Ronaldo Ship Financing Cok

Maritime Business
La ode muhammad ronaldo amrin (04211640000088)

Dosen Pengajar
Raja Oloan Saut Gurning, ST.,M .Sc,PhD
NIP 197107201995121001
DEPARTEMENT TEKNIK SISTEM PERKAPALAN
FAKULTAS TEKNOLOGI KELAUTAN
INSTITUT TEKNOLOGI SEPULUH NOPEMBER
SURABAYA
2019
Ship Financing
Ship financing is an arrangement that uses ship
rental costs as a source of principal payments,
while various forms of collateral are structured
around shipbuilding and lease agreements to
reduce credit risk. We utilize the wealth of our
experience and proven track record in this field
to help clients get long-term funds to buy new
and used vessels.
Ship Financing
a variety of transactions involving the purchase or sale of
maritime equipment. We are principally involved in “owner
financing” or “alternative financing”. Before going into the
type of financial management that we do, it is important to
understand conventional or standard financing.
Ship Financing
There are a lot parties involved in the domain of Ship financing. Some of
these parties are conventionally established in their method of
operational activities while ship finance operators are unconventional
yet established in their own singular way. This difference existing
between the many available ship financers creates a wide array of
feasibilities for the people requiring maritime financial aid.
Ship Financing
During the ship financing pre-delivery phase, a bank provides a pre-delivery
construction or refurbishment maritime loan, in installments to a shipyard. The
ship financing loans are backed by a corporate guarantor and a refund guarantor.
The ship financing pre-delivery security package includes:
- Assignment of Shipbuilding Contract

- Assignment of Refund
- Guarantee (from Refund Guarantor acceptable to Lender)
- Corporate Guarantee
Ship Financing
The ship financing post-delivery security package includes:
- Maritime Mortgage on Vessel

- Assignment of Charter
- Contract Assignment of vessel earnings, insurances and requisition compensation
- Charge over bank account
- Pledge of shares of Borrower
- Corporate Guarantee
- Ship Manager’s undertaking
The structure of a ship financing lease deal is somewhat different but analogous to
that used in a ship financing purchase transaction.
Conventional Ship
Financing
Conventional Ship financing involves a security arrangement
with a bank or other lending institution, by which money to
purchase a vessel is received in exchange for a security
interest in the vessel.
Conventional Ship
Financing
The security interest generally takes the form of a First Preferred
Ship’s Mortgage. The borrower executes a “promissory note”
promising to pay the loan, as well as, a First Preferred Ship’s
Mortgage which pledges the vessel as security for the loan.
Conventional Ship
Financing
The note usually obligates the borrower personally so that if
the vessel is foreclosed and sold by the lender, the borrower
must pay any deficiency if the vessel does not sell for enough
to pay the entire loan. This mortgagor pledges the ship as
security for the loan and has priority over most other claims
with some specific exceptions.
Types of Lenders
Standard commercial financing depends upon your credit history,
amount of down payment and the evaluation of the ship. Many
banks will make such loans if you are a “good” customer and have a
credit history with them. This also assumes that they will do marine
financing. Due to the crash in the oil field industry during the 1980’s
and 1990’s many lenders left the marine market and have not
returned.
Types of Lenders
Marine lending is viewed as a high-risk market due to the
nature of the business and the fact that the ship may leave
U.S. ports and never return. The fear of seeing their security
sail over the horizon inhibits many bankers.
Types of Lenders
To balance out the risk factors, the banks will look at several
things, principally, your credit history and other suitable
security such as real estate, cash or investments in addition to
the ship.
Types of Lenders
If you have a long, good relationship with a bank, that should be
your first choice. You will be more likely to receive a good interest
rate and fair terms. Be aware that you will have to pay the difference
between the loan amount and the purchase price of the ship. Your
down payment generally will range from 10% to 40% depending
upon the requirements of the particular bank.
Types of Lenders
Generally, the bank will not lend money for ,Start up costs, Repairs
or refitting, Fuel and lube oils, Insurance and fees.
Also, the bank will probably be expecting to lend between 60% and
80% of the purchase price of the ship. This means that on a
$500,000 purchase, you will need to have between $100,000 and
$200,000 in cash to pay for the purchase down payment.
Introduction
Significant developments in bank
shipping finance occurred the
subsequent decades. The world
economy growth together with the
need for larger cargo capacities
elevated the amount of requisite
capital investment to levels
beyond the ability of private equity
finance
15
Introduction
Bank shipping finance began to
grow in importance in the 1960’s
with owners in possession of oil
charters from major oil companies
of sufficient duration to cover a
substantial part of the repayment
period.
16
Introduction
To date, with an estimated require-
ment 1 of $207 billion over the
six years 2002-2007 [M. Stopford,
2002], owners have a hard-time
satisfying the industry’s appetite.
The reason for this is that we are
going through a convalescence
period.
17
Bank & Other Lending
Organisations
These are the conventional maritime financing service
providers that exist. Banks as lending organisations take a
detailed inventory about the firm approaching them for
financial purposes. Only if they are satisfied with the
company’s credit worthiness or only if the company has a
long-standing association with them, then the banks invest in
with the required funds.
Bank & Other Lending
Organisations
As collateral, the receiver of the finance is required to mortgage the ship
or pay an initial deposit as per the bank’s existing norms. The amount of
initial deposit claimed by a bank is anywhere between 10 to 40%, while
maritime financial assistance is provided for only about 60 to 80% of the
intended commercial activity. The rate of interest is also variable
depending on a bank’s association with the party intending to opt for
marine financing.
Marine Money Landers
Money-lenders too form a vital part in the domain of shipping
financing. While money-lenders are not opted for by
companies primarily for maritime financial assistance
purposes, they nonetheless provide valuable assistance when
aid from banks and other recognized financial organization is
denied.
Marine Money Landers
The most important and note-worthy aspect of loaning
marine finance from money-lenders is that their repayment
options are tricky and costly at the same time. Unlike banks
which have a prescribed set of rules and stipulations, money-
lenders do not fall under the ambit of these stipulations which
could cause problems for parties opting for money-lenders as
a lending option.
Capital Investment
Just like investments in shares, in the marine sector there is the
option of investing in a particular marine project. Some people
interested in how to buy cc. Interested people invest their funds for
the project to come to fruition with limited profits to their credit.
Capital Investment
While capital investment is a good option in terms of
maritime financing, it is equally risky as, if a project ends up
failing, all the people with vested funds in the project end up
losing their money completely.
Capital Investment
Shipping financing is a necessary cog in the marine industry. It
helps the marine industry to take risks and reach new heights,
and also attract newer and newer business organizations to
enter the fray.
Manufacturer Lending
Several of the major engine companies have developed
financing programs revolving around the purchase of their
propulsion engines and generators. Detroit Diesel and
Caterpillar in the United States have been the two major
players in this market.
Manufacturer Lending
The loan program generally requires the purchaser to either build a
new vessel with specific equipment or to repower an existing vessel.
