Ship Finance in Asia

Kevin Oates Managing Director

Marine Money Asia Pte. Ltd

27th Marine Money Week June 2014Oates

Today’s Topics 1. The Growth of Ship Finance in Asia 2. What caused Asian Ship Finance to Expand? 3. The Rise of Export Credit Finance 4. Leasing: the next big thing in Asian Ship Finance 5. Some words of Warning

1. The Growth of Ship Finance in Asia

Typically Asian banks supported local owners. This is still predominant in Singapore, Japan and Taiwan and common in China. Terms offered cannot be matched by international shipping finance.

But Asian banks were not active on the global scene - until after 2009.

2. What caused Asian Ship Finance to Expand?

The Shipping Market Cycle

Ship prices drop

Over-ordering by speculators/bargain hunters

Over tonnaging

Freight rates drop

Demolition increases

Demand for new-buildings drops

Excess of shipbuilding capacity

Yards reopened or new yards created

Demand for new-buildings increases

Fleet shrinks

Freight rates recover

Source: DVB

A normal shipping cycle has one or two high years and six or seven year lows.

But the 2003/4 – 2007/8 boom cycle was different.

Prolonged Shipping Cycle led to Irrational Exuberance and Escalated Asset Values

The 2003 to 2008 shipping cycle had a peak of four years for the following reasons: 1. Inadequate shipbuilding capacity . • The upswing started with too little yard capacity needed for normal fleet renewal process • Then the LNG wave came where people started to build ships for projects and the offshore boom came • The yards found themselves lacking capacity a longer period of time 2. The rise of China after entry to the WTO in 2001 and massive investment in infrastruture in the years to follow3 3. Abundance of liquidity in the financial markets

Prolonged Shipping Cycle led to Irrational Exuberance and Escalated Asset Values

But over the four year boom Global shipyard capacity increased tremendously, especially in China The fleet of ships in all sectors more than doubled because of low scrapping and massive newbuilding Huge orders were placed even in 2009 Owners and bankers alike were behaving as if the good times were here forever.

And then the Global Financial Crisis Struck… (unavailability of trade finance accelerated the shipping crisis)

Financial Institutions failed or were bailed out by governments

Source: BBC

Source: Marine Money

Material Contraction in Ship lending capacity among major shipping banks Distressed exposures to non-core names and excessive lending at the cycle peak caused a retreat to narrower target market and greater focus on existing clients Some prominent shipping banks were nationalized and some faced over-exposure to unique ship finance conditions in home markets

0

10

20

30

40

50

60

70

Shipping Portfolio of Selected European Banks

2008

2009

Those banks which WERE lending increased pricing and severely tightened covenants

And the Shipping Markets

Plunged into Crisis

Unprecedented collapses in both shipping and financial markets

Key Shipping Value Chain Participants

Rapidly deteriorating macro-economic environment

– Pronounced decline in demand

Potential long-term contractual commitment to use assets

– High cost assets in declining rate environment puts margins under pressure

New funding, if at all possible, prohibitively expensive

Overextended balance sheets

Challenging overall liquidity situation

Loans secured through insufficient collaterals

– Loan-to-value covenants inadequate

Challenging operating environment is enhancing the execution risk of repossessions

Material decline in asset values

– Breach of loan-to–value covenants

Declining rate environment

– Potential charter renegotiations

Substantial orderbook

– Material outstanding finance commitments

New funding, if at all possible, prohibitively expensive

Asset Financiers Asset Owners Asset Operators

Pain Across The Entire Shipping Value Chain

Source: Citibank

Who was to become the white knight?

3. The Rise of Export Credit Finance China Exim. Sinosure. JBIC. NEXI. KEXIM. KEIC

Q: What is an Export Finance Agency?

A: Export Credit Agencies (ECAs) are public institutions that facilitate financing for home country exporters and investors doing business overseas, particularly in developing countries and emerging market economies.

