Shipyard Risk Management

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Risk Management

Rio de Janeiro, October, 2008

Dean Domazet (BOHN, DOMAZET & ASSOCIATES GMBH)

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AGENDA

UniCredit Group at a glance

HypoVereinsbank Global Shipping Expertise

HypoVereinsbank Shipyard Consulting

Development of the Maritime Sector

Process of Shipbuilding

Risk Management Reactive

Risk Management - Preventive Risk Management Method

Risk Management Results

Risk Management - Examples

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over 40 million customers in 23 countries 1)

over 10,000 branches

over 180,000 employees

a leader in the euro zone

1) As per: August 2008

UniCredit Group at a glance

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Offshore

Shipyard ConsultingResearch

SyndicationMaritime LogisticsShipping

Hamburg

Singapur

Oslo

Pirus

Dubai

Know-how International Exposure

HVB has over 30 years experience and in-depth knowledgeof the maritme industry.

One of the leading TOP 15 international shipping banks.

Providing tailor-made finance solutions to meet specific clientrequirements together with a full range of banking services.

International expertise and local presence in the coreshipping markets (Hamburg, Oslo, Piraeus, Singapore, Dubai).

Long relationship to leading international shipowners.

Dedicated team of over 80 professionals globally.

Advisor to Governments, Shipping companies and Investors.

Diversified loan portfolio of approx. EUR 8bn (9,5bn incl.Italy) in 2007

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HVB Global Shipping Expertise


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Dockwise Shipping BV

USD 745,000,000Senior and Subordinated

LoansMandated Lead Arranger

&Bookrunner

CMA CGM

USD 480,000,000Loan Facility

Co-Arranger

HVB Global Shipping (HVB) provides a full range of shipping finance servicesand offers a comprehensive range of advisory services within the shipping andshipbuilding industry

Products Structuring/arranging project

finance for: Vessel construction financing Senior/junior/mezzanine loans

Equity

HVB Global Shipping Expertise

Selected recent transactions

ZIMIntegrated Shipping

Services Ltd.

USD 80,000,000Senior Term Loan

Facility

Mandated Lead Arranger

Golden Energy Marine

Corp.

USD 188,800,000Term Loan Facility

Arranager, Agent &Swap Provider

Croatian Government

Restructuring of theCroatian Shipbuilding

Industry

Mandated Advisor

Odfjell Invest I Ltd.

Odfjell Invest II Ltd.

USD 850,000,000Senior Secured Credit

Facility

Mandated Lead Arranger

Port facilities/Infrastructure/Offshore Acquisition and Leverage Finance Lease Structuring Container-Box-Financing

Shipyard Consulting

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Shipyard Consulting History/ Approach

HVB Global Shipping is for many years involved in consulting their own customers in

respect of shipyards. Main target is how to obtain best results in the shipbuildingprocess starting from actual market needs, initial design requirements to assessment of

the the chosen shipyard where to be built and last but not least monitoring of thenewbuilding phase to assure quality, timely delivery and no cost overruns.

HVB has grown over time as a strong problem solver or even further as preventivemonitoring tool by following the new building projects from early building stages.

In 2000, HVB Global Shipping has decided to form their own team and to form a

cooperation with Bohn Domazet & Associates - a maritime consulting firm with a proven

track record in the industry.

This combination of skills (banking, technical, commercial, as well as managerial) isgiving HVB Global Shipping unique standing in the shipping market all over the world.

HVB is the only bank which offers such kind of services.


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Shipyard Consulting History/ Approach

HVB clients range from ship owners to shipyards, as well as to other banks and to

governments. These governments are EU member States as well as Central EuropeanCountries negotiating their EU membership by restructuring its State Shipbuilding

Industry after and in conformity with EU rules.

HVB Global Shipping long lasting cooperation with Bohn, Domazet & Associates GmbH

has proven to be of utmost flexibility and of competitive advantage. No other Bank hassuch Shipbuilding Industry Know-How integrated in its structure able to support large

spectrum of clients.


