The Role of Easy Access to Maritime Capital: Opportunities and Challenges in the Maritime Business The IMO World Maritime Day Parallel Event Istanbul, 4-6 November 2016 Ilias VISVIKIS, Ph.D. Professor Director, Executive and Professional Development World Maritime University, Sweden

AGENDA Today’s Market Situation Where is Capacity Flying to? – Where is Money Coming from? Developments & Challenges in Bank Maritime Financing The Future and Challenges of Maritime Finance Opportunities Ahead ... 2

1. Today’s Market Situation Longest downturn in sector’s history and slow market recovery expectations: From the Supply side: Newbuilding prices are on the low side (resulting in oversupply in past years) Outstanding orderbook is 10-30% of the current fleet, depending on asset class Renewal of fleets and scrapping led to young, modern world fleet (< 10 years old) From the Demand side: Growth in global trade has significantly slowed down Demand for commodities has peaked in advanced economies (Europe, North America) and not returned to pre-crisis levels. Slower growth in developing countries. China’s economic growth has slowed 3

1. Today’s Market Situation (cont.) Freight Rates & Asset values plummeted in all three main shipping sectors Shipping Charter Rates (Indexed - as at Q.1 2005) Asset Values (US$ mm - as at Oct. 2016) Dry 150 ( 84% ) 24 5-Year old Capesize July 2008 Oct 2016 Container 65 ( 85% ) 10 5-Yr 3,500 Teu vessel (78%) (76%) (74%) % Change July 2008 Oct 2016 Tanker 79 ( 60% ) 5-Year old Aframax 31.5 July 2008 Oct 2016 Source: Eurofin Group (Clarksons data) 4

Today’s Market Situation (cont.) Vessel values and freight rates are at barely operating breakeven levels for quite some time now (“too low for too long”): Shipowners facing weak cash-flows renegotiate as cannot perform on their loans Investors faced with below-target returns likely to start sell vessels and exit Shipbuilders faced with defaults and cancellations on existing orders have seen newbuilding orders to fall – focus on retrofitting and specialist work / alliances   Consolidation and mergers (size, scale, route coverage and bigger ships). Defaults and bankruptcies – Less competition may exist in the next decade. Maritime financing is very expensive and scarce as: There is lack of complete availability of financing for most shipowners Lack of long-term and reliable employment for vessels makes financing even harder 5

2. Where is Capacity Flying to? Traditional Shipping Sectors: Not a Priority (low freight rates-overcapacity) Dry bulk: No interest Tankers: Older that 8 years are too old to lend Crude tankers: Too risky Containerships: Need for secured long-term charter Offshore: No appetite Energy: Some interest Clients: Financially solid / Transparent corporates / Credit quality Assets: Specialized / High Quality specification vessels Employment: Long-term with high credit rating charterers

3. Developments in Bank Maritime Financing Shipping banks are very selective on their (core) clients and conservative: Some shipping banks were nationalised and other faced over-exposure to unique conditions in home markets Bank finance has became scarcer and more expensive Confidence must be restored among banks in order for lending to start again Restructuring of deals to meet new market conditions, with stricter covenants: Loan pricing spreads have doubled (2% - 5%) Arrangement fees have increased Finance amounts have fallen (to around 50%-65% LTV) Amortization tenors have fallen (to around 5 years) Covenants tightened Credit standards tightened Nationalised: RBS (UK), Commerzbank (Germany), HSH (Germany) 9

3. Developments in Bank Maritime Financing Many traditional shipping banks have already left shipping, and few more have been divesting shipping loans: Distressed vessel loan portfolios are sold to private equity and hedge funds Traditional banking relationships have been damaged Banks face increasing capital requirements from expanded Basel III rules and compliance issues, resulting to an increase in the cost of bank finance. Banks still active focus serving existing clientele. New clients have to be “strategic”, with large fleet of vessels, sound business prospects, recognizable names, strong business models, and risk management focus. Over-concentration on one account: Thus, “big gets bigger”, as the market is structurally changing: Banks are looking for a “certain critical mass” in size (over 10-15 vessels) Left shipping: RBS, Commerzbank, HSH 10

3. Developments in Bank Maritime Financing According to Petrofin Global Bank Research, between 2014 and 2015, the total number of vessels in the world fleet rose by 1.76% from 89,676 to 91,256 vessels (Clarkson’s World Fleet Register). However, this growth in fleet investment was achieved without an increase in bank ship finance (as per the previous figure). Therefore, there was more reliance on non-bank finance sources and owners equity. The next figure presents a consistent decline by Western banks over the years and an increase by Far Eastern and Australasian banks: Need to support their own local shipping Solution to a number of owners with local newbuilding orders Despite the above, some Western banks found the correct formula to grow during this difficult period Formula to grow: Credit Suisse, ING, Unicredit, BNP Paribas, ABN Amro, Den Norske Bank (DNB), DVB Bank, Citibank 12

3. Developments in Bank Maritime Financing 13

3. Developments in Bank Maritime Financing Dutch and Scandinavian banks show a small growth and the marked decline in commitment is shown by the most traditional lenders 14

4. The Future of Maritime Finance New business model: Traditionally, a shipowner with a decent record and credit would knock on a bank’s door, put down 30% equity and borrow 70% as a mortgage to buy a ship, mostly on a hand-shake and name-lending (“My Word, My Bond”) This now is not working and likely will not work for some time Banks do not have liquidity to lend, and any money they have, they give it to caliber names at LIBOR+100 bps Also, new regulations and Basel III make loans too expensive for the banks Thus, the traditional ship finance model is changing …. 18

4. The Future of Maritime Finance (cont.) When economic market conditions improve ... ship finance will improve. Shipping companies will need to evolve same as the shipping industry and evolves, and react quickly to change and market disruptions. Transparent corporate structures and better corporate governance are factors for successful ship financing. Development of new financing sources and diversification of existing capital structures. New banks may also join shipping, aiming for the small to medium owners. 19

5. Opportunities Ahead … Little appetite from financiers to invest in shipping. Lack of cheap financing functions as a cap on tonnage supply: “Return to profitability in 2019 if shipowners deliver zero supply side growth, year on year … assuming 2% per annum trade growth” (BICMO dry bulk report, 6th Oct 2016) Sustained orderbook decline and scrapping could lead to long-term rebalancing of oversupply post 2018/2019 period. Multi-year low asset prices for new vessels, allowing for favorable entry point: Buyers diversifying portfolios, with risk appetite Market consolidation could give growth for well capitalized shipowners and new entrants, with risk management, forecasting and ROI focus Shipping is a segmented market – search for opportunities in niche markets 2-

OPPORTUNITYISNOWHERE Where do we go from here? OPPORTUNITYISNOWHERE   One may read this as: Opportunity is NOWHERE or NOW HERE T H A N K Y O U

Alternative Sources of Maritime Finance Export Credit Agencies (ECA) – e.g. Korea, China, Japan, Norway, Germany Availability, long-term horizons, high loan amounts (70-80%) Countercyclical role with activity in difficult times Becoming more careful as to counterparty risk – need financially solid clients For LNG, tankers, drilling rigs, floating production, among others Annual volumes of about US$ 15bn Chinese Leasing firms Looking for: assets with long-term charters, stable cash-flows, creditworthy charterers Often a Chinese “element” is needed (i.e. vessel build, charterer) Deals more than US$200m (LNG, chemical tankers, large containers) Well supported by local banks (providing liquidity, expertise) Since 2013, newbuilding orders of around 12.2m GT and secondhand orders of around 3.3m GT under operating lease models 16