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M.I.T.

INTERNATIONAL SHIPPING CLUB CAPITAL MARKETS PRESENTATION


October 2013
SEWARD & KISSEL LLP Gary Wolfe One Battery Park Plaza
New York, New York 10004 Tel: (212) 574-1200 Fax: (212) 480-8421 E-Mail: wolfe@sewkis.com Website: www.sewkis.com

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Billions to be Made or Lost: What happens when investors search for the bottom of the shipping market?

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What is so special about Shipping?


Shipping has been around forever It has its own special legal regime It requires a lot of capital It has its own cycles (They have their own cycles)

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What is so special about Shipping?


Ships move around the world Ships operate in a highly volatile market Ships generally operate tax free Ships need services wherever they are and do not have bags of cash to pay for them

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What is so special about Shipping?


Ships are owned and managed separately Ships can be damaged Chapter 11 for shippingNot so great Why bother to invest in Shipping? Considerations for equity investors

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How Many Deep Sea Ships are There in the World?


(1)

Dry Cargo/Bulk Container Tankers Total


________
(1) 10,000+ dwt

9,700 5,100 5,800 20,600

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Who Owns Ships?


Many, many, many shipowners
Families Entrepreneurs (Shipping Magnates) Oil companies (Exxon Valdez, Amoco Cadiz) Governments Private equity funds Publicly traded companies

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How Much do Ships Cost?


Foreign Flag Vessels
VLCC (315,000 dwt/2 million bbl)
NB = $86 million 5 yr = $55 million 10 yr = $30 million Suezmax (150,000 dwt/1 million bbl) NB = $58 million 5 yr = $39 million 10 yr = $25 million

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How Much do Ships Cost?


- Product Tankers
LR II (105,000 115,000 dwt) NB = $52 million 5 yr = $33 million 10 yr = $23 million MR II (50,000 dwt) NB = $35 million 5 yr = $27 million 10 yr = 17 million

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How Much do Ships Cost?


Foreign Flag Vessels
Capesize (170,000 dwt) NB = $52.0 million 5 Yr = $40.0 million 10 yr = $20.0 million Supramax (52,000 dwt)) NB = $27.0 million 5 Yr = $23.0 million 10 yr = $18.0 million

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How do You Come Up with the Money?


Loan from banks 65 % (used to be 80%) Your own money 35 % What if bank money and your own arent enough? Suppose banks are not lending? Suppose you dont want to use your own money?

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How do You Come Up with the Money?


Wouldnt it be great to have a 15-year charter from Chevron. Even then, the bank may not lend to you.

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So Why Invest In Shipping?


E c o n o m ic g r o w th E c o n o m ic g r o w th M a r k e t b o tto m s o u t M a r k e t b o tto m s o u t

Exit

S tim u la te s v e s s e l S tim u la te s v e s s e l dem and dem and

F u n d a m e n ta ls F u n d a m e n ta ls b a la n c e b a la n c e

2003

2008
F r e ig h t r a te s r is e F r e ig h t r a te s r is e

S u p p ly m o d e r a te s S u p p ly m o d e r a te s

S p e c u la tiv e n e w S p e c u la tiv e n e w o rd e rs o rd e rs

S r a p p in g in c r e a s e s S r a p p in g in c r e a s e s

Future Investment
R a te s b e g in to R a te s b e g in to w eaken w eaken

2011

O rd e rb o o k O rd e rb o o k o u ts tr ip s d e m a n d o u ts tr ip s d e m a n d

O r d e r in g s u b s id e s O r d e r in g s u b s id e s

D e liv e r ie s r is e D e liv e r ie s r is e

Because shipping is volatile and you know you can predict the market.

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That is how you get to the Capital Markets.

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What are the Capital Markets?


Sources of funds
Mutual funds (Fidelity) Pension funds (unions, governments) Schools (colleges and universities) Retirement plans (401K, IRA) Hedge funds Private equity funds (Oaktree/Monarch/Blackstone)

In addition to, or an alternative to, the owners equity and bank debt

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What are the Capital Markets?