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Shipyard Consulting - a unique service

Services:

Evaluation of technological, organisational and economical standard

=> risk/project evaluation

Monitoring of shipbuilding process

=> timely delivery, minimise risk

Coordination of entire project management

=> make investments work

the Government of Croatia has mandated HVB Global Shipping forthe "Restructuring of the Croatian Shipbuilding Inidustry"

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Developments

What can we expect?

Demand regarding maritime transportcapacities is further increasing

Shipbuilding industry is working to fullcapacity

New shipyards are entering the marketand offer good prices

If we are planning

to participate in

the favorabledevelopment of

the maritimetransport sector,

we have to avoid

all risks that maychallenge this

development.The chances to receive vessels of good

quality at the negotiated prices and

according to agreed terms aredecreasing

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Risks arising fromthe production

process are

commonly detectedonly when shipyard

asks for a mark-up,the delivery date is

postponed and the

operability of thenew construction is

not guaranteed.

Common Process of Shipbuilding Projects

Owner has charter

Owner needs vessel

Shipyard makes offer

Letter of credit is available

Financing is approved

Contract with shipyard is signed

The vessel is completed too late, is of poor quality andthe costs are higher then agreed upon

The order is cancelled with loss accruing,owner has no vessel

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Cycle (Reactive risk management)

Defaults aredetected only atthe end ofproduction process

The defects call forcomplicatedchecking and

review processes,which cost a lot ofmoney and defectsmay not becorrected

New

shipyard

Calculation

error

CapacityBottleneck

Liquiditybottleneck

Costsexceeded?

Suppliersreimbursed? Date is

unrealistic

Qualityis OK?

Cancellation

Date ispostponed

Priceincrease

Touching

up

Selectionof shipyard

Operation ofvessel

Constructionprocess

Offer

Error level

Process level

Effect level

Reaction level

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Reactive Risk Management

Reactive risik

managementalways results inhigh losses forowner and

investor. Damages cannot

be avoided

Risk Management

Delivery date not met

Risk was acknowledged too late

Looking for causes andresponsible persons

Remedy measures are nolonger possible

Owner suffers significant losseswith charter

Cancellation of building contract is considered

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Preventive Riskmanagement allowssimplified cyclesand reduces theprobability of risks

Second step isinitiated only if risk

probability is lowprior to starting firstprocess step.

Operation ofvessel

OutlookCharter?

RPIA

Charter

Constructionprocess

Processes,Costs,dates?

RPIAconstruction

Offer

Offer

realistic?

RPIAoffer

Selectionof Shipyard

Shipyardcapacity?

RPIAshipyard

Simplified Cycles (Preventive Risk Management)

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Preventive Risk Management

Preventive risk

managementrequires less

efforts anddamages for

owner and

investor can beavoided

A few stepshit the target

Contract is fulfilled

Risks will not occur

Systematic search for possible risksbefore each process step

Determine and implement measuresto avoid risks

Need for new vessel construction, offers, shipyard selection,credit, contract, construction, delivery & operation

Risk Management

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Quality LeaderClient Image

Risk ManagementSecurity for BankDelivery statement for shipownerWork load for shipyard

Risk free shipyard

RPIA ShipyardManagement evaluationEquipment evaluationProductivity assessmentQuality assessment

Risk free project planning

RPIA Offer Calculation assessment Supplier assessment Production flow Capacity assessment Scheduling assessment

BDA- RiskMangement SystemShipbuilding capacityPreventive measuresExperience

Risk free constructionprocess

RPIA Construction Monitoring of dates Budget control Resource allocation Delivery control

Preventive riskmanagementregarding financing

of vessels andvessel constructionconsists of fourelements

The core of risk

management is theRisk Probability andImpact Analysis(RPIA)

Risk free Refinancing

RPIA Charter Freight rate development Charter outlook Charter contracts Shipowner credit

Preventive Risk Management

Elements

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Risk Scenarios (Phase 1: Shipyard Assessment)

Risk Indications Impact Control

Shipyards equity rate too low in comparisonwith turnover

Small cash reserve Focus on letter of credit examination

Production plant not yet in operation Productions starts too late Determination of delivery date range

Staff with low level of training cannot fulfillquality standards

Reclamations and reworks, potentiallimited operability of vessel

Enhancing capacity of site office

Order book is overwhelming productioncapacity

Scheduled delivery dates cannot be met Setting new priorities together withshipyard

Risk Management

Selectionof shipyard

ShipyardCapacity?

