The absence of market equilibrium in the marine

sector poses a threat to all stakeholders. Owners

and operators have faced restructurings and some
have failed. Various banks have exited the sector or
reduced lending levels. How will the industry obtain
the capital it needs given the challenges it faces?
By Christopher Frampton and David Manson,
Partners, White & Case
Uncharted
waters

Industry analysis Shipping
T
he nancial crisis of 2008 set in motion a series of events that converged
to threaten all stakeholders in the marine sector. Global trade slowed as
economies contracted and crises in the nancial markets and banking
sector saw banks retreat from prior lending practices. And yet the order
books for eet expansion remained at signicant levels.
As new vessel deliveries continued, the supply-demand imbalance was exacerbated,
earning capacity for eets dwindled further, and it became increasingly dicult for
many shipping companies to service debt and pay other operating costs. Economic
growth failed to revive enough to restore nancial health to many parts of the sector and,
eventually, various operators were forced below the break-even point.
A wave of restructurings followed, some consensual and some resulting in formal
insolvency proceedings. It is unlikely that the industry has seen the end of this downturn
and its consequences.
Present challenges and outlook
The fundamental challenges facing the industry are relatively simple. There are still too
many vessels for too little trade. The banking sector the traditional source of nance
for the marine industry is not expected to be able to provide the full amount of capital
needed to address anticipated capital expenditure and renancing requirements in the
coming years. By some estimates, more than US$215bn of debt capital is required by the
maritime sector through the end of 2014.
On the revenue side, two industry benchmarks paint a sobering picture. The Baltic Dry
Index has fallen from a high of 11,783 points on 20 May 2008 to a range of 700-2,000 points
in 2013. Rates for capesizes large-sized bulk carriers and tankers typically above 150,000
deadweight tonnage are expected to average US$11,500 a day in 2013, according to the
median of nine analyst estimates compiled by Bloomberg. This might be 40 percent more
than 2012, but it is still well below the US$16,000 a day the largest ships need to turn a
prot, according to estimates by Oslo-based investment bank Pareto Securities.
The picture is not all gloomy, however. For 2013, although the IMF predicts subdued
growth of 3.1 percent in world trade, projections increase to 3.8 percent for 2014.
Technological advances in the maritime sector oer potentially substantial cost savings
as a result of fuel eciencies for those able to nance a large modern eet or the
necessary retrots to existing vessels. The opening of the Northern Sea Route similarly
oers cost savings on the Europe to Asia routes. Strategic partnerships, such as the one
between UASC and China Shipping Container Lines, as well as the alliance of Maersk,
MSC and CMA CGM, are expected to produce operational eciencies.
There are other bright spots. The transport of LPG (liqueed petroleum gas) and LNG
(liqueed natural gas) is expected to grow. The market for oshore rigs and related assets
remains strong. Product and crude tankers are seen as a relatively healthy part of the
industry, with rates expected to rise. In 2013 and for the coming years, new deliveries of
many vessel classes are expected to nally begin to slow down.
These developments are positive, but in the absence of a broad-based return to health
for the global economy and corresponding increases in world trade, more is required.
Financial discipline
Banks, particularly in Europe, have signicant exposures to the marine sector. Petron
Research believes that European banks hold approximately 75 percent of an estimated
US$450-500bn in global shipping loans. These banks have been hit particularly hard by
the downturn.