Advantages of ECAs

• Availability – When commercial financing is limited/not available • Long-term – The total loan horizons are longer than those available on a purely commercial basis • High loan amounts – can be 70/80% of value • As the Seller’s Credit is a loan, the Seller may even receive interest accrued on the principal

Source: Marine Money, HSBC

Source: Marine Money, HSBC

Types of ECA Products

• Buyer’s Credit – A financial arrangement in which a bank or an export credit agency extends a loan directly to a foreign buyer in the importing country to pay for the purchase of goods and services from the exporting country • Seller’s Credit – A financial arrangement in which the seller provides credit to the buyer in respect of part of the purchase price of the good • Export Credit Insurance – An insurance policy provided by an ECA that protects an exporter of products and services against the risk of non-payment by a foreign buyer

Refund Guarantor

Shipbuilder

Classification Society

Management Company

Insurance Company

Typical Buyer’s Credit Structure

SPV

Charterer

Shipowner

Charter Hire Bareboat Charter/ Time Charter

Export Credit Agency

Loan Repayment/Mortgage

Buyer’s Credit

Source: Marine Money

Refund Guarantor

Shipbuilder

Classification Society

Management Company

Insurance Company

Typical Buyer’s Credit Structure - II

SPV

Charterer

Shipowner

Charter Hire Bareboat Charter/ Time Charter

Commercial Bank Loan Repayment/Mortgage

Buyer’s Credit

Export Credit Agency

Buyer’s Credit Insurance

ECA financing provides credit enhancement to lenders, facilitating greater appetite, longer tenors and cheaper pricing than wholly commercial sources of funding

Source: Marine Money

Important ECAs in Shipbuilding Nations in Asia China: The Export-Import Bank of China (China Eximbank) China Export & Credit Insurance Corporation (Sino-sure) China Development Bank (CDB)

Japan: Japan Bank for International Cooperation (JBIC) Nippon Export and Investment Insurance (NEXI)

Korea: The Export-Import Bank of Korea (KEXIM) Korea Trade Insurance Corporation (K-sure)

The Rise of Export Credit Finance China Exim Flexes Financial Muscle • Since its establishment in 1994, China Exim Bank has played an instrumental role in supporting China’s maritime industry, having granted shipping/shipbuilding related loans of over RMB 116.8 billion (USD 17.1 billion) in the domestic currency and USD 8.5 billion in greenback at the end of 2009 • Financed over 3,700 Chinese built vessels of over 120 million dwt • Adopts a two-pronged strategy to support Chinese Shipbuilders by: a) Encouraging foreign ship owners to build ships in China through attractive financing packages. b) Providing shipbuilders bank guarantees required in their business which include refund guarantees, tender

bonds, performance bonds, payment guarantees and seller’s credit • The objective is to nurture and provide financial support to a selected group of Chinese shipbuilders including state-owned CSSC and CSIC, as well as privately held Jiangsu Rongsheng Heavy Industries, Sino-Pacific Shipbuilding and Jiangsu New Century

China Exim Takes Bold Steps to Help Greek and Italian Owners

In October 2010 during his visit to Athens Chinese Premier Wen Jiabao gave his backing to Greek shipowners with the establishment of a massive USD 5 billion shipping fund to facilitate the sale of Chinese built ships to Greek shipping companies. This amount is reportedly said to have doubled to USD 10 billion In the same month, China Exim signed an agreement with Confitarma (the Italian Shipowner’s Association) to promote the availability of Chinese finance for Italian shipowners placing orders at Chinese shipyards

Source: Marine Money, Lloyd’s List

Some CEXIM transactions

THE EXPORT-IMPORT BANK OF CHINA page 28

More CEXIM transactions

THE EXPORT-IMPORT BANK OF CHINA page 29

Korea EXIM Bank

SHIPPING LOANS AND FACILITIES TOTAL OVER USD 30 BILLION

The Export-Import Bank of Korea (Korea Eximbank) is an official export credit agency providing comprehensive export credit and guarantee programs to support Korean enterprises in conducting overseas business. Established in 1976, the bank actively supports Korea's export-led economy and facilitated economic cooperation with foreign countries. Korea Eximbank's primary services include export loans, trade finance, and guarantee programs structured to meet the needs of clients in a direct effort to both complement and strengthen the clients' competitiveness in global markets

30%

70%

2008

Offshore Ship

25%

75%

Buyer's Credit

30% 70%

Builder's Credit

52% 48%

2012

Offshore Ship

72% 28%

Buyer's Credit

30% 70%

Builder's Credit

ECA Ship Financing in General

KEXIM’s ship financing feature

Record of KEXIM’ S/F Credit Commitment Bn($) Bn($)

