2nd Cayman Shipping Summit - Presentation by Karatzas Marine Advisors & Co. March 11th, 2014

Karatzas Marine Advisors & Co. International Maritime Advisory

„Private Equity Discovers Shipping”

2nd Cayman Islands Shipping Summit 2014 MARE FORUM

Grand Cayman, March 11th 2014

Cayman Islands: The Historical Crossroads of

Shipping !  Discovered by Columbus in 1503 !  Caiman !   ‘He hath founded it upon the sea’ !  Victualing port with sea turtles and fresh

water; treacherous waters !  Caymanians looked upon the sea as a

source of subsistence and business endeavor rather than a source of isolation (reminds one of the Greek islands)

!  At present, Cayman is the preferred jurisdiction for institutional investors

KARATZAS MARINE ADVISORS & Co. March 2014 Page 2

‘Safe Harbor’ Statements

!  ‘And seas but join the regions they divide’

Alexander Pope

!   ‘In Sea affairs, nothing is impossible, and nothing is improbable’

Admiral Lord Nelson, writing from HMS Victory in 1804

!   ‘If you want to build a ship, don’t drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea’

Antoine de Saint-Exupéry


Agenda

!   Company Introduction

!   Private Equity / Hedge Funds

!   Dealbook

!   Shipping’s ‘eternal capital partner’?

!   Company Contact Information


Company Introduction

!   Karatzas Marine Advisors & Co. is New York-based firm with worldwide footprint & strong, well-qualified management team

!   Active in shipping finance advisory, restructurings, maritime strategy, private placements, vessel valuations, ship brokerage and vessel management

!   Clients include: !   Financial institutions seeking shipping market expertise and advisory on shipping matters !   Financial institutions in need of origination of transactions in shipping !   Banks seeking to dispose of shipping assets and/or shipping loans !   Shipowners seeking advise to access the financial markets !   Shipowners seeking advisory and investors with existing ‘legacy’ concerns !   Shipowners seeking financial partners to benefit from present market trough

!   Dry bulk, tankers, containerships and offshore !   International flag business primarily, but also Jones Act expertise !   Proven track record of market outperformance and delivering value to clients


Professional Memberships !   American Bureau of Shipping (ABS), Member

!   BIMCO, Member

!   Propeller Club, New York / New Jersey Chapter,

Board Member (past)

!   Society of Naval Architects & Marine Engineers (SNAME), Associate Member

!  Royal Institution of Naval Architects (RINA), The

Associate Member

!   Piraeus Marine Club (Greece), Member

!   Connecticut Maritime Association (CMA), Member

!   Singapore Chamber of Maritime Arbitration (SCMA)

!   BALTIC EXCHANGE (Application pending) KARATZAS MARINE ADVISORS & Co. March 2014 Page 6

Agenda



!   Dealbook




Shipping on the Radar!


Getting our bearings!

!   Private equity funds have more than $750 BILLION dry power (according to the Financial Times, November 2013)

!   Global shipping debt market: about $500 BILLION (in 2008) !   Shipping banks have curtailed $60 BILLION from shipping, with several

traditional shipping banks expressing their intent to leave the shipping space altogether


Institutional Investors & Shipping

!   Hedge Funds !   Prefer liquid / trade-able assets !   Prefer ‘derivative assets’ to ‘physical assets’ !   Not managerial involvement with company !   Short investment horizon (as short as minutes) !   Primary investors in the shipping IPO boom

!   Private Equity (PE) Funds !   Can invest in physical assets, such as vessels !   Are actively involved with the company’s management !   Wish to grow the ‘platform’ before exiting !   Investment horizon usually up to five years !   Presently, the newsmakers about shipping investment

!   Leasing Companies / Lessors !   Passive owners of physical assets !   Limited activity at present due to lack of ‘project financing’


Private Equity & Shipping

!   Joint Ventures / Co-investments

!   Joint venture with shipowner / vessel manager !   Both parties contribute equity !   PE makes majority investment / has managerial control !   Usually, clean slate projects !   In general, requires both shipowner and PE to be equally strong and like-minded in

investment philosophy; usually, the toughest structures to set up !   Examples: York Capital Management & Costamare for containership vessels, Apollo &

Rickmers for containership vessels

!   Acquisitions / Direct Investments

!   PE sets strategy and usually contributes the whole investment amount !   Vessel manager is hired as ‘third party’ service provider !   PE fully defines investment strategy, timing, exit strategy !   Small profit-sharing for vessel manager / build own vessel management company !   Easier to take place; Apollo with Principal Maritime (suezmax tankers), W.L. Ross with

Diamond S. (product tankers and suezmax tankers), Delos Shipping and Tennenbaum Capital acquiring König & Cie.