Again, the amount of the loan will depend upon a realistic evaluation
of your credit status and the value of the vessel upon completion.
Lenders of Last Resort
We consider banks and equipment manufacturers as lenders
of first resort because they offer the lowest rates and most
competitive terms. They are also the most difficult from
whom to obtain a marine loan.
Lenders Last Resort
Lenders of the last resort, are, for the most part, private
lenders who specialize in “high risk” loans with a very “high
rate of return.”
Lenders Last Resort
These individuals offer money when you need it, but at
interest rates in the 17% to 25% range. Usually, these loans
are for twelve months or less and require the borrower to
provide personal guarantees for the loan.
Lenders Last Resort
The higher rates are justified by the high risk nature of the
loans. Generally this type of loan can be completed in a few
days or weeks and may, in some cases, save your interest in
the ship.
Lenders Last Resort
Security for the loan is generally in the nature of a First
Preferred Ship’s Mortgage as well as other security such as
real estate, bonds or stock shares.
Venture Capital
Venture capital is money that is invested by private individual
to provide start-up costs, vessel purchase funds and operating
costs. The money is invested in a particular ship or project
with the purpose of earning profits for the investor.
Venture Capital
Generally, venture capital is secured only by the project. If the
ship or shipping project fails, the investor loses his
investment. There is no other obligation other than the
equipment alone.
Venture Capital
There may be any variety of combinations of investments in a
Venture Capital program, but in the general sense, the
investor becomes a limited partner in the ship and takes his
chances along with the operator.
Bond Financing
Bonds were originally developed to finance states for various
purposes. This type of debt investment is today used widely
also by companies to finance projects.
Bond Financing
The procedure to raise funds through bonds requires a bond issue
and an IPO (Initial Public Offering) in a stock exchange. Investors buy
the bond at the par price in the day of the IPO, thereafter the bond is
trading with its daily price reflecting its status.
Bond Financing
While the owners of bonds (bond holders) are in fact creditors
to the company that has issued the bond, the funds raised
through the bond issue are considered as quasi -company
equity in cases where other types of borrowing are also
present.
Bond Financing
Although the duration (term) of a bond is fixed, the interest
payable may be fixed or variable. Short term bonds are for
periods up to five years, medium term from five to twelve and
long term for more than twelve years.
Bond Financing (2)
Company bonds generally offer higher yields
compared to government bonds to compensate bond
holders for a higher risk of default.
Bond Financing (2)
The two main types of corporate bonds are Convertible and
Callable bonds.
A Convertible bond can be redeemed for company’s equity at
predetermined times if the bond holder so wishes and this in
effect constitutes a form of stock option.
Bond Financing (2)
A Callable bond instead can be redeemed at the discretion of
the issuing company before maturity, usually at a premium.
This type of bond offers the possibility to the issuer to take
advantage of lower interest rates through calling the higher
interest bonds and re-issuing new lower interest ones.
Bond Financing (2)
Bonds are tradable. In the past many high yield shipping
bonds fell in the category of ‘’junk bonds’’ – i.e. BB rating or
lower - due to the high risk they represented for the bond
holder.
Bank Loan Financing
Bank loans are the oldest form of asset financing and by far
the most common method in shipping. The lender provides
funds to the borrower on basis of a Loan Agreement.
Bank Loan Financing
Prior to a loan agreement, a Commitment Letter is sent by the bank
to the borrower where the main terms, conditions, covenants and so
on are laid out. A Commitment Letter assumes legal status after the
recipient has signed it, indicating his basic agreement. Thereafter
the parties will need to contact their legal counsels in order to start
discussions in preparation of the Loan Agreement.
Bank Loan Financing
Loan agreements are flexible instruments that can be cut to
measure according to the wish of the contracting parties, yet,
these contain a substantial number of common terms.
Representations and
Warranties
Before commiting to make a loan , a lender will invstigate the
potential borrower’s financial condition and credit
worthiness.
Representations and
Warranties
It will also require the borrower to confirm his legal status
(sole proprietor or other business entity), and other material
issues that the lender may require prior to a loan commitment
Conditions to Closing
Lenders require aborrower to : demonstrate that she has the
authority to approve the loan, including corporate
resolutions, pay any fees at closing and sign all documents
Bank Loan (2)
continued All loan agreements make mention of: the duration
of the facility (tenor), the applicable interest rate (fixed or
floating), the bank fees payable for the management of the
loan, the collateral(s), i.e. liquid or fixed assets which the
lender can access in case of a default, and the covenants, i.e.
certain conditions the borrower must satisfy and the rights of
the lender in case of a default in repayment.
Bank Loan (2)
These basic requirements are followed by a detailed list of
provisions which describe what needs to be done and how.
These however lay outside the scope of this introductory
presentation.
Ship Leasing
In countries where ship leasing is allowed, leasing arrangements
provide an alternative to traditional ship financing. Banks will
generally consider it favourably given that the position of the
‘’lender’’ is stronger compared to loan financing.
Ship Leasing
As banks are generally unwilling to become involved in ship
management the most usual method used takes the form of a
‘’ Sale and Leaseback’’ where a shell company owned by the
lender ( lessor) becomes the owner of the vessel and enters
into a bareboat contract with the lessee who takes over both
the commercial and the technical management.
Ship Leasing
The lessor will typically have a first preferred mortgage on the
ship. This triangular arrangement has considerable
advantages, but also serious disadvantages, for the lessee
which we shall briefly review.
Sale and Leaseback
The main advantage of a Sale and Leaseback solution for the
lessee is the ability to expand the fleet under his own control
with the minimum of equity.
Sale and Leaseback
The main disadvantage is a quite complicated, inflexible and
inequitable leasing contract replete with covenants in favour
of the lessor.
Sale and Leaseback
S+LB is a back to back arrangement where the lease is paid
over a number of years through charter hire involving three
parties, the owner of the vessel, the bareboat charterer and
the lessor.
Sale and Leaseback
As in all leasing contracts one finds a ‘’ Hell and High Water’’
clause which nullifies the possibility of the borrower to pay
only interest and remain within the spirit of the agreement, as
the case is under a loan agreement.
Sale and Leaseback
Installments therefore have to be paid in full and by the due
time or else a charter termination event may be triggered.
Sale and Leaseback (The
Owner Side)
Generally the interests of the Owner and the Bank are coordinated,
yet at an arm’s length. The Owner for example will always welcome a
clause whereby loan repayments will need to be made only
subsequently to charter hire payments and that the bareboat
Charterers will be under obligation to respect mortgage covenants.
Owner Side)
Similarly, the position of the Owners vis-à-vis the Bank will be
strengthened if events of default concerning their own loan
agreement could only take place following a breach from the
side of the Charterers.
Owner Side)
In case of problems regarding the proper course of lease
repayment the Owners are the party to take measures against
the bareboat Charterers to safeguard the interests of the
lessor.