Many industry insiders lament the way in which the marine
sector has inicted harm on itself. To these people, credit was
extended too easily to nance new builds or roll over existing
debt during the boom years. Similarly, unjustied optimism
about the future health of the industry and/or an unwillingness
to face the bleak realities of the downturn delayed the type of
enforcement action on nonperforming loans or restructurings
involving a deleveraging of the balance sheet that might have
brought a much-needed sense of nancial discipline to the sector.
What developed has been referred to as an amend and extend
approach, one where creditors deferred repayments and
restructured terms to avoid foreclosures without a timely
write-o of a portion of the relevant loans or the taking of other
action in collaboration with the relevant shipping company to
address the underlying economic realities.
Undue criticism of these actions, many of which were taken
in the chaotic aftermath of 2008 or at a time when a return to
prosperity was the expectation of many analysts, seems harsh
and unnecessary. More importantly, there are some clear lessons
to be learned. On the creditor side, those lessons have begun
to be heeded, encouraged by a variety of legal and regulatory
developments, governmental pressure and investor demands
to improve returns. Among other things:
new bank credit lines appear to be based on healthier loan-to-
value ratios, with some falling to the 60-70 percent range;
a number of banks have made clear their intent to reduce new
lending and/or to shrink, sell or wind down existing loan portfolios;
faced with the challenges of a complex and wide-ranging
restructuring of particular debtors, some banks have been
prepared to accept equity positions in consideration of further
credit extensions and/or modications of existing payment terms
and covenants; and
a number of banks have begun using warehousing and other
similar structures, thereby segregating nonperforming assets
with a view to ultimately addressing their exposures, whether
through portfolio dispositions, joint venture or other structured
arrangements with alternate operators or otherwise.
The transaction concluded in April 2013 between
HSH Nordbank and the Navios Group is illustrative of the actions
that may need to be taken. By restructuring its existing exposure
of approximately US$300m into senior and nonrecourse
subordinated loans and partnering with an experienced operator,
HSH was able to reduce its risk exposure and put in place an
arrangement that will allow it to mitigate potential losses if the
underlying assets ultimately begin to perform protably again.
European banks have not signaled an en masse retreat from
the marine industry. Some have openly committed to the sector
for the long term, despite substantial exposures. Many of those
are, however, focusing on a ight to quality, whether in respect
of underlying credits and/or those sectors deemed to be in
relatively better health (such as oshore rigs and related assets
or LPG and LNG carriers). Others are adjusting their strategy and
adopting a broader-based focus on transportation assets in general.
The cleanup has begun in the banking sector. While the
necessary corrective actions are far from over and there are likely to
be further challenges arising from additional restructurings and/or
failures of particular operators, this is an important step. That said,
a funding gap has nonetheless opened up given the extent to which
the banks have reduced their overall lending to the sector.
Funding the future
Where will the money come from if not from the banks? This is a
question that applies to all nancing challenges the industry faces
and the answer is not going to be the same in all cases. Signicant
variations are expected depending on the credit quality of the
underlying obligor, the relevant class of vessel or other marine
asset, the particular nancing need or opportunity being addressed
and a variety of other factors.
European bond market: Some relief on the debt side has been
found through the issuances of corporate bonds by European
shipping companies. In June 2013, Hamburg-based Rickmers
Holding raised 175m through an issue on the Frankfurt Stock
Exchanges specialist SME board. In August 2013, Teekay LNG
Partners sold NOK 900m of ve-year senior secured bonds in the
Norwegian market.
Some are skeptical about the signicance of these transactions
for the broader marine sector, citing among other factors limited
availability to a relatively select group of high-quality issuers and
the discrete size of the Frankfurt and Norwegian exchanges. For
the companies involved, however, a vital new source of capital has
been accessed.
Latitudes
There are fundamental issues to
be addressed regarding the way
the marine sector nances itself.
The banks are going to have to
address underperforming loans,
and owner/operators are going
to have to implement nancial
models that allow for long-
term protability
Randee Day, President & CEO, Day & Partners

Benchmarks and funding sources

A declining revenue base
A growing eet
Deliveries nally
slowing
Funding the future
2008:
773.77 million
Gross Tonnage (Start Year)
2013:
1092.91 million
Gross Tonnage (Start Year)
2005:
632.92 million
Gross Tonnage (Start Year)
4
,
1
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6
3
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4
3
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2
5
4
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4
8
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4
8
3
$
1
4
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6
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$
1
5
,
4
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$
1
4
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3
7
7
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1
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9
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6
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9
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6
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2,435
2,124
910
1,977