RPIAShipyard

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Risk Indications Impact Control

Fluctuating prices for materials and

components

Costs are higher then calculated in initial

offer and exceed liquidity ceiling

Acknowledgment by agreeing on new

price or cancellation

Quality level lower then assumed Operability of vessel is jeopardized Price reduction or cancellation

Information about technical parts is not inthe computer system

Day to day purchasing, deliveries arearriving late.

Important purchasing positions are takenover by owner

Productivity is lower as rated in calculation Postponement of delivery dates later thencancellation date

Cancellation of vessel

Risk Scenarios (Phase 3: Construction Process)

Risk Management

Constructionprocess

Processes,costs,dates?

RPIAconstruction

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Determining Risk Factors

Listing of all possible risks jeopardizing thefulfillment of a product function or a project criterion

Creating an element structure

Which element could fail in what way?

Which risks can occur regarding organization,manufacturing, transportation & assembly?

Estimating all possible impacts in the event that a riskwill occur

What impact will this defect have? What is the customers opinion about this defect?

Finding the reasons that lead to a possible riskExample:

Capacity bottle neck situation

Material defect/material handling error

Calculation error

BD&A hasdeveloped project

specific templatesfor creating astructure ofelements

Risk Management Method

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Assessment criteria for occurrence probability A Possible error rate Assess-ment

HighIt is very likely that a high amount of errors will be made in either construction orassembly

1... 1/10 5

MediumThe methods applied in construction or assembly have caused difficulties in the past


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Assessment criteria for extent of consequences of error B Assessment

Error with extreme consequences: leads to jeopardizing the safety of humans and/or a long termproduct failure and/or non-compliance of legal regulations

10

Significant error: leads to a mid term product failure, causes considerable efforts for customer andirritation of customer

4

Medium significant error: leads to a short term product failure, may be remedied easily, but willmake customer unhappy in the long run

3

Insignificant error: there is no product failure and remedy is possible after conducting a routinecheck

2

Hardly noticeable error: it is very unlikely that error will have noticeable consequences on functionand safety of product. Customer will most likely not detect error.

1

Errors with extremeconsequences have a

low level of probabilityof occurrence andtherefore the riskassessment is low.

The error withextremeconsequences isassessed as value 10.


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Assessment criteria of probability of risk detection E (prior toproduct operation by customer )

Detection probability Assess-ment

UnlikelyError detection involves significant checks and destruction of product, respectively

99,9% 1

The harder it is todetect a risk, the

more dangerous therisk is for the projectand therefore, it isassessed with thehighest risk value


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Minimum content of RPIA FormI = Importance of error (1....10)

PO = Probability of occurrence (1....10)

PD = Probability of detection (1....10)

RPV = Risk priority value (B*A*E) (1...1000)


MeasureRPVPDPOIDetectionAvoidanceCauseEffectRisksFunctionElementNr.

Analysis Sheet (RPIA type, object, date, revision status)Owner/Shipyard

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Risk Management (Result)

Until August 2008, BD&A has conducted risk probabilityimpact analyses regarding shipbuilding projects withowners in shipyards worldwide

The analyses result in the following forecasts: 62 % of the vessels are delivered in good quality

and on time 27 % of the vessels are completed up to one year

after delivery date 11% of the vessels should be cancelled,

since their operability is unlikely

BD&As forecasts had an accuracy of 87 %

Preventive riskmanagement hasstood the testmultiple times withfinancing ofvessels

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Risk Management (Examples)

These perfectly rustproofed and equippedblocks with high fittingaccuracy are proofthat the shipyard iscapable. It is OK to

place an order withthis shipyard.

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Risk Management (Examples)

This pre-assemblysite is chaotic andleads to theconclusion that themanagement is noteffective. In this case

we can assume thata time sensitivescheduling is veryunlikely.

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Risk Management (Example)

If the engine room of avessel looks like thisafter a test run, we canassume a highprobability of risks withthis shipyard.

The operability of this

new construction isdefinitely jeopardized.

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Risk Management (Example)

One has confidence inthis shipyard at firstsight.

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Shipyard Risk Management

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