Owner Side)
These measures will typically include the right to replace the
Charterer, the right to seek a buyer for the vessel and other
stop-gap measures which will ensure that a non-performance
from the Charterers leading to a charter termination event
does not end up as an Owners’ default.
Events of Default
the borrower does not pay any money due for payment by it
under the loan agreement (or any security document or
guarantee) in accordance with its terms and conditions.
Events of Default
the borrower does not comply with any other obligation
under the loan agreement (or any security document or
guarantee) and, if that default is capable of remedy, it is not
remedied within [5 Business Days (or such longer period
agreed by the Lender)] after its occurrence or the borrower
does not, during that period, take all action which in the
lender’s opinion is necessary or desirable to promptly remedy
that default.
Events of Default
a representation, warranty or statement made or deemed to
be made by the borrower under the loan agreement is untrue
or misleading; the loan agreement is unenforceable (or any
security document or guarantee) is void, or is claimed to be
so.
Events of Default
and an administrator, provisional liquidator is appointed in
respect of the Borrower or any action is taken to appoint any
such person and the action is not stayed, withdrawn or
dismissed within [5 Business Days].
Character Side)
In case of delays in charter hire payments leading to a charter
termination event, the Owners will need to see clearly what
their rights are concerning the ‘’Charterer’s Deposit’’ i.e. the
lessee’s capital contribution to the deal.
Character Side)
In a similar, albeit inverse way, the Charterers will be keen to
see they own ‘’ Charterer’s Deposit’’ to be as protected as
possible.
Character Side)
Will need to see a clear term sheet delineating their rights and
obligations. Will need to see purchase options at specific
dates
Character Side)
Will review the interpretation of the ‘’Hell and High Water ‘’
clause and will want to make sure mortgage covenants do not
impact their rights under the bareboat charter party.
Blank Check Companies
According to the Securities and Exchange Commission ‘’a blank
check company is a company that has no specific business plan or
purpose, or has indicated as its business plan to enter into an
unidentified merger or acquisition. These companies often involve
speculative investments”.
A Special Purpose Acquisition Company (SPAC) is a
corporation formed by private individuals in order to raise
funds through an Initial Public Offering.
Typically the money raised is committed to a Trust until either
an investment is made, or a certain time period has lapsed.
During that period the staff managing the SPAC are not
allowed to receive salaries.
If no deal is made by the deadline, the funds are returned to
the investors together with allowances for bank or broker
fees.
Syndicated Loans
When capital requirements exceed the credit ceiling of a bank
to a single customer, banks form a syndicate whereby each
one of the covers a portion of the total facility,
Syndicated Loans
The syndicate has a leader. The leader is in charge of negotiating the
terms and conditions between the syndicate and the borrower. After
this stage is completed the lead bank manages the flow of credit
from the syndicate members to the borrower and vice versa during
the stage of repayment.
Syndicated Loans
Syndication has advantages for both sides and it is the ultimate
weapon of bank financing in the battle with other types of finance in
commercial shipping. However, negotiations between syndicate
members can last for months and negotiations with the borrower
even longer.
Syndicated Loans
Therefore, slowness and complication may be the main
disadvantages of a syndicated loan in exchange for very high
levels of lending.
So , this is levels of lending
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Export Credit Schemes
Many exporting countries facilitate sales abroad by
guaranteeing seller’s credit to foreign customers. The
exporters extend credit to their customers and the state acts
as guarantor to this credit by taking over the risk of default.
Seller’s credit has a long history in shipbuilding, however in
recent years it has become object of heated arguments in
OECD, in WTO and in the EU whether such practices fall
within the definition of a State Aid.
Central to this debate is whether the interest rate charged is –
directly or indirectly – subsidized but other important issues
are also examined.
Despite these debates export credit schemes continue to
exist in an overt or covert fashion, particularly in the Far
Eastern markets.
Export Credit Insurance Cover to Banks
• Export Credit Insurance Packing Credit

• Export Credit Insurance Export Production Finance (ECIB-EPF)
• Export Credit Insurance Post Shipment (ECIB-INPS)
• Export Credit Insurance Export Finance (ECIB-EF)
• Export Credit Insurance Export Performance (ECIB-EP)
• Export Finance (Overseas Lending) Guarantee
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KS and KG Funds
This type of financing is found in northern Eourpe and in its
heyday it has enabled the construction of entire fleets. The
basic prerequisite for the creation of such funds is national
legislation providing for substantially lower taxation to highly
taxed profits which invest in such schemes.
KS and KG Funds
Historically such schemes have attracted wide interest among
professionals of all kind who have regarded them as a way of
extending commercial scope and spreading commercial risk.
KS and KG Funds
KGs in Germany for example are partnerships where some
members have unlimited liability for the debts of the
partnership and others whose liability is limited to their
contribution.
KS and KG Funds
The role of the unlimited liability partner (General Partner)
however can be assumed by a limited liability company
(GmbH & Co KG).
KS and KG Funds
Funds collected in that way constitute the equity side of a
financial structure which subsequently seeks additional debt
financing from a bank or other institution to purchase a new
or second hand vessel.
KS and KG Funds (2)
It is evident that this type of financing is not open to everyone
as it presupposes location in a country where such legislation
exists.
KS and KG Funds (2)
The importance of this type of financing for the containership
sector cannot be overemphasized.
KS and KG Funds (2)
Ships built under these schemes are typically chartered out
for long periods and their technical management is entrusted
to professional ship management companies.
KS and KG Funds (2)
The abundance of equity coupled to the eagerness of the
banking sector to provide loans have led to a proliferation of
container ships.
KS and KG Funds (2)
The bubble burst in 2008 with a dramatic fall in ship values
which has put the partnerships under pressure to meet their
obligations under the value maintenance clause, leading to
ship sales and KG closures.
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Islamic Finance
finance which complies with islamic law requirements (Sharia)
on lending. Sharia prohibits acceptance of specific interest or
fees for loans whether the payment is fixed or floating.
Islamic Finance
Likewise, investment in businesses that provide goods or
services considered contrary to Islamic principles are not
allowed.
Islamic Finance
In view of the fast expansion of islamic finance during the last
three decades – its annual turnover presently running in
trillions of US dollars – many banking institutions have
developed methods for providing funds in Sharia - compliant
ways.
Islamic Finance
This essentially involves risk-sharing which is a component of
trade rather than risk-transfer which is seen in conventional
banking.
Islamic Finance
Islamic financing therefore employs concepts such as: profit
sharing, joint ventures, safekeeping, leasing and cost plus
transactions, in place of the traditionally used interest in
western style financing.
Islamic Finance
Islamic banks provide investment funds by issuing floating
rate interest loans, however, the rate of interest is pegged to
the company's individual rate of return.
Islamic Finance
Thus, the bank's profit on the loan is equal to a certain
percentage of the company's profits. Once the principal
amount of the loan is repaid, the profit-sharing arrangement
is concluded. This practice is called Musharaka.
Islamic Finance
Where venture capital is required by a company, a partnership
arrangement is created under the name, Mudaraba whereby
the company provides staff while financing is provided by the
bank, thus both profit, or lose, and risks are shared.
Islamic Finance
Such participatory schemes between capital and labor reflect
the Islamic view that the borrower must not bear all the
risk/cost of a failure.
Alternative Sources
There are also other methods of financing the acquisition of
ships which do not necessitate the participation of financial
institutions.
Alternative Sources
Several of them are absolutely legitimate such as: using
retained - undistributed -profits, or issuing new company
shares, or reinvesting the proceeds from well timed asset play
which means taking advantage of the effect of the freight
rate cycle on the values of secondhand ships. All these are
common considerations of every ship management team and
are widely used.
Opportunities to pursue
lease financing
Lack of availability of bank financing or other financing options
Theremaybeavarietyofreasonsforthisincludingthebank’s
unwillingnesstoprovideshipfinancingingeneralorbecauseofthe
creditworthinessofthecompanyseekingthefinancing.
Strength of Leasing
Companies
The leasing company is in the business of arranging this type of
financing structure so in the case of financially sound operators, is
more likely to receive bank funding as they present a lesser credit
risk. Their higher credit rating will also mean credit is obtained more
cheaply.
Opportunities to pursue
lease financing
- Restrictions by existing financing arrangements
- Other restrictions (constitutional documents, etc.)
Advantages for the lessor
The lessor still retains legal title to the asset. This means the
lessor is typically in a better position than a lender as the
asset is not subject to any security granted by the lessee in
favour of an existingl ender.
Advantages for the lessor
It should also be easier for the lessor to re-take possession in
the event of default by the lessee in making a scheduled
payment as compared to the position of a secured lender
who tries to enforce its security.
Possible disadvantages of
lease financing
- Lessee Perspective , Tax ,Flexibility of use of asset
- Lessor Perspective, Insolvency of the lessee , Legal
ownership/liability relating to the asset during the lease period.
Ways of Financing Ships and
Ship owning Companies
There are several ways to finance ships and ship-owning
companies. In the following chapter, three financial sources
for doing so are presented, starting with private funds.
Private funds are capital the company holds. For start-up
companies, the initial funding often comes from heritage,
investments or loans from family and friends. For existing
companies, new investments can be made with capital from the
already existing cash flow.
If the company does not possess a sufficient amount of
money, several financing methods can be combined. This
leads us to the next financial source, debt financing.
In order to retrieve funds, loaning capital occurs frequently.
According to Stopford (2008) bank loans are the most important
source of ship finance. Loaning capital is advantageous as it leaves
the company with full ownership of the business.
On the other hand, interest rate is a concern when
considering a bank loan as it might be very expensive for the
company. Over time, the expenses in total may even exceed
the losses affiliated to selling shares to increase equity.
Companies issue bonds when they wish to borrow money from the
public on a long term basis. Issuing a bond is often done when the
company’s internal capital sources do not cover the bank’s capital
requirement, comparable to a top-up loan.
Buying a bond from a company means that you lend the
company an amount of money. The bond issuer will pay an
interest, called the coupon, but none of the principal will be
repaid until the end of the lending period.
The cash flow from a bond is constant resulting in a fluctuating
value. When interest rates in the marketplace rise, the bond is worth
less and opposite when the interest rates fall
(Ross, Westerfield et al. 2007).
The final method for financing is to search for funding in the equity
markets. By making a public offering of shares, the company can
increase equity. Searching for funds in the capital market is often a
less preferred method for finding funds.
The owners must give up parts of their stocks, which over
time, can cause a greater loss than paying interest. The price
of financial distress is on the other hand unknown and
increasing share capital can be profitable 10 in some periods.
According to Stopford (2008), large companies that is known and
accepted by the financial institutions have an advantage in the
capital markets. Until the 1990s, a limited group of shipping
companies was accepted. During the 1990s, the shipping industry
became more active on the stock exchanges around the world and
developed public offering of equity as a capital source.
It has remained a minor player in ship finance because most
of the ship owning companies are small and do not have the
same need for raising very large sums of money (Stopford
2008).
Capital structure is a key issue in
finance , it shows the company’s
debt willingness. Below are four
tables showing the debt/equity ratio
for the companies in this study, the
tables are established based on
numbers from the companies’ 2012
annual reports and profit
The average for the offshore segment is 2.1,
the LNG and LPG segment 1.37, the bulk
segment 1.122 and the tank segment -1.16. In
comparison, the ten largest companies in
Norway in 2011, ranked by revenue, had an
average debt/equity-ratio of 3.07.
The four segments in the ship-owning industry
have all a debt/equity-ratio below the average
for Norway’s top ten companies.
This indicates that the ship-owning industry in general is less
leveraged than the largest companies in Norway are. The
volatile market in the ship-owning industry may be a reason
for the difference
The debt/equity ratio expresses the degree to which a
business is geared to sustain losses before it affects the
lenders. In a volatile market, the cash flow will have
significant variations, high degree of leverage can be hard to
operate in the stage of a trough.
Miller and Modigliani’s
Propositions
The principal of Miller and Modigliani’s two propositions is
based on a world without corporate taxes. Proposition I states
that it is irrelevant how a firm chooses to arrange its finances.
Propositions
In other words, different capital structure cannot change the value
of the firm and no capital structure is any better or worse than any
other capital structure for stockholders. Cost of capital is also
unaffected by the firm’s capital structure (Ross, Westerfield et al.
2007).
Propositions
Proposition II states that the cost of equity depends on the
required rate of return on the firm’s assets, the firm’s cost of
debt and the firm’s debt/equity ratio (Hillier, Clacher et al.
2011).
Propositions
Miller and Modigliani’s propositions is often referred to as the
traditional financing principle. It argues that the firm’s overall
cost of capital cannot be reduced as debt is substituted for
equity, even though debt appears to be cheaper than equity.
Propositions
When the firm adds debt, the remaining equity becomes
risky and then when the risk rises, so will the cost of equity
capital.
Propositions
According to Ross, Westerfield et al. (2007), Miller and
Modigliani have a convincing argument that a firm cannot
change the total value of its outstanding securities by
changing the proportions of its capital structure.
Propositions
This indicates that managers cannot change the value of a firm by
repackaging the firm’s securities. Though this idea was considered
revolutionary when originally proposed in the late 1950s, the Miller
and Modigliani approach and proof have since met wide acclaim and
been challenged by other theories.
The Static Trade-off
Theory
The theory of capital structure has been dominated by the search for
optimal capital structure where the company is eager to reach an
optimum. Optimums normally require a tradeoff, for example
between the tax advantages of borrowed money and the costs of
financial distress when the firm finds it has borrowed too much
(Shyam-Sunder and C. Myers 1999).
Theory
Optimum varies between companies and finding it involves
advanced calculations and is dependent of the market cycles.
Theory
According to the trade-off model, each firm balances the
benefits of debt, such as the tax shield, with the cost of debt,
such as distress costs. The optimal capital structure for a
company varies, however the debt/equity ratio for asset-
based industries tends to be approximately two.