Private Equity & Shipping (cont’ed)

!  Mezzanine and subordinated debt financing

!  There are more funds looking for credit investments rather than equity investments !  Predominantly for ‘legacy projects’ where outstanding mortgage is too high !  Follows ‘first preferred mortgage’ on ‘waterfall’ structure !  Usually 10-20% of the value of the vessel / project !  Several examples with KG houses in Germany

!  Bridge Financing

!  ‘Variation on the theme’ on mezzanine financing !  Expecting timely market recovery (or another refinancing event at lower cost) ! Oaktree provided about $170 mil to General Maritime expecting for a tanker market

recovery by 2011

!   ‘DIP’ Financing !  Debtor-in-possession financing !  Usually expensive financing provided by funds with legal expertise !  Has been ‘productive’ for the recovery of several companies, and also the initiation of

several funds investing in the shipping industry !  Prominent examples of Teco Marine and OSG.


Private Equity & Shipping (cont’d) !  Sale & Leaseback transactions

!  There used to be a very active market for sale & leaseback transactions, when debt financing for projects was plentiful (80-90% leverage) and inexpensive (less than 5%)

!  Presently hard to originate such deals at present fair market value (FMV) of vessels; banks will lend neither plentifully nor inexpensively; most importantly, banks today do not provide ‘project lending’

!  Limited amount of such transactions take place below FMV to primarily monetize on any equity left in projects

!  Shipping loan acquisitions / Distressed debt acquisitions

!  Shipping lending landscape under tectonic shifting !  Shipping banks exiting shipping / mindful of capital ratios and Basel III !  Selling of shipping loans in the secondary market !  ‘Derivative market’ as purchase of shipping loan portfolios doesn't’t require immediate

vessel ‘ownership’ and associated risk / logistical concerns !  Presently, incredibly very strong demand by PE funds for shipping loans !  RBS sold shipping loans on Eagle Bulk, DNB on Genco, BNP on BLT !  Pricing above 90% of face value for certain cases !  


Agenda



!   Dealbook



KARATZAS MARINE ADVISORS & Co March 2014 Page 14

Dealbook !  More than $5 billion of shipping loans have been sold in 2013 in the secondary

market !  More than $1 billion of OSG (several lenders, including HSH, BNP, etc !  RBS sale of their Eagle Bulk exposure ($700+ million) !  DNB sale of the Genco exposure ($700+ million) !  Commerzbank sale of $300 million shipping loans (chemical tankers) !  Lloyd’s sale of $750 million shipping loan portfolio

!  More than $5 billion of joint venture investments in shipping in 2013 !   $500 million between Apollo and Rickmers (containerships) !   $500 million between York Capital and Costamare (containerships) !   $220 million between Oaktree and Navig8 (chemical tankers)

!  More than $3 billion in direct investment !   $1 billion by Oaktree with Rickmers as vessel manager (5,000 TEU containerships) !   $800 million by Oaktree with Ocean Bulk as vessel manager (dry bulk) !   $200 million by Riverstone with Ridgebury Tankers (product tankers & suezmax)


Dealbook


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2008 2009 2010 2011 2012 2013 Equ

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Equity Investments by PE funds

Data source: Karatzas Marine Advisors & Co

Agenda


!   Scope of Services

!   Dealbook




PE: Shipping’s Eternal Capital Partner?

!   Institutional investors are accountable to their investors (Limited Partners or ‘LPs’) and

according to the partnership agreement, principal and profits have to be returned to investors within a pre-determined investment horizon

!   An ‘exit strategy’ at the time of committing a new investment has always to be considered

!   Institutional investors are ‘opportunistic’, ‘industry indifferent’ and not ‘long term players’

!   Investment horizon no longer than five years, seven at most

!   Nor vested interest in shipping neither ‘national interest’ mandate to support the industry

!   Already certain funds are heading for the exit by selling to strategic buyers (Blackstone sold their Jones Act APT Tankers company to pipeline company Kinder Morgan in 2013, original investment in 2008) or selling through IPO for markets in recovery (W.L. Ross took public Navigator Gas in the LPG market in 2013, original investment in 2007)


If not PE, then what?

!  More than $100 BILLION funding gap in shipping at present (DNB estimate in 2013)

!  Banks are forced to move away from shipping (new regulatory environment, Basel III)

!  To the extent banks will be open for business, preference will be given to corporate credit – which will phase out smaller, independent owners

!  Preferred exist strategy for many PE investors is the capital markets and IPOs

! US capital markets have clearly demonstrated that they are the most receptive to shipping and relatively new shipping companies

Cayman Islands’ maritime tradition, vessel registry services, preferred jurisdiction for institutional investors and predictable legal environment can be a benefit to the

country in the changing reality of the shipping industry.


Agenda



!   Dealbook




Thank you for your

Attention!

Karatzas Marine Advisors & Co. International Maritime Advisory

One World Financial Center, 30th Fl 200 Liberty Street New York, NY 10821 USA !   Switchboard: +1 212 380 3700 !   Mobile (US): +1 713 545 5990 !   Mobile (D): +49 0 1523 7361 205 !   Email: [email protected] !   Web: www.BMKaratzas.com

Contact Details

KARATZAS MARINE ADVISORS & Co. March 2014

Business

2nd Cayman Shipping Summit - Presentation by Karatzas Marine Advisors & Co. March 11th, 2014