US capital markets: These oer an intriguing and potentially
signicant source of nance for the marine sector. Institutional
investors in the United States, many of which have provided
lending for other transportation sectors, have demonstrated a
willingness to consider alternate asset classes as a way of
addressing their own portfolio objectives.
The US private placement transaction closed this summer by
Meridian Spirit ApS (Meridian) is illustrative. Meridian renanced
the debt associated with an LNG tanker by issuing US$195m of
debt in a transaction rated Baa1 by Moodys. The security package
included a traditional ship mortgage (and related assignments and
pledges) as well as an assignment of a long-term charter to Total
E&P Norge AS (TN). Particularly noteworthy is that the notes had
a 17-year tenor, with a nal maturity in August 2030, a few months
before the scheduled expiration of the underlying charter with TN.
In its analysis of the transaction, Moodys noted among
other things the importance of the credit quality of both TN
and its parent, Total S.A. (rated Aa1 negative), and the
importance of the LNG market to Total. Also relevant were what
Moodys considered to be the favorable terms of the underlying
charter and the particularities of the LNG market and LNG
transport sector, which were noted as being less risky than
other oil and gas nancings.
Whether the success of the Meridian transaction will be able
to be replicated for other participants in the marine sector remains
to be determined. That transaction had the benet of one of the
sectors bright spots from an asset class perspective (LNG
tankers), combined with the likelihood of relatively stable
long-term cash ows as a result of the charter arrangements.
Dierent and likely harder challenges will exist for the
nancing of other classes of marine assets in the US market,
but those may be able to be addressed if, for example, investors
are presented with nancing structures used in other
transport sectors.
Industry analysis Shipping
&
Latitudes
Sources: Bloomberg; Clarksons Research Services Limited; BRL Maritime Data Services
Baltic Dry Index: An assessment of the price
of moving a range of commodities by dry bulk
carriers (based on 23 shipping routes and
measured on a timecharter basis). Snapshot
fgures from the month of May in each year.
ClarkSea Index (US$/Day): A weighted average index
of earnings for the main vessel types where the weighting
is based on the number of vessels in each feet sector.
Snapshot fgures from the month of December in each year,
apart from 2013 (latest available fgure derives from October).
The number of new vessel deliveries
(all classes) from 2010-2013.
HISTORIC HIGH POINT
2008 2009 2010 2011 2012 2013
HISTORIC HIGH POINT
2008 2007 2009 2010 2011 2012 2013 2010 2011 2012 2013
US Capital
Markets
Export Credit
Agencies
Banks
Private Equity
& Funds
European Bonds

The disclosure requirements that need to be addressed in
this market may limit the universe of issuers prepared to consider
this alternative. That notwithstanding, the fundamental forces
aecting the industry make it likely that there will be increased
activity for US investors and shipping companies alike, at least for
so long as the US market oers issuers the potential for pricing
advantages with tenors no longer (or rarely) available in the bank
market (or elsewhere) and/or until investors have better or
preferred means of satisfying portfolio diversication strategies.
Export credit agencies (ECAs) and other state support:
ECAs and other instrumentalities of state-supported nance
have a clear rationale to support the maritime sector where jobs
and the national interest are in play. In Asia, this is particularly
acute given the rivalries between the shipyards of Korea, Japan
and China. An added element is also in play in the region in the
case of LNG vessels and technology. The shift in Asian energy
policy towards LNG eectively creates a double strategic benet
supporting the economic health of the shipyards and securing
transportation for the resource required to meet domestic
energy demand.
The type of support provided by the Asian ECAs is evolving.
The Korea Trade Insurance Corporation (K-Sure) and The
Export-Import Bank of Korea (KEXIM) are reported to be planning
additional products, including insurance and/or guarantees of
bonds to be issued by purchasers of marine assets built in Korean
shipyards. While other ECAs, notably in the United States and
Europe, have issued similar products in support of aviation
manufacturers, this will represent an innovative development for
the marine industry. This will particularly be the case if such
arrangements are provided in conjunction with direct loans by the
ECAs, eectively enhancing the leverage provided by state support
and bringing new investors into the marine space.
While oshore rigs and LNG vessels are likely to be the
primary targets for these products, broader usage should not
be ruled out, especially where the asset purchasers are deemed
suciently strong from a credit perspective and/or the assets
are scheduled for usage under favorable charter arrangements.
The announcement by Scorpio Tankers Inc. on 28 August 2013
of a letter of intent from KEXIM for a loan facility of up to
US$300m to nance various new builds upon delivery, subject
to various conditions, indicates the importance of the role to be
played by the ECAs.
State support can no doubt be helpful in isolation, but
widespread intervention is suggestive of systemic ill health.
The overall environment for commercial debt has cooled
considerably. But the shortfall is partly being lled by enhanced
capital allowances and export-import nance orders, and by
government support for the shipbuilding industry, says Erik
Nikolai Stavseth, an analyst at Arctic Securities.
This represents a risk to recovery, as most segments need
to have their access to additional capacity constrained.
Private equity and other funds : There has been much talk in
shipping circles of an inux of private equity and hedge fund or
similar capital, and a number of high-prole transactions have
been completed.
Costamare formed a joint venture with York Capital
Management for investing in box-ships. Delos Shipping and
Tennenbaum Capital picked up majority control of German KG
Knig & Cie. Other private equity sources have been active in a
number of dierent segments of the maritime industry, including
through investments in General Maritime and that companys
successful prepackaged Chapter 11 plan of reorganization. In
addition, private equity has recently been active in the secondhand
market and has provided funds to acquire a eet of MR tankers
from TORM A/S, as well as pursuing strategic joint venture
partnerships with both Ocean Bulk Maritime and Rickmers.
There is skepticism in various quarters about the role that
this capital source will play in the marine sector, with previously
anticipated investment levels having failed to materialize.
Latitudes
Caption to come
here: caption to
come here
Restoring fnancial health to the marine industry
will require cooperation and a fresh approach from
all stakeholders, old and new alike.