Theory
The optimal capital structure depends on whom it is going to
benefit. Changes in capital structure benefit the stockholders if and
only if the value of the firm increases. In the presence of corporate
taxes having debt is positive related to the firms value.
A leveraged firm pays less in taxes than the all-equity firm
does. In addition, the value of a leveraged firm is greater than
13 the value of an all-equity firm, because the value of the firm
is the sum of debt and equity. The illustration in figure 1
conveys this example in a simple matter.
Tax deductions on the company’s earnings, due to debt, gives
the company greater profit. Why different companies choose
different capital structures is often a result of the company’s
or the manager’s attitude to debt.
The Pecking order Theory
Although the trade-off theory has dominated corporate
finance circles for a long time,
attention is also being paid to the pecking order theory (Ross,
Westerfield et al. 2007).
According to Shyam-Sunder and C. Myers (1999), the basic
pecking order model, which predicts external debt financing
driven by the internal financial deficit, has much greater time
series explanatory power than a static trade-off model, which
predicts that each firm adjusts gradually toward an optimal
debt ratio.
According to the pecking order theory, changes in
debt/equity ratio are driven by the need for external funds,
and not by reaching an optimal capital structure.
Ross, Westerfield et al. (2007), states that if a firm issues stock, the
firm was likely overvalued beforehand. Opposite, if a firm issues
debt, the stock was likely undervalued. This indicates that timing is
the financial manager’s only consideration in financing issues when
following the terms of the pecking order theory.
The theory of the pecking order provides two rules. Rule number
one; use internal financing, meaning that if the company has capital
it will use this first to finance new investments. Rule number two;
issue the safest securities first. Issue straight debt before issuing
convertibles. In this context, safe means that the decision is not
affected by revelation of a managers’ inside Figure 2 Value of the
firm with and without debt, made by author inspired by Ross,
Westerfield et al. (2007) 14 information. This means that a company
will always use retained earnings before they issue debt and they will
always issue debt before they issue stocks.
Implications to this theory are that there is no target amount
of leverage; each company chooses its leverage based on
financing needs. Second, profitable firms use less debt.
Profitable firms are in less need for financing because they
use generated cash to finance their investments.
Third, companies like financial slack. The pecking order
theory is based on the difficulties of obtaining financing at
reasonable costs. If the company can be ahead of time and
possess capital that they use to fund profitable projects in the
future, this can make the company independent of the capital
markets when a project comes up (Ross, Westerfield et al.
2007). When profit is transferred to equity to finance future
investments, it is unlikely that these companies will pay
dividend.
Propositions
The expected correlations for the Miller and Modigliani
Theory areInterest Rate Level – Do not expect statistically
significant coefficients , Global GDP Growth – Do not expect
statistically significant coefficients , Issuance of bonds – Do
not expect statistically significant coefficients ,Decreased
Share Capital – Do not expect statistically significant
coefficients
Static Trade-off Theory
The static trade-off theory is based on an optimal capital
structure hence, the company is interested in keeping the
debt/equity ratio at the point of maximal value of the
company.
interest rate level is positive correlated with increasing share
capital. When the interest rate rises, financial costs rise. The
cost of selling shares may then be regarded as smaller than
the financial costs related to loans.
If the global GDP growth is low, the companies will probably
have a smaller cash flow and the debt/equity ratio will
increase. To avoid this, the company can increase their share
capital by selling stock.
In other words, with the static trade-off theory, global GDP
growth is assumingly negatively correlated with increased
share capital. Issuance of bonds can be interpreted as a move
to adjust the capital structure.
Issuance of bond could have been done to increase the
debt/equity ratio because they have done or are supposed to
increase share capital. Decreasing share capital might be a
move to adjust the debt/equity ratio, by using equity to buy
shares back to the company.
Decreasing share capital is negatively correlated with increasing
share capital because the actions offset each other. If the company
choose to decrease share capital it is unlikely that they would
increase share 16 capital at the same time. A company should buy
own shares when the stock price is low and sell when it is high. The
expected correlations for The Static trade-off theory are Interest
Rate Level – Positive ,Global GDP Growth – Negative, Issuance of
bonds – Positive, Decreased Share Capital – Negative.
Pecking Order Theory
According to the pecking order theory, managers that adhere
to this financing theory always use internal financing first and
stocks are only sold if the interest rate level makes debt
unattractive.
Assuming that the pecking order theory best reflects the reality, the
expected result in the study, is a positive correlation between
interest rate level and increased share capital and a negative
correlation between the coefficient of global GDP growth.
It is conceivable that growth in the Global GDP leads to
increased cash flow, which in turn gives the opportunity of
internal financing. Not paying dividend is an element
recognized in the pecking order theory.
Instead of paying dividend, the company saves the profit in good times
to finance investments in bad times. The expected correlations for the
pecking order theory are Interest Rate Level – Positive , Global GDP
Growth – Negative , Issuance of bonds – Negative , Decreased Share
Capital – Do not expect statistically significant coefficients .
Offshore
The offshore segment consists of companies that operate an

offshore fleet. Typical vessels for this segment are ATHS, PSV,
MPV and OSCV. These vessels are used to supply platforms,
anchor handling operations, assist in operations, construct
and maintain offshore constructions.
LNG and LPG
Companies in the Liquefied Natural Gas and Liquefied Petroleum

Gas segment is transporting gas. LNG and LPG vessels have the
ability to reduce the volume of the gas by cooling it down. A LNG or
LPG vessel is expensive to build, due to highly advanced tank
system.
Vessels in the bulk segment are shipping dry cargo. The cargo is transported unpackaged in
large quantities. Coffee, coal and shingle are examples of products that are normally shipped
in bulk. The vessels are built for simplicity where the design focus is on cubic capacity, access
to holds and loading equipment (DanishShipFinance 2014).
Tank
Tankers transport liquids in bulk with cargo space consisting

of several tanks (Stopford 2008). The typical cargo is crude oil,
gasoline and diesel. Tankers are often built for a specific cargo
Note that the book value of a firm’s equity does not and specific routes.
always equal the market value. For
example, the book value of a vessel can be 200 m
USD but the actual value of the vessel will
constantly change in accordance to supply and
demand in the market.
Collecting Quantitative
Data
As mentioned, the data used for the thesis is collected from
Oslo Børs, the companies’ webpages and Proff. Oslo Børs is a
database for company data and gives access to annual
financial reports, issued bonds and exchange messages
concerning companies listed on Oslo Børs.
Collecting Quantitative
Data
Proff is a database that presents financial numbers of all Norwegian
corporations, the numbers are provided by Brønnøysundregisteret; a
register that secures order and clarity of the economic
responsibilities in Norway.(Brønnøysundregisteret 2014)
Capital Structure
The companies’ annual financial reports have been used to
get an overview of the capital structure in the companies.
Debt/equity ratio is calculated by dividing debt by equity, the
number is found in the balance sheet of the annual report.
