Shipping and the Law Naples October

Scarcity of Capital in Shipping Many Owners do not have the capital they need ­ Many owners are capital poor as their existing portfolios have substantially reduced in value. Further capital injections are required to meet LTV covenants or margins have increased in return for waivers ­ Revenue from vessel trading has substantially reduced as a result of increased vessel supply. ­ In addition, new buildings ordered over the last years have reduced LTV debt, and in today's market requirement is for the Owner to fund all payment installments until delivery Traditional first-mortgage lenders are having difficulty in their existing shipping portfolios as well as having wider financial constraints including capital adequacy thresholds ­ The top 8 lenders by portfolio size are European, all of which have been hit by the financial crisis ­ Loans are scarce with those available being at a lower loan-to-value, often 50-60% compared with 75-85% during the boom years.  The opportunity exists for new capital to enter the market Traditional sources of shipping finances are unwilling or unable to continue providing capital **HSH Nordbank - $42bn DnB Nor - $33bn Commerzbank - $28bn Nordea - $20bn Nord LB - $20bn RBS - $18bn Kfw - $18bn BnP Parabas - $17bn

Private Equity Funds Private Equity Funds are entering shipping in a variety of forms Shipowners have had to seek alternative sources of capital. Private Equity has been a key component in filling this gap Private Equity Funds have seen an opportunity in shipping: ­Asset values across the major shipping segments (dry bulk, tankers, containers) are at or close to historical lows ­Freight rate weakness is causing distress in the market with many owners at or below breakeven on, leaving owners vulnerable and in need of injections of capital ­Too many ships ordered during the boom years ( ) have led to oversupply compounding the current weak market and low asset values. ­Consequently entry levels look attractive, plus overall demand fundamentals (requirement for raw materials in China and India in particular) remain robust. ­Shipping is positively correlated to global GDP – and therefore subject to recovery Private Equity Funds have been filling the gap in a variety of ways: ­Direct equity investments into ships or shipping companies ­1 st Lien Debt “Secured Equity” ­Provision of Mezzanine Capital

Where are attractive investments in shipping and why? 4 Timing of entry and sector selection is crucial Niche positions or sectors that have undergone structural change have proven attractive: ­The much talked about product tanker market has seen an industry shift in refineries from the consumer market of USA and Europe, to Asia-Pacific – thereby increasing ton-mile distance of transportation. In simple terms this has absorbed what would otherwise be over-supply which has led to demand for tonnage and subsequently increased freight rates ­The offshore market is accessing the renewables industry, particularly in the North Sea and Continental Europe, eg. tonnage otherwise engaged in Oil & Gas markets are being utilized extensively in the offshore wind turbine markets ­Sectors where asset prices and freight rates have hit historical lows, prove to be attractive counter-cyclical investments – i.e. simple timing of entry with 3-5 year recovery forecast

Other reasons to invest in the maritime sector 5 The maritime sector offers a unique mix of characteristics that make it an attractive sector for institutional capital - Capital intensive -No risk of obsolescence -Long-life, hard asset backed investments -‘Provincial’ industry – Highly fragmented with roughly 80% of assets in private hands -Direct access to major multinationals via charters (leases) -Cyclical/volatile earnings and vessel values provide evergreen opportunities Shipping Offers a wide risk/return spectrum to match different appetites -From distressed ships at auction to partnership with investment grade end-users -From older vessels at scrap value to ordering new fuel efficient newbuildings -From spot employment to long-term (10+year) lease contracts -From pure asset ownership to a charter-in operation (i.e. vessels controlled through leases not ownership) -From bareboat charters (i.e. pure financial play) to a fully-staffed operating company

The Benefits and Disadvantages of using Private Equity funds 6 BENEFITS: DISADVANTAGES: Access for ship owners to large pools of capital An alternative to hard-to-find traditional forms of debt Ability to expand or build fleets when asset prices are at / near historic lows A cushion to support cash-flow in what is a capital intensive industry Used and structured efficiently, private equity provides significant muscle to an owner’s balance sheet Private Equity have return thresholds considerably above traditional bank debt, and above owners usual return requirements Terms of investment often conflict with the requirements of owners – preferential terms in favor of the investors, Board positions, dilution of ownership and control Short time horizons – entry and exit can be expected within as little as 12months, but usually no more than +/- 3 years Over and above all entry points, one must remember Private Equity may be aggressive in the sense of disregarding long term relationship factors prevalent in shipping

THANK YOU Jonathan Campbell Campbell Johnston Clark LLP Tel: