Finance Sources and Instruments for Shipping Companies

Giuseppe Valerio Agovino Eugenio Biancucci Vincenzo Gregorio Del Sorbo Alessandra Laudati

MIS – MASTER IN SHIPPING: LOGISTICA, FINANZA E STRATEGIA D’IMPRESA

Tutors: Dott. Francesco Rotundo Dott. Giovanni Barberis

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Shipping Companies

2/19

Capital intensive

Family business

High leverage

Cyclical business

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3/19

Market tendence and optimal behaviours

• M\L term periods during which the market is stable, freight rates remain steady at medium/low level

• During market peak, freight rates rocket

Supply and Demand trend

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4/19

Financial crisis and Shipping

Basilea 3

Credit crunch

Leverage ratio decrement

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Debt financing

5/19

The main debt financing sources are:

Bank financing

Bonds

Convertible bonds

Private and public

placement

Ship financing

(Loan)

Bank credit

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Ship Financing

6/19

The Bank evaluation starts from the analisys of patrimonial status, resilience and refund capacity, in order to estimate the internal rating.

the bank generates the contract proposal (term sheet), based on internal rating and market conditions,

Internal rating

Market conditions

Term Sheet

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Term Sheet

7/19

Interest rate • Benchmark • Spread

Refund Conditions

• Ammortization • Bullet

Guarantees

• Mortgage • Holding guarantee • [Refund guarantee]

Covenants • Loan to value • Negative pledge • Next rata allowance

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How to choose the benchmark

8/19

The choice of the benchmark for the loan has to be evaluated on the forecast of future interest rate trend.

Bullish view of the interest rate

Pre-hedging

• chosing a fixed interest rate

Bearish view of the interest rate

floating interest rate

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Bonds as an alternative for debt sourcing

9/19

The difficult conditions to access debt sources have prompted shipping companies, traditionally linked to bank financing, to look for new forms of financing.

• The emission of bonds by shipping companies has increased noticeable during the last five years

46%

14%

24%

7% 4% 5%

Asian Shipping Bonds Issues

China

Japan

Korea

Taiwan

Singapore

Malaysia -1000

4000

9000

Asian Shipping Bond Volume (in USD milion)

2009 2010 2011

Fonte: Bond Markets and Shipping: A Summary of 2011

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Advantages and Disadvantages of public and private placement in bond allocation

10/19

Public

High number of potential underwriters

Size ≥ 500 € M

Execution risk

Covenants

More complex and expences procedures

More than one rating required

Private

Restricted number of selected high standing investors

Size 50 – 250 € M

No execution risk

Less complexity and costs

More control on the emission procedure

High risk tolerance by underwriters required

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Alternatives types of bond

11/19

Plain Vanilla Perpetual bonds

Sukuk Convertible bonds

Bonds

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Equity sources

12/19

The use of equity sources is not well developed in Italy, due to the high standing required to enter this market and the cultural background of the shipping companies’ governance.

IPOs Private Equity

Mutual funds

Mezzanine instruments

(LBO, convertible

bonds)

Requires an open attitude to the market Access to mass investors Mandatory strong reputation, financial

resilience and company transparency Internal adequate structure Residual remuneration of the

shareholders

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The role of Private Equity in shipping industry

13/19

• IRR 25%

• Duration 3-7 years

• Capital gain

• Strong investment (more than 30%)

• Strong influence in the governance

IPOs

Private Equity

Mutual funds

Mezzanine instruments

(LBO, convertible

bonds)

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d’Amico International Ship s.p.a. (DIS): IPO in FTSE/MIB in 2007

14/19

Differently from competitors, d’Amico I.S. has percieved the exigency to wide its horizon, in order to compete in the global market.

Capitalization (2007): 241,19,349.5

Fo

nte

: M

orn

ing

sta

r

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Ship financing simulation

15/19

According to nowadays market condition, the hypotesis concerns the buying of a new Vessel with the following features:

• Vessel: HANDYSIZE MR2 (Product Tanker) 50.000 DWT

• Price: 35.000.000,00 USD

mm.dd.yyyy Tx (months) USD Causal

07.02.2014 T0 SAJ Form

underwriting

3.500.000 1st advance 10%

01.02.2015 T6 3.500.000 2nd advance 10%

04.24.2015 T10 Steel Cutting 3.500.000 3rd advance 10%

07.02.2016 T24 Ship delivery 24.500.000 final payment 70%

(bank committment)

SAJ Form Agreement The contract establishes the following conditions for the ship building, terms of payment and delivery

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16/19

Loan Amount: 24,5 M USD

refoudable in 10Y with 15 Y profile

Refound procedure: Mixed (9 payments x 1,634 M USD) + (1 baloon x 9,8 M USD)

Benchmark: 10 Y Mid SWAP (1,5%)

Spread: 280 BP 250 BP

Upfront: 1% 0,8 %

Commitment: 1% 0,8% x year, until 07.02.2016

Guarantees: Mortgage; Holding Guaranty

Covenants: Loan to Value 135% 130%

Bank Contact (T1) & Term Sheet negotiations

Company request: 70% of the vessel price (no execution risk)

Bank Evaluation on company health status and financial stability

(History; managment; reputation) internal rating

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Bank approves at T3 the following debt repayment plan:

17/19

Anno Quota

capitale

(USD)

Quota

interessi

(USD)

Totale

(USD)

Residuo

(USD)

T24 - - - 24.500.000

A1 1.633.333 65.333 1.698.666 22.866.667

A2 1.633.333 65.333 1.698.666 21.233.334

A3 1.633.333 65.333 1.698.666 19.600.001

A4 1.633.333 65.333 1.698.666 17.966.668

A5 1.633.333 65.333 1.698.666 16.333.335

A6 1.633.333 65.333 1.698.666 14.700.002

A7 1.633.333 65.333 1.698.666 13.066.669

A8 1.633.333 65.333 1.698.666 11.433.336

A9 1.633.333 65.333 1.698.666 9.800.003

A10 9.800.003 9.800.003 0

Totale 24.500.000 587.997 25.087.997

• 2 months later the Bank stipulates the loan agreement (T5)

Is possible to forecast the sale of the vessel for a particularly advantageous offer. Repayment the loan in advance need to pay the value of the swap at mark to market. Is necessary to evaluate whether the capital gain is higher than mark to market.

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Conclusions

18/19

Complex pattern of financial sources and the inability of bank loan to cover financial needs

Major emissions of bonds and partecipatory financial instruments

IPO and Equity finance

• coherent use of pre-hedging instruments (IRS)

• require a strong standing and reputation • financial marketing

needed in order to get bank loan at better rate and conditions and competitive advantage

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Thank you for your kind attention

19/19

Giuseppe Valerio Agovino Eugenio Biancucci Vincenzo Gregorio Del Sorbo Alessandra Laudati