The debt/equity ratios are based on numbers from the 2012
annual reports. The debt/equity ratio for each company
Financial Activity
The company time-line sheet was made to give an orderly
overview of the financial activities the companies have
performed in their presence on Oslo Børs. Information when
the financial 23 activities took place were found at Oslo Børs
NewsWeb in the category of Share Capital Changes/Dividend
Information (NewsWeb 2014). The timeline contains the
following activities ,Increased share capital ,Start point of
bonds ,Decreased share capital ,Dividend payment.
Financial Activity
Several companies offered shares to employees during the 17 years of question. When this
occurs the share capital will increase with a smaller amount of money. This kind of share
capital adjustment is not interesting for the study and to avoid that these adjustments
influenced the results, the lower limit of increased share capital to be registered was set to 10
MNOK.
Interest Rate and Global
GDP Growth
Information about of the interest rate in Norway from 1982-2013 is
gathered from NorgesBank (2014). The global GDP growth for 2012
was collected from the InternationalMonetaryFund (2013). Interest
rate level and global GDP growth are two of six independent
variables in the regression analysis.
Regression Analysis
A regression analysis is a statistic method used to study the
correlation between several variables. In many cases, it is
used to figure out if a variable is changing as a function of
other variables (StoreNorskeLeksikon 2013).
Regression Analysis
The method has dominated the social science in the last
decade because of its advantage in multivariate analysis
where several independent variables are included.
Regression Analysis
At the center of regressions are the relations between two or
more variables, called the dependent variables and
independent variables.
Regression Analysis
The dependent variable, called Y, is on the left side. The right side
consists of independent variables and their corresponding
coefficients. In this study, the dependent variable Y is increased
share capital. On the right hand side, there 24 are six independent
variables; starting with the interest rate in Norway, then the Global
GDP growth, further it is four dichotomous variables related to bond
issuance and decreasing share capital or paying dividend.
Regression Analysis
Logistic regression is used when the objective is to determine
if given factors increase or decrease the probability of an
outcome.
Regression Analysis
Logistic regression is the preferred method when the dependent
variable is dichotomous. In this thesis, the dependent variable has
two outcomes, did or did not increase share capital, hence logistic
regression is the preferred method.
Regression Analysis
The dependent variable is a dummy variable indicated by, Y=0
or Y=1. The goal of logistic regression is a bit different because
the goal is to predict the likelihood that Y is equal to 1 (rather
than 0), given certain values of X.
Regression Analysis
If X and Y have a positive linear relationship, the probability that a
company will have a score of Y=1 (did increase share capital), will
increase as values of X increase. For example, as the interest rate
increases, the probability that Y will be equal to 1 will tend to
increase (Tufte 2000).
Regression Analysis
The mathematical explanation of the applied regression
model is presented below. The following model is the result of
using logit:
Regression Analysis
The coefficients βj has interpretation as the change in log-odds if one unit changes Xj. In this
thesis, it is sufficient to just look at the coefficient, if it is negative or positive and if it is
statistically significant. To convert the Log odds to numbers that are intelligible is
comprehensive and considered not to be necessary when the objective is to look for negative
or positive correlation. Equations are taken from lectures at The Norwegian School of
Economics by Møen (2010), on the topic applied methods.
Several data programs are used to conduct a regression analysis,
JMP is one. JMP is a userfriendly program and sheets from excel
are easily imported. Table 10 illustrates how the variables were
organized in excel sheets before imported to JMP.
Credibility of the Study
To judge the quality of the research design it is important to
pay attention to validity and reliability. Construct validity is
the accuracy with which a case study’s measures reflect the
concepts being studied(Yin 2012).
Internal Validity
According to (Yin 2012) internal validity is determined by showing
the absence of spurious relationships and the rejection of rival
hypothesis. A regression with spurious relationships will incorrectly
give answers that are statistical significant and a high R-squared.
Internal Validity
One possible reason for this is that the variables are
dependent of the same underlying variable. Goodness of fit is
a measure of the validity of the model. R2 measures goodness
of fit, referred to as the explanatory power of the model.
Internal Validity
One possible reason for this is that the variables are
dependent of the same underlying variable. Goodness of fit is
a measure of the validity of the model. R2 measures goodness
of fit, referred to as the explanatory power of the model.
Internal Validity
R2 ranges from zero for no fit and 1 for perfect fit (JMP 2014).
The result of the goodness of fit test is presented later and
the internal validity is decided based on the results.
External Validity
A common concern in case study research is an apparent
inability to generalize from case study findings (Yin 2012). The
external validity is the extent to which the findings can be
analytically generalized to other populations or universe.
External Validity
It is likely to think that the results of this case study can be
generalized to the worldwide ship-owning industry because
the industry is affected by the same market. At the same
time, the interest rate level and access to capital will vary in
different parts of the world and generalizing cannot be done
with certainty.
Reliability
It is important to present the premises for the conclusion to
ensure that the thesis has reliability. It is achievable to
replicate this study and have the same results because it has
been a high level of transparency during the data collection.
Reliability
All data sampled is presented clear and orderly in excel sheets that
can be found in the tables, figures and appendices. All the data
included in the regression analysis is systematically presented in the
timeline, Interest Rate Level sheet and Global GDP Growth Sheet.
Empirical Findings
This chapter includes a presentation and discussion of the results, as well as a presentation of
the outcome. Firstly, the results from the data collection will be presented. Secondly, the
results from the regression analysis will be presented in two levels; a presentation of the ship
owning industry as a whole and the results from the four segments. Finally, the results will be
summarized and compared with the hypothesis.
Results
In the following chapter, the variables included in the research
will be presented. Further, there will be a presentation of
results from the regression analysis and a discussion of the
findings.
The Dependent Variable
Increasing share capital is the dependent variable in the
regression analysis. When and under which condition a
company increases share capital is a financial move that can
indicate a distinction between the three financing theories.
Having increased share capital as a dependent variable makes
it possible to test the hypothesis to a certain extent.
Increasing share capital is the dependent variable in the
regression analysis. When and under which condition a
company increases share capital is a financial move that can
indicate a distinction between the three financing theories.
Having increased share capital as a dependent variable makes
it possible to test the hypothesis to a certain extent.
70% of
the companies increased their share capital during the 16 years.
In three of the segments 70% of the companies increased share
capital, excluding the Offshore segment where only 53,8% of
the companies have increased share capital in the 16 years of
question.
The Independent Variables
Issuance of bonds is included as a variable in the regression
analysis because it is an alternative to increase the share capital
by selling stocks. Issuance of bonds can indicate that the
company prefers not to increase equity.
The variable is an element in the analysis that contributes in test of
the hypotheses. Bonds are secured or unsecured debt where the
issuer pays the buyer interest, called the coupon. The coupon
reflects the interest rate level at the time of issuance.