14.0bn

3.0bn

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5

- 5.0

10.0 15.0 20.0 25.0 30.0 35.0

2007 2008 2009 2010 2011 2012 2013(e)

Total Buyer's Credit

Record of KEXIM’ S/F Credit Balance

30.3bn

10.6bn

-

2.0

4.0

6.0

8.0

10.0

12.0

-

10.0

20.0

30.0

40.0

50.0

2007 2008 2009 2010 2011 2012 2013(e)

Total Buyer's Credit

Bn($) Bn($)

Ichthys LNG CPF, FPSO 4,590mil

Deals going bigger

Vessel Type Contract Price

(1 vessel, million) Deal Value*

(million)

Bulker ~ 50

300 ~ 800 Container ~ 150

Tanker ~ 100

LNGC ~ 200

400 ~ …??? Drillship 500 ~ 800

FPSO/CPF… 600 ~ 2000

* KEXIM’s previous deals

1,204

402

-

200

400

600

-

500

1,000

1,500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Contract price (by project) KEXIM's commitment (by project)

For Better Support of ECA

Filling gap of liquidity

A.P. Moller 18 Containers

3,663mil

Seadrill 3 Drillships 1,573mil

Ocean Rig 3 Drillships 1,864mil

BGT 6 LNGCs 1,337mil

Golar LNG 2 FSRUs, 6 LNGCs

1,730mil

($mil) ($mil)

4. Leasing

The next big thing in Asian Ship Finance

Q: What is Leasing?

A: Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.

Source: Wikipedia

Equity Investors

Typical Leasing Structure

Equity Investment Lessor

(Shipowner)

Lessee

Lease

Lender Loan Repayment/Mortgage

Loan

Source: Marine Money

Leasing Income

When Banks Become Ship Owners… • Chinese banks moves into owning vessels through the establishment of ship leasing divisions ICBC Leasing Bank of Communications Financial Leasing Minsheng Financial Leasing China Development Bank (“CDB”) Leasing China Construction Bank (“CCB”) Leasing Agricultural Bank of China China Everbright Bank And more to come, as other Chinese banks are applying to set up leasing their own subsidiaries

• State-owned chemical group Sinochem has its own ship-leasing division, that targets small and medium size Chinese shipowners – International Far Eastern Leasing • Standard Chartered Bank has a ship leasing division to provide clients bareboat charters, on long term lease tenors of 5 to 12 years

Ship Leasing in China

• In 2007 the China Banking Regulatory Commission (“CBRC”) launched its pilot project and granted the first batch of twelve licenses for financial institutions to venture into leasing – including Industrial and Commercial Bank of China (“ICBC”), Bank of Construction, Bank of Communications, Minsheng Bank, China Development Bank and China Merchants Bank

• Among the real pioneers was ICBC Leasing which has become a powerhouse since the

landmark RMB 5.3 billion (USD 780 million) leasing facility for Chinese state owned power generation enterprise China Huaneng for 12 supramax dry bulkers constructed by China State Shipbuilding Corp (CSSC) and other yards

• In 2013 ICBC Leasing supported a excess USD1 billion deal sale and leaseback deal with French offshore group Bourbon

Chinese leasing companies are well supported by local banks who have

• Liquidity

• Encouragement from central authorities (Government) to support shipping

• Leasing expertise

• Ability to do massive deals – even excess $1 billion

• But have not YET attracted many foreign clients

Finally,

5. Some words of warning

Traditional shipping banks

• Are mending their balance sheets and are lending again • For top clients competition amongst the banks is fierce with

pricing down 100 bps in 12 months and covenants weakening • This may price the ECAs out of the market or render the ECAs

less desirable in a transaction

Source: Marine Money, HSBC

The Asian banks have had their own distress situations – even the ECAs

Source: Marine Money, HSBC

BLT TMT

Torm STX

Korea Lines Nanjing Tankers.

Final Point

Will Asian banks (ECA and non-ECA) continue to play the role they have played in the past five years in shipping?

Or will the European and US shipping banks take the lion’s share once again?

Will leasing be the next big thing in ship finance in Asia?