Marine Money, New York

20th June 2017

The Last 30 Years in

Shipping Investment
What Have We
Learned?

Martin Stopford, President CRSL 20 June 2017

 I gave shipping

Fitzcorraldo
cycles a whole
new meaning
Directed by Werner Herzog
An inspirational film for all shipping
Starring
Fitzcorraldo investors
John SweeneywhoFitrzgerald
are in search
- KlausofKinsky
the
true meaning
Molly McGuire ClaudiaofCardinale
Takes ship over a the Featuring
shipping -investment
The Molly Aidacycle.
mountain to get to
the rubber trade See your shipping investment climb
to the heights then crash into the
Gets up OK but when
trough.
he comes down the
other side the ship
goes into the rapids Share the euphoria of success and
the pain of the collapse
Martin Stopford, President CRSL 20 June 2017
 1. The shipping investment cycle
2. Seatrade International Ship
Finance Forum 1987
AGENDA 3. Investment 1986-2016
4. A word about investment cycle
economics
5. The investment cycle 2017-2046
 Idemitsu Maru 209,413, delivered Nov 1966 DHT Jaguar 299,000 dwt delivered Nov 2015

1. The Shipping Investment cycle

Two ship investment cycles that lasted 30 years
Martin Stopford, President CRSL 20 June 2017
 Two shipping Investment cycle mountains to climb
Twenty four Sir, our fleet ofOh
40 Sh**t. Lucky
Who needs TCs
35% VLCCs please!! new Supramaxes isLIBORs
a .5%.
when you can
borrow 105% unique
Mr Investor Sir, opportunity
Lets order some
30% against the asset? sorry about the more for the
Newbuilding contracts % fleet (dwt)

Theres easy Past the

upturn
bond. Is 30
25% Hey guys, oil money on Wall trough? No
cents/$ OK?
companies Sorry Mr Street guys cash? Time to
20% are offering Banker, sir I
eek Ive invest,
Lucky shipmates
time charters cant pay a
still got a
15% few TCs cent!

10%

5%

0% 1957 1987 2017

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Martin Stopford, President CRSL 20 June 2017
Recap: Investment Supercycle 1 1956-1986
35% Contracts placed as % world fleet (dwt) 1973
peak
30%
1974/5
25%
Very
20% rapid
collapse
15%
1986
10%
trough
5%
0%

1952 1957 1962 1967 1972 1977 1982 1987

Martin Stopford, President CRSL 20 June 2017

Recap: Shipping Supercycle 2 1986-2016 different shape
2007
35%Contracts placed as % world fleet (dwt)
peak
30% Much more
ordering in trough
25%
than previous
20% cycle

15% Supercycle 1 Supercycle 2

2016
10% Trough?

5%
0%
Cycle 2 1986 1991 1996 2001 2006 2011 2016 2021
Cycle 1 1952 1957 1962 1967 1972 1977 1982 1987

Martin Stopford, President CRSL 20 June 2017

 Interest rates had a big impact on the two supercycles
LIBOR interest on new Panamax bulker
THIS CHART SHOWS THAT
120% SUPER-RECESSION 1
HIGH interest rates INTEREST AS % EARNINGS (NEW 2
SYPER-RECESSION
LOW interest
VERY rates
Interest (LIBOR on 80% of new

100% discouraged PANAMAX BULKER) WAS

investment and encouraged
DIFFERENT IN THE TWOinvestment
SUPER- &
price) as % Earnings

80% encouraged
foreclosure RECESSIONS discouraged
foreclosure
60%

40% Recession 2
Starts 2009
20% Recession 1
Starts 1974
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Martin Stopford, President CRSL 20 June 2017
2. The Seatrade International Ship
Finance Forum ..December 1987
What bankers thought at the trough of SUPERCYCLE 1
Seatrade 1987 Forum Seatrade International Ship Finance Forum
Delegates included:-
Bankers Trust Smeatons Vaults, The Brewery, City of London 10 December 1987

Marine Midland PROGRAMME

Bank of America 9.30am Introduction: Christopher Hayman, Seatrade

Chase Manhattan Chairman: Douglas Hamilton, Norton Rose Botterell & Roche

Den-Norske Creditbank Session 1- A market diagnosis: What went wrong and why?
Australia & New Zealand Bank Discussion leaders: Boris Nachamkin
Bergen Bank Bankers Trust

Chemical Bank Olaf Peters

Citibank Schiffshypothekenbank Zu Lubeck

Commerzbank Michael Revell

Retired. Formerly Marine Midland Bank
Deutsche Bank
Bernard Kruyne
Deutsche Schiffahrtsbank Bank of America

Hong Kong & Shanghai bank Session 2 - Worldwide Demand for Ship Finance 1988-2000
J P Morgan Speaker: Dr Martin Stopford
National Westminster Bank British Shipbuilders

Martin Stopford, President CRSL 20 June 2017

A market diagnosis what went wrong?
The same problems were mentioned repeatedly:
1. Too much shipbuilding capacity!
2. Too much government intervention!
3. Too many owners ordering too many ships!
4. Too many overage and substandard ships!
5. Too many charterers/shippers eager for short-
term gain at the expense of the industry's future!
6. Too many banks, lending too much money. Boris Nachamkin
7. Too much support for speculators. Bankers Trust gave
His view on what
8. Charters only as good as shipper & owner. went wrong