It is conceivable that issuance of bonds
can
influence financing decisions in the
following quarter, this is why issuance
of bonds is
included in two variables. Fifty six
percent of the companies have issued
bonds in total, 76,9%
have issued bonds in the offshore
segment. In the three other segments
have less than 50%
of the companies issued bonds. Twenty
six % of the bonds are secured either by
negative
pledges, pledge or solidary debtors.
The value of a bond is fluctuating and it is assumed that this can

influence the decision whether the company should or should not increase share capital.
Issuance of bonds is represented in two of the independent variables; if the company issued
bonds in the current quarter and previous quarter.
One way of decreasing share capital is by buying back shares or pay dividend. Paying dividend
is interpreted as decreased share capital because the company pays dividend instead of
transferring profit to equity. It is not expected that any company increases and decreases
share capital during the same period.
For example, a company would normally not pay
dividend if the share capital was increased in the previous quarter. Decreasing share capital is
relevant when testing the hypotheses and is for this reason included in the regression analysis.
Fifty-one of the companies either paid dividend or increased share capital during the period.
The bulk segment stands out, 75% of the companies have done one or both moves. The tank
segment however, is found at the other end of the scale with only 28,6%
Interest rate is crucial for companies when issuing debt or bonds. High interest rates result in
expensive loans and it is assumed that companies will consider increasing the share capital
when the interest rate exceeds a certain level.
The bulk segment stands out, 75% of the companies have done one or both moves. The tank
segment however, is found at the other end of the scale with only 28,6%
Interest rate is crucial for companies when issuing debt or bonds. High interest rates result in
expensive loans and it is assumed that companies will consider increasing the share capital
when the interest rate exceeds a certain level.
Hence, the interest rate level is taken into
consideration to check if it is statistically significant correlated to the
activity of increasing
share capital.
If the interest rate coefficient correlates with the dependent variable and is
statistically significant, there are two alternative outcomes:
- Positive correlation – As the interest rate rises, the probability of increased
share
capital will rise
- Negative correlation – The probability of increased share capital lowers with
decreasing interest rate.
The global gross domestic product is measuring the growth the world is experiencing every
year. Global GDP growth is considered in the thesis because it is reasonable to think that
growth in the world will influence the companies’ cash flow, including ship-owning companies,
which is the case in this study. In times with increasing global GDP growth, it is likely that a
company’s cash flow rises.
If a company’s cash flow is rising, the company will have the opportunity
to finance investments by using internal funds. Opposite, if the world is
experiencing negative or low GDP Growth, this might influence the cash
flow negatively. The growth in the ship-owning industry is assumed to
be proportionally to the global GDP growth.
As for the Interest Rate Level, there are two alternative outcomes for
the global GDP growth coefficient, either positive or negative. The
following is expected:
- Positive correlation; the probability of increased share capital rises with
Global GDP Growth
- Negative correlation; the probability of increased share capital lowers
when Global GDP Growth rises. When there is a negative growth, the
probability of increased share capital increases.
Regression Analysis
The variables have been explained and justified and the time has come to present and discuss
the results from the regression analysis. A regression analysis investigates if there are any
correlations between the dependent and the independent variables as explained in chapter
5.3. The next chapter includes a presentation of the results, first the results from the industry
and then from the four segments.
The Industry
The Parameter Estimates is a table of the coefficients, their standard
error and if the coefficient is statistical significant. The results from
the regression analysis of the industry are presented below in table
11. Note that the red numbers are considered unstable; an
explanation of the instability will be discussed later.
The interest rate level coefficient is statistically
significant and indicates that the probability
of increased share capital increases with the
interest rate level. Interest rate is an important
factor when considering bank loan or bonds; if
the interest rate is high, the company might
see financial stress as a higher price to pay than
losing ownership of the company. Loans turn
out to be a less attractive financing method
when the interest rate is on a high level and the
companies can more easily consider financing
investments with share capital.
The Industry
The independent variable Global GDP Growth seems to be negatively correlated with the
dependent variable. This is not statistically significant but it is still of interest to comment the
observation. A negative correlation tells us that as the global GDP growth decreases, the
probability of increased share capital rise.
The Industry
Lower GDP growth can lead to reduced cash flow. Lower cash
flow in a company can lead to less private equity in the
company and internal financing is no longer an option for the
company.
The Industry
Lower GDP growth can lead to reduced cash flow. Lower cash
flow in a company can lead to less private equity in the
company and internal financing is no longer an option for the
company.
The Industry
Issuance of bonds are negatively correlated to increased share capital but not statistically
significant. The regression analysis points out that both the pecking order theory and the Miller and
Modigliani’s propositions can illustrate the financial strategies in the ship-owning industry.
The pecking order theory hypothesis seems to fit the actual results at several points.
The Industry
Also, it 32 is important to mention that only the correlation
between Y and X1(Interest Rate Level) is statistically
significant. However, the results give interesting numbers
pointing at the pecking order theory.
The Industry
The interest rate level has a positive correlation to increased share capital. This means that as
the interest rate level rises, the companies will consider acquiring capital from the capital
markets rather than obtaining debt. The cost of selling shares seems to be regarded as cheaper
than the cost of financial distress when the interest rate level rises.
The Industry
The other variables do not seem to have an impact on whether the
company will or will not increase share capital. Summarized, the interest
rate level is positive correlated to increased share capital. Global GDP
Growth, issuance of bonds in both current and previous quarter and
decreased share capital in previous quarter are all negative correlated.
The Industry
The last variable, decreasing share capital in current quarter is
unstable and considered zero. If the results were statistically
significant, the results from the regression analysis would
have indicated that the pecking order theory best reflected
how ship-owning companies acts in financing decisions. In
fact, the results are not statistically significant and to
conclude based on the coefficients alone is not sufficient.
The Industry
The last variable, decreasing share capital in current quarter is
unstable and considered zero. If the results were statistically
significant, the results from the regression analysis would
have indicated that the pecking order theory best reflected
how ship-owning companies acts in financing decisions. In
fact, the results are not statistically significant and to
conclude based on the coefficients alone is not sufficient.
The Industry
This underpins Miller and Modigliani’s propositions; capital
structure makes no difference in the valuation of a firm. The
results may signalize that companies in the shipowning
industry pick the financing source they consider cheapest at
the time, regardless of capital structure
The Industry
The explanatory power of the model is expressed by R2. The value
indicates if the variables fit the regression model. R2 is a number
between one and zero and a R2 of 1 means that the model perfectly
explains the reality. R2 for the regression analysis of the industry is
0,0280 and is considered insufficient.
The Industry
R2 is very small in this study, indicating that the variables
included in the analysis do not fit the model. Lack of fit can
also signalize that the companies, supporting Miller and
Modigliani’s propositions once again, the companies equally
rate all of the financing alternatives.
The Segments
the cycles in the tank-segment are more volatile than the
offshore segment as a result of high activity in the North Sea.
Several companies in the offshore segment operate in the
North Sea.
The Segments
Because of constant operations, the offshore-segment will be
perceived as relatively stable with small fluctuations while the
three freight segments might experience larger fluctuations
because of variation in supply and demand.
