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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.
Risk Management Method
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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
Risk Management Method
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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)
Risk Management Method
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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