having experience in fundingoil & energy assets with vessels such as Crude & LNG carriersrepresenting the next logical steprepresenting the next logical step

• Asset backed nature of vessel funding makes it naturallyibl i h Sh i h i i lcompatible with Shariah principles

• Ship finance offers Islamic banks a means of diversification aspthis as an asset class, has been relatively less tapped.

• From a ship-owner perspective ‘Bareboat Charters’ matchFrom a ship owner perspective Bareboat Charters matchwell with Sharia principles

Expansion in the number of specialists working in banks law• Expansion in the number of specialists working in banks, lawfirms and shipping entities capable of dealing with thecomplexities of Sharia-compliant project / ship finance deals.

Shipping Department - Research

I d i ’ Sh i h li t b k t i t t k

Indonesia Shariah Funding

• Indonesia’s Shariah-compliant banks are teaming up to takeadvantage of the governement’s $40b annual developmentbudget

• The country passed a law in 2008 to allow financialinstitutions to offer Shariah-compliant services. Lenders had

l id i l R 5 97 illi ($684 illi )total paid up capital or Rp 5,97 trillion ($684 million)asDecember 2010, compared with Rp 105,52 trillion at non-Islamic banks.

• Indonesia has 11 full-fledged islamic lenders and 23 thatoffer services through tellers at bank branches. Islamicbanking assets rose to Rp. 100,3 trillion last year from Rp67trillion in 2009.

• The sale of Islamic bonds in Indonesia rose 56% in 2010 toRp 26,2 trillion


Growth of Islamic Finance

• Regulation started materializing - Standards introducedfor contractual agreements• This will lead to• This will lead to

• a unified system structure and have homogenousproducts

have access to the capital market• have access to the capital market• tradable instruments• diversification of products in terms of volume, in

f k d f f h dterms of kind, in terms of structure of those products

LenientRegulation

ConduciveEnvironment

AgressivePromotion &

DevelopementEXPANSION!

p


Islamic Ship Finance can be generally broken down into two


Islamic Ship Finance can be generally broken down into twostructures, each tailored to suit the requirements of thetransaction

• Structure # 1 : Existing Vessel

• Existing vessel financing can be based on the sale &• Existing vessel financing can be based on the sale &leaseback structure using the concept of ‘Ijara’

• Wide acceptability amongst the various Sharia scholars &Wide acceptability amongst the various Sharia scholars &boards

• Structure # 2 : New build Vessels (under construction)( )

• Financing structures for new build vessels mimictraditional Islamic Project Finance structures

• Structured as an Istisna (Arabic word literally meaning‘procurement’ covering pre-delivery construction phase)and forward Ijara concept (for post delivery period)


and forward Ijara concept (for post-delivery period)

Known Shipping Transactions

2010US $ 69.3 million - Silk Holdings , Malaysia, partly finance the construction

of two AHTS vesselsof two AHTS vessels.US $ 30.0 million - Silk Holdings agreed for a Musharakah Mutanaqisah

facility

2009US $12.5 million - Safeena , Malaysia acquired a 19,900 dwt stainless

steel chemical tanker ( Istisna (construction contract)and Ijarah mawsufah fi dzimmah (forward lease) )and Ijarah mawsufah fi dzimmah (forward lease) )

US $70 million - DnB NOR Markets and Tufton Oceanic’s secured a saleand operating leaseback for Ocean Tankers

US $54 million - Tanjung Offshore , 10-year Islamic Finance LeaseFacility

2008US $505 million Brunei Gas Carriers for two LNG newbuildings atUS $505 million - Brunei Gas Carriers, for two LNG newbuildings at

Daewoo Shipbuilding and Marine Engineering

The recipe for successful Investment

• Seen an increased need for Shariah compliant financial productsespecially in alternative asset classes, such as shipping.

• Market entry opportunity, through the expected stabilization of theglobal financial markets which would lead to an appreciation in value ofshipping assets in the medium to long term.pp g g

• The Fund will invest predominantly in shipping assets (ship ownership)through the establishment of special purpose vehicles (“SPVs”) and willinvest only in Shariah compliant vessels and shipping related activitiesinvest only in Shariah compliant vessels and shipping related activities,with a special focus on various types of ships of the Offshore Sector.

• The Fund’s financial structure will be an optimal combination ofThe Fund s financial structure will be an optimal combination offinancing and equity with the objective of minimizing the overall costof capital.

E i k ill b i i i d b f ll i h li f• Exposure to risk will be minimized by carefully assessing the quality ofthe vessels to be acquired, directing the bulk of the Fund’s investmentstowards more secured deal structures with pre-determined cash flowsand clear exit values, and partnering with reputable charterers.