Some believe that the industry does not t the classic model
for the relevant investors.
Traditional private equity looks for an exit before it invests,
says Paul Slater, chairman of First International. Where is the
return from shipping in three years, or ve years?
Such skepticism notwithstanding, the speculation
surrounding this capital source has intensied in recent
months, with some projections anticipating, nally, signicant
increases in investment. In August 2013, Kohlberg Kravis Roberts
announced its entry into the marine space through a new nance
company capitalized with US$580m of equity. Its focus will
include the structuring, underwriting and distribution of
secured debt nancings in the marine sector.
Given the cyclical nature of the industry and the
opportunities that exist in a down cycle, there are investors
seeking discounted investments in the secondary debt market
and/or in respect of low vessel valuations. This may increase
if further restructurings are faced by the industry.
Others in this area are exploring the possibility of an
operating lessor model not dissimilar to that used in the
aviation sector.
The deployment of this new capital source will not be without
signicant challenges. New investors will have to conduct careful
diligence and select partners with the necessary industry expertise
to ensure an understanding of, among other things, regulatory
compliance with sanctions-based regimes, potential trading and
environmental risks and liabilities, contingent maritime liabilities,
the interaction between trading routes, risks for maritime arrests
from unsecured creditors and potential board and shareholder
liabilities. The length of time for which capital is intended to be
deployed will also be signicant, and whether that is tied to
potential exit opportunities through IPOs, secondary listings or
otherwise will also have to be considered.
Uncharted waters
The world of maritime nancing will likely look very dierent in
the coming years when compared with the bank-driven nance
market of 2008.
It remains to be seen whether ECA intervention will
ultimately be viewed as having provided a necessary bridge
between the old and new regimes or as having contributed to
an extension of the sectors supply-demand imbalances. What
seems evident, however, is that the sectors nancing needs
will not be able to be met solely by the ECAs.
Additional capital sources will be required, and whether
these ultimately come from the issuance of bonds, capital markets
oerings and/or private equity and hedge or other funds, or
otherwise, it seems likely that these new sources of capital will
bring changes with them. New capital providers can be expected to
approach the industry with a dierent type of investing discipline,
as well as using techniques and structures deployed with success in
other industries. It is to be hoped that the combined eect of these
changes will help the industry return to nancial health.
Future growth in global trade will of course also be a signicant
determining factor in how and when the industry returns to health.
And then there are the imponderables, such as the impact of recent
discoveries of a variety of energy sources in the United States. As
noted by Poten & Partners: With crude oil production in the US
rising to levels unseen in 22 years, the self-imposed restrictions on
the export of crude oil is resulting in the rening of this product and
an increase in product tanker movement from the Gulf Coast to the
South American, Central American and West African zones.
Although the US oil surge is having a positive eect on US product
tanker movement, it is hurting the already weak European rening
and product tanker markets, and could prove to have longer-term
negative eects on European reners if current conditions persist.
This development highlights both the uncertainties and
the opportunities faced by the maritime sector and all of its
stakeholders, including those considering entry for the rst time.
Five years on from the crisis of 2008, the industry remains in
uncharted waters.
Latitudes Industry analysis Shipping