Martin Stopford, President CRSL 20 June 2017

 Reasons why things went wrong"
1. Inadequate collateral and not recognising the
distinction between a loan to a business and the
industry risk.
2. Inadequate information about the operators of
the company - "if all the facts have been known,
much of the business should not have been
done".
3. The industry should pay more attention to
statistics "it takes a strong character to turn Bernard L Kruyne
down business". Bank of America
4. Banks too interested in marketing and neglect gave his views
the basic disciplines. People acted hastily.
Martin Stopford, President CRSL 20 June 2017
What to do about it (consensus view)
1. Banks and other financial institutions should not finance
speculative newbuildings and insist on a larger equity
participation by the owner (50%).
2. Shipowners should not order vessels except where a clear
commercial need is established and take positive action to
accelerate scrapping of uneconomic tonnage.
3. Shipbuilders should bring capacity in line with existing
requirements.
4. Governments should eliminate subsidies.
5. Underwriters should refuse to insure substandard ships. Jim Davis, Chairman of IMIF
6. Classification societies should not permit any lowering of
standards for competitive reasons. Jim Davis, banker and
7. Charterers and shippers should recognize that whatever President of IMIF
the short-term benefits, uneconomic freight rates cannot Was a member of the
be in the long-term interests of efficient transport. afternoon panel

Martin Stopford, President CRSL 20 June 2017

Conclusions - where the banks were in Dec 1987
1. In 1979 to 1981, a period viewed by many as a
permanent recovery, between 200 and 250 banks were
involved in ship financing. Can 200 to 250 banks all
have mature and qualified ship finance units?
2. By 1985 the number of shipping banks had dropped
below 50 and in 1986 no more than a handful, say 12 to
15 banks, were actively looking for new business.
3. With pockets of optimism in, many banks were back in
the hunt. They talk about lending only 40 to 50%
instead of 80 to 90%. This is an important 1st step, but
the jury is still out. Basel I, issued in 1988,
4. "It's the banks not here that really matter aimed to create a bank
asset classification system.

Martin Stopford, President CRSL 20 June 2017

 3. The Investment cycle
1987-2016
This was the mother of all cycles. Some
investors made a killing, others got killed.
Just a matter of timing
Martin Stopford, President CRSL 20 June 2017
 In1988 the press saidthe speculative element has gone
A 1988 Euromoney
article spoke of
stringent financing
terms
But analysts were
predicting a shortage of
shipbuilding capacity
And where would the
industry find the $10-
$14 billion a year to
finance fleet
replacement?

Martin Stopford, President CRSL 20 June 2017

By 1992 investors & commercial banks were at it again

By 1990 the
lenders were
back to their
old ways and by
1992 the
markets were
slipping back
into recession
with too many
deliveries.

Source : Daily
Express 1992 Martin Stopford, President CRSL 20 June 2017
 Investment 1987-2017 : 2009-2016
1992-7 1997 Shipbuilding credit
300 Several IPOs in Oslo, & Asian leasing
IPOs Wall Street & 262 companies active
250 funds active 2009-2016
Very active lending up to 80%

1994 Low interest rates &

200 German KG high levels of
177
market takes off 170
investment continue
150 1990 1996-8 133
Commercial Many companies 111 111 104 115

100 banks lending issuing Junk bonds 91 90 89

70
up to 80%
50
50 32 33 31 34 32 36
39 33
32 32 32
42
30
19
0
0
1990 1995 2000 2005 2010 2015
Martin Stopford, President CRSL 20 June 2017
Investors do what they want, but they
do it within an economic framework
and must have some sort of rationale
Why am I a
shipping

4. A word on investor?

investment cycle
economics

Martin Stopford, President CRSL 20 June 2017

External investment should add value
Between 2000 and 2017 the Cumulative earnings &
industry ordered for about $1.7 orders placed 2000-2017
2,000
trillion of new ships.

$ Billion 2000-2017
Net earnings of roughly $1.6 trillion 1,500 $1.4 trillion
could have covered this investment. Orders could
1,000 have been

$1,711
External investors/lenders must

$1,595
funded from
know HOW THEY ARE ADING VALUE
500 cashflow
- funding speculation just reduces
returns. $303
-
Maybe new technology companies? Earnings New Excess
(less OPEX) orders orders

Martin Stopford, President CRSL 20 June 2017

5. The investment As we head into Supercycle
How do you find the best
investments? Here are some
cycle 2017-2047?
Martin Stopford, President CRSL 20 June 2017
suggestions
Heading into Supercycle 3 Its time we faced
1. Fewer banks, low interest rates reality my friends,
Were not exactly
2. KG system in collapse (it financed half rocket scientists
container fleet so what now?)
3. Tougher banking regulations
4. World economy recovering But
5. About 23% surplus ship capacity
6. Lots of shipbuilding capacity and
support programs very busy
7. Massive pool of investor funds looking
for any half plausible investment
8. Asian leasing companies very active
The forecast? Im still working on my
supercycle forecasting model .
Martin Stopford, President CRSL 20 June 2017
 Its the goal of I built my opera
investment house in the end
that matters and got Enrico
Caruso to sing
there.
Fitzcorraldo

Takes ship over a

mountain to get to
the rubber trade

Gets up OK but when

he comes down the
The lesson is that, in Supercycle 3,
other side the ship shipping will need investors who can
goes into the rapids
lead sea transport into new territory.
Martin Stopford, President CRSL 20 June 2017
 The End
In 2047 will investors be pushing ships up hills in the Brazilian jungle?
Or moving shipping into the digital age? Its your decision. Enjoy!
Martin Stopford, President CRSL 20 June 2017