The Product• Target Size: US$ 150 million

• Minimum investment: US$ 1 million for all investors

• Management Fee: 2% of outstanding capital contributions payable quarterly• Management Fee: 2% of outstanding capital contributions payable quarterlyin advance

• Performance Fee: 25% of net asset value appreciation over hurdle rate.pp

• Shariah Committee Fee: 0.25% of transaction size or US$ 50,000 (whicheveris lower) per transaction reviewed.

• Redemption: No early redemption is allowed.

• Shariah Committee: KFHMB’s Shariah Committee• Shariah Committee: KFHMB s Shariah Committee.

• Administrator: KFH Asset Management Sdn Bhd (KFHAM)

• Investment Committee: Appointed by the General Partner

• Advisory Committee: Independent of the Sponsors and/or the GeneralP


Partner.

Global Shariah Shipping Fund L.P.

Notes1. IMC will conduct preliminary evaluation / analysis, due diligence, source for assets, formulate business plan

and growth strategy, screen and negotiate third party fees, etc for escalation to the IC.


g gy, g p y ,2. IC will review and approve / reject any investment proposal recommended within context of the Fund’s

investment strategy.

Understanding status of shipping and ship-financing now

Global ship lending figures (drawn and committed) at 2010 are estimated at $520bn (excludes offshore sector), of which

$440bn is drawn and $80bn committed but undrawn.



Average per annumAverage per annum

2005-2009 = USD64bn2000-2009 = USD39bn

Source: Marine Money, HSBC, SFS Shipping Research



200 Original scheduled orderbookCurrent Estimate

151142140

160180

ht

Deliveries

Demolition

Estimate(based on

orderbook)

117

142

120

100120140

eadw

eigh

Stage 2

92

626080

100

Mill

ion

De

Stage 1

19 15 16 1625

3022

28 28 27

14

33

204060M

g

1510 5 6 6

14

0

994

995

996

997

998

999

000

001

002

003

004

005

006

007

008

009

010

011

012

013


19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Source: Clarkson Research Services


Loan portfolio of the top 40 banks according toLoan portfolio of the top 40 banks according to geographic location, January 2011

USA$9 50

Europe, $373.86

$9,50

Far East$66.40

Total top banks’ portfolio: US$449.76bn


Source: Petrofin Bank Research

Challenges that Conventional banks face

•European banks still vulnerable to weak economic conditions,affecting their domestic marketsaffecting their domestic markets.

•Rapidly deteriorating conditions in the shipping sector havep y g pp gsqueezed the ratings on European banks exposed to theshipping industry.

• Pressure on banks coming from an increasing number of loandefaults, rapidly deteriorating shipping company credit quality,

d k d f ll land weaker recovery expectations due to falling asset values.

• Bank’s capital ratios may decline as deteriorating• Bank s capital ratios may decline as deterioratingcreditworthiness feeds through internal rating models andincreases the relative risk-weighting under Basel II and III.


The future of Funding in the shipping industry

•Recovery expected in 2 - 3 years

• Shipping still represents an attractive area of expertise /• Shipping still represents an attractive area of expertise / growth potential with high returns

Th t ib ti f E b k t l b l hi fi• The contribution of European banks to global ship finance expected to reduce but to still remain a leading source of loan finance.

• Greater cooperation anticipated between European and Far Eastern banks e.g. HSH, DVBg ,

• An injection of about US $ 70 bln is currently required, a great opportunity for Islamic Financial Institutions to tap ingreat opportunity for Islamic Financial Institutions to tap in the market.


The recipe for successful Investment

• Allignment of Objectives

C it t t t d f di• Commitment to asset and funding

• Hard, prudent and economical work

• Constructive Planning

• Willingness to cooperate, share information

• Abidement to certain restrictions, guarantee more assetsAbidement to certain restrictions, guarantee more assets

• Instill honesty, transparency, dependability

• Acknowledgement counterparty’s concerns, worries, fears


• Banks and Clients shown considerable maturity and flexibility

Shariah Funding as part of this recovery

Banks and Clients shown considerable maturity and flexibilityin working together through the crisis

• Lenders have a scent of Shariah since European’s are still• Lenders have a scent of Shariah since European s are stillimproving their financial position and liquidity

Banking Institutions in this market came through the crisis• Banking Institutions in this market came through the crisisunscathed and financially stronger

l C Sh l h• Islamic Countries use Ship Financing as tool to support theirnew building Industries

• Liquidly reserves and deposits have been shifting to the MiddleEast and Far East

• Room for growth with a US$5-10 bln share for the current needsof the market

Thank you


Dr. Demos Petropoulos Head of Shipping SFS Group...

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