Shipping and Private Equity Investment structures Avv. Claudia Gregori – Avv. Giuseppe Loffreda Shipping and the Law Naples, October 24, 2011

 Shipping has traditionally not been involved by private equity investments and structures  Shipping has recently instead become a very interesting sector for private equity  Reasons Financial crisis and greater difficulty for shipping companies to raise debt financing International market Asset-based market  lower volatility compared to other industrial sectors Possibility to obtain interesting returns (IRR) for the investors, also due to the decrease of the asset prices in the last few years Stability of the returns on the assets, which are based on rent payments Several opportunities for portfolio diversification, also depending on the kind of ships involved Shipping and Private Equity Investment structures

Private equity structure: Example Shipping Company Private Equity Fund SPV INVESTMENT AGREEMENT SHAREHOLDERS’ AGREEMENT FINANCING BANKS SHARES SHARES / EQUITY INSTRUMENTS / DEBT INSTRUMENTS DEBT VESSEL

 Whether or not a shipping company is involved in the deal as industrial partner  in such a case, the isolation of the vessel into a special purpose vehicle (”SPV”) is generally needed, to ring fence the asset and the related financial flows (IRR);  Legal nature of the SPV (e.g. corporate vehicle versus partnership)  Jurisdiction of incorporation of the SPV, also depending on the flexibility of the applicable corporate and tax law regime: −ship Register, permanent and parallel registration and related costs −tonnage tax −withholding on interest on debt financing −tax and social security incentives for shipping companies Structuring a shipping private equity deal – Main features to consider

 Risk that the private equity fund is willing to take in the deal:  purely financial investment; or  market and industrial risk  The financial or industrial nature of the participation of the private equity fund to the deal does have an impact on several key elements:  the legal instruments through which the private equity funds makes the investment: ­shares, having or not preferred administrative and economic rights ­other equity instruments  e.g. strumenti finanziari partecipativi (art of the Italian Civil Code) ­debt instruments (possible mezzanine investment) Structuring a shipping private equity deal – Main features to consider

 the way in which the ship is employed -ship leasing arrangements: charter by demise (in which the use of the entire vessel and all associated expenses pass on from the ship owner to the charterer) bareboat charter (if the charterer also has the right to appoint own master and the crew) and bareboat charter out (in which the vessel has its registration suspended and be bareboat chartered-out to another registry in the name of the bareboat charterers), either to the industrial partner or to a third party  the stability of the return is consistent with an investment of a purely financial nature -time charter  the private equity fund takes the risk of the commercial and technical operation of the vessel -spot  the volatility of the returns is in principle not consistent with the goal to obtain a certain IRR -pool  potential difficulties in having consistency between the pool agreement and the shareholders’/investment agreement between the private equity fund and the industrial partner Structuring a shipping private equity deal – Main features to consider

 Other aspects to consider when structuring the relationship between the private equity fund and the industrial partner  need of entering into an investment agreement / shareholders’ agreement: governance of the SPV  corporate bodies, majorities, veto rights strategy for employment of the vessel major decisions in respect of the vessel (e.g. technical management) exit -exit on the asset versus exit on the SPV (the latter being less likely) -tag along/drag along on the shares of the SPV -put/call option on the asset and/or the shares of the SPV -right of first refusal in case of sale of the asset and/or of the shares of the SPV for the non-selling party -earn in/earn out Structuring a shipping private equity deal – Main features to consider

 In addition to the typical private equity features mentioned above, all the ordinary shipping law aspects are to be considered when structuring the deal, which renders such structuring more complex than in other sectors : purchase of the vessel by the SPV -new building versus re-sale -MOA in line with market standards employment of the vessel  Possible need to adapt the agreement for the employment of the vessel to the contractual rules governing the relationship between the private equity fund and the industrial partner commercial and technical management of the vessel  this is generally not carried out directly by the private equity fund, which may then rely on skills of the shipping partner  Need to properly regulate the relationships in this respect Shipping aspects

OFFICES: Milan Rome Contacts: Claudia Gregori - Giuseppe Loffreda - Via Dante, 7 Tel Fax Via XX Settembre, 5 Tel Fax