Smart Investments in Shipping - Mare Forum Conference at Cayman Islands - Basil Karatzas' presentation

Karatzas Marine Advisors & Co. International Maritime Advisory

„Smart Investments in Shipping”

3rd Cayman Islands Shipping Summit 2015 MARE FORUM

Grand Cayman, May 5th, 2015

Cayman Islands: The Historical Crossroads of

Shipping  Discovered by Columbus in 1503 Caimán   ‘He hath founded it upon the seas’  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. May 2015 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

  Shipping Finance Overview

  Shipping Market Overview

  Investing in Shipping

  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


Agenda







Shipping Finance Overview

  Traditional shipping banks are leaving the industry   Intensive banking regulatory environment and low interest rates put pressure on banks to lend to well-established ‘corporate’ shipowners and ignore the rest of the market   Institutional investors (private equity) have not had a successful sailing so far in shipping;   Most investments ‘underwater’   Questions on how they will react: double-down? Cut their losses and run? ‘Stick it out’?   Have moved ever further to ‘risk averse’ camp

  A tremendous funding gap in shipping financing likely for the foreseeable future   It’s very hard seeking for money in shipping at present, for the majority of the ‘traditional’ shipowners


Agenda







Shipping Market Overview

  Dry bulk market trading at thirty-year low (Baltic Dry Index)   Tanker market trades at cash flow positive rates, but there are many

expensive tankers and doubts on the market’s robustness   Containership market has improved year-o-year, but not remotely close

to 2008 highs; besides, a great deal of containerships are commercially or technologically obsolete   As a result:

  Dry bulk shipowners are running low on cash   Many newbuildings on order do not have financing   Shipowners run out of money to dry dock vessels   Both ‘working capital’ and ‘legacy transactions’ need for financing   Wide impact on market, as dry bulk is a much wider market than containerships

  δεῖ δὲ χρημάτων (Money is necessary - Demosthenes, Olynthiakos)


Agenda







Investing in Shipping

  Since we are at cycle trough levels in shipping, wouldn't’t make sense to go ‘long’ and invest in equity in shipping?

  Probably, but…   Tremendous outstanding orderbook (typically 20% for most asset classes)   Modern, new fleet (given waves of newbuildings delivered)   Meaningful shipbuilding capacity still (no ceiling in tonnage supply)   Low interest rate environment make ‘OK’ shipping investments look great   Tremendous ‘dry powder’ by institutional investors to deploy capital (more than

US$ 1 trillion, in all industries) that can keep the market over-supplied with tonnage; ‘short-termism’ and an eye for a quick exit, not necessarily vested in the shipping industry

  Equity investments may still a desirable position in the capital structure for nimble, expert, well-capitalized, opportunistic shipowners and investors


Investing in Shipping

  If Equity is not the preferred way of investing in shipping, then what?

  With shipping banks leaving the industry en mass and a weak freight market, there are opportunities to ‘invest’ in shipping without taking great market exposure:

  Provide lending in shipping (first preferred ship mortgages can allow 8% interest for 50% loan of the value of the vessel or 200% of the scrap value for ten-year old vessel

  Provide lending in shipping as working capital

  Provide mezz finance for restructurings   Buy shipping loans from banks at discount   Provide convertible debt for riskier transactions

  With ‘credit investments’ yields of 8-10% are attractive in a low rate environment, are comparable to equity returns, minimal or no market risk, primary credit risk secured conservatively by the asset (vessel) and upside potential in a market recovery


Case Studies

 2004-blt Japanese aframax tanker valued at $25 mil with performing loan maturing in early 2016, having balloon payment of $10 mil; present lender is leaving the shipping industry and demanding that borrower pays the loan in full.

Appr. $6 mil scrap value, thus loan of $10 mil is 180% of present FMV  Vessel has 10+ yrs remaining economic life  Loan of $10 mil is less than 50% of present FMV  Vessel daily OpEx of ca. $8,000 pd, average earnings of $15,000 pd  Borrower prepared to pay 8% interest for a new loan (which is low risk given the value of the collateral, and 3x more expensive than present loan)

  2000-blt small containership seeking working capital for drydock   Salvage value of vessel at $2.5 mil; present FMV at $ 5 mil; loan sought of $2.5 mil

 First preferred mortgage at 100% of scrap value, 50% of present FMV  Break-even cash flows; uncertainty over vessel’s remaining economic life  Borrower is prepared to pay 10% interest for first preferred mortgage


Agenda







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   Email: [email protected]   Web: www.BMKaratzas.com

Contact Details

KARATZAS MARINE ADVISORS & Co. May 2015

Thank you for your attention!

For more thoughts and commentary on shipping finance,

Please feel free to visit our blog at

www.shippingfinance.wordpress.com


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Smart Investments in Shipping - Mare Forum Conference at Cayman Islands - Basil Karatzas' presentation