Available in many forms of equity and debt Available publicly or privately

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What are the Capital Markets?


New York Stock Exchange Nasdaq Stock Exchange Traders sitting at PCs Speculators

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What do You Buy and Sell on the Capital Markets?


Stock (shares) Notes, bonds

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What is Stock?
Equity

What are Notes and Bonds?


Debt

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Equity vs. Debt


Equity
You dont have to repay it You dont pay interest You may pay a dividend You dont post collateral Your stockholders may have different ideas as to whats best for the company So, you may lose control

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Debt vs. Equity

Debt
You do have to repay it You may have to post collateral (a mortgage on your assets) You will have to pay interest But you keep control of your company -unless you default

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The Capitalization Layer Cake


Senior Secured Debt* Senior Subordinated Secured Debt** Senior Unsecured Debt***

Junior (Subordinated) Debt

Senior Preferred Stock

Junior Preferred Stock

Common Stock

* Bank loans ** Also known as second lien debt *** Where high yield and many bank loans stand

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Ships move around the World: What is special about that?


Ships need to know which laws apply to them The significance of a ships registry Good registries Reputable inspection of ships

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Ships move around the World: What is special about that?


Ships may go to places like Iran or Sudan Enforcement of mortgages where? Low, or no income taxes

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Ships need a lot of capital


Borrowing based on time charters and bareboat charters
ability to assign charters ability to assign revenues ability to take back ships if the charterers default

Status of unsecured bond holders

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Ships need a lot of capital


Protection of bank lenders (ship mortgages)
good registries good ports recognition of ship mortgages ability to foreclose on a ship

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Ships generally operate tax free


Good open registries (flags of convenience) Tonnage taxes vs. income taxes Importance of correct structure Ability to keep shipping profits offshore Consideration of exit strategy capital gains eventual IPO

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Ships have their own legal regime


Shipping laws are similar around the world Shipping agreements may come in preprinted forms Common for financing agreements to be governed by English/New York or Maritime law System of arbitration Ships have a system of secret liens

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Ships can be damaged


Availability of marine insurance Pollution Liability
The corporate veil should be respected U.S. Oil Pollution Act Civil Liability Convention

Other types of claims Chances that plaintiffs could reach to investor level extremely small

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Ships: Considerations for equity investors


Ships are owned and managed separately Treating shipping as an asset play or as an operating business helps determine your structure Corporate Governance
Who makes the decisions Boards of Directors/Management

Fees: Technical Management/Commercial Management/Asset Management

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What are Public Companies?


IBM GE Ford OSG (Chapter 11) Frontline Maersk Torm Diana Shipping Dry Ships Seadrill Kirby

General Maritime

Eagle Bulk Horizon Lines

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What is the Difference Between a Private Company and a Public Company?


Shareholders Board of directors Executive Officers (Management) Government Involvement (Regulation)

Ability to sell your shares

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The Public Capital Markets NYSE/NASDAQ


Ready source of funds Cheap source of funds Makes future capital raising easier Provides a liquid market for company securities and currency for acquisitions and employees incentives You can sell shares. You can buy shares. Very different from a business run from your friends garage

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How did Regulation Change Shipping?


Foreign flag shipping went from unregulated to highly regulated in 20 years Consequence for new competitors Remember how much ships cost Therefore, shipping companies turned to the capital markets for money

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How do You Tap the Capital Markets?


You find an investment bank
Morgan Stanley, Goldman Sachs, UBS, Jefferies, JP Morgan, Bank of America, Citigroup, Wachovia, Evercore, Maxim

The role of the Securities and Exchange Commission (SEC) What do investors need to know?

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U.S. Publicly Traded Shipping Companies


Lets look at our printouts.

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Predicting the Future: Age profile of Bulk, Tanker and Container fleets:

Source: Lloyds List

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About 90% of world trade is carried by the international shipping industry. Without shipping, the import/export of affordable food and goods would not be possible - half the world would starve and the other half would freeze!
Source: Shipping Facts

Ah yes, I remember it well

Things are looking up

There are always surprises