The Segments
Different financing may be expected because of varying fluctuations
between the segments. The results from the regression analysis
were not statistically significant still, it is interesting to check if the
coefficients are positive or negative. The lack of statistical
significance may be due to fewer observations in the segments than
in the industry; in addition, few observations occur at the same time
as the event of increased share capital.
Table 12 was created on the basis on parameter estimates
tables from the segments regression analyses, yet the
numbers were excluded because of the lack of statistical
significance.
The Segments
In the offshore segment, the variables concerning dividend and
decreased share capital are unstable. This can be interpreted as no
impact on the dependent variable. The four remaining 34
coefficients are negative and positive as in the results for the
industry. For the offshore segment, the coefficients seem to fit the
hypothesis of the pecking order theory. Lack of statistical
significance leads us to the same outcome as for the industry; the
offshore segment seems to adhere to Miller and Modigliani’s
propositions.
The Segments
The offshore segment has
experienced huge growth since the technological development has moved towards subsea
construction, where high-tech vessels play a key role in the performance of the work. It is
reasonable to think that companies will rather use profit to finance new investments than
paying dividends to shareholders.
The Segments
Further, the LNG and LPG segment starts off similar to the offshore segment with respectively
positive and negative value on the first and the second variable. The following three variables
turned out to be unstable while the last one is negative correlated. Compared to the
hypothesis, the results from the LNG and LPG segment seem to be close to the static trade-off
theory where the goal is to reach an optimal capital structure. Still, the coefficients are not
statistically significant and as for the offshore segment, the results indicate that Miller and
Modigliani’s propositions are applicable here as well.
The Segments
For the bulk segment, the coefficients of the first two
variables are negative while the four remaining are unstable.
According to the hypothesis, this cannot be related to the
static tradeoff theory or the pecking order theory. As for the
previous segments, Miller and Modigliani’s propositions seem
best to illustrate the financing methods in the bulk segment.
The Segments
For the bulk segment, the coefficients of the first two
variables are negative while the four remaining are unstable.
According to the hypothesis, this cannot be related to the
static tradeoff theory or the pecking order theory. As for the
previous segments, Miller and Modigliani’s propositions seem
best to illustrate the financing methods in the bulk segment.
The Segments
The immediate thought when looking at the coefficients in the tank
segment is that it does not meet the expectations from the
hypothesis of the pecking order or the static trade-off. The results
are not statistical significant and it is reasonable to say that the tank
market has a financing strategy that is best explained by Miller and
Modigliani’s propositions.
The Segments
When observing the coefficients isolated, one can see a
difference when comparing the results from the industry and
from the four segments. The LNG and LPG segment differs
from the other segments, due to the interest rate level
coefficient. The coefficient is negatively correlated to
increased share capital, which is opposite of both the industry
and the other segments.
The Segments
The difference in the bond coefficients appear in the offshore
segment, where issuance of bonds, in both current and previous
quarter, are negatively correlated to increased share capital,
indicating. Decreasing share capital in previous quarter is the
coefficient that 35 varies the most within the segments, LNG and
LPG segment is negatively correlated and tank segment is positively
correlated to increased share capital.
The Segments
Eventually, the final answer seems to be that there is no correlation
between the dependent and the independent variables, due to lack
of statistical significance. No correlation signalizes that the six
independent variables do not have an impact on whether the
company increases share capital or not. Hence, it is likely to think
that the companies’ valuation of the firm is independent from the
choice of financing method.
The Segments
Summarized, as long as the coefficients are not statistically significant it is not possible to
conclude based on the coefficients. The results can either be explained by no correlation
between the variables, or that there is a lack of consistency in the dataset so that any true
correlation is hidden. As for the industry, Miller and Modigliani’s Propositions seems best to
reflect the companies financing decisions in the four segments.
Explanation of Unstable
Variables in JMP
JMP identified the dichotomous independent variables as unstable in parts of the regression
analysis. According to JPM user service(JMP 2014) this is a common problem, it can possibly
be a result of sparse data. In this setting sparse means that there are few or no repeats of each
setting of the covariates. It is possible that the regression analysis for the segment where n
was smaller than in the regression analysis for the industry, has too few observations. This can
explain why the dichotomous independent variables are unstable. If there are no
observations, they will turn out as zero. In table 9, the unstable variables are marked with red.
In table 10, the unstable and zeroed variables are replaced with the symbol ~.
Alternative Reasons and
Weaknesses
The results presented above contribute to the final conclusion. Still it is important to consider
other possible factors that may have had an impact on the analysis. Alternative reasons and
weaknesses are the topic of this chapter.
Including Numbers in the
Analysis
The study determines if there were any financial activities in the companies. How
much increase or decrease of share capital and the actual size of the issued bond
on the other hand, were not questioned. The result could possibly turn out
different if the numbers were taken 36 into account. Including these numbers
however, would probably not lead to major changes, but instead expand the
scope of the study and increase the workload.
Including Numbers in the
Analysis
The study determines if there were any financial activities in the companies. How
much increase or decrease of share capital and the actual size of the issued bond
on the other hand, were not questioned. The result could possibly turn out
different if the numbers were taken 36 into account. Including these numbers
however, would probably not lead to major changes, but instead expand the
scope of the study and increase the workload.
Individual Benefits
Companies have individual benefits in the market such as
banking relations, trustworthiness in the capital markets and
ownership structure. Such benefits are not quantifiable and
are probably important factors when companies acquire
capital for investments. It is a weakness that these factors are
not considered in the study.
Capital Requirements
It has been a higher frequency in issuance of bonds since 2008 (Appendix I). It is likely to think
that the recession resulted in stricter capital requirements for companies issuing debt. If the
company does not have required capital to issue debt, can bonds be an option to cover the
equity requirement. Higher capital requirements may have decreased the number of loans
issued, thus more companies search for funding in the capital markets.
Bonds
The recession in 2008 introduced high equity requirements from lenders. This might have
affected the companies in how to acquire capital. It is visual that there was obtained more
bonds after the recession in 2009 in the timeline in appendix 1. One reason may be that the
bankers increased their capital requirements. One way to fulfill the requirements is to issue a
bond and use the money to cover the capital requirements.
Bonds
It is important to mention that expired bonds are not taken into account in this thesis. This is
because Oslo Børs only has a register for current bonds, which leaves expired bonds out of the
scope. Additionally, Ross, Westerfield et al. (2007) states that most trading in bonds takes
place over the counter, trades on the OTC-markets are not registered at Oslo Børs. This makes
the bond market less transparent, often not possible to observe. The thesis is based on data
from Oslo Børs and does not include bonds traded on the OTC-market; this fact may have a
weakening impact on the results from the regression analysis.
Bonds
The Secured bonds generally provide lower returns than unsecured bonds. Securing the bond
is often done to lower interest payments. The bond can be secured by the pledge of a special
asset or a revenue stream. Seventy four percent of the bonds issued by the companies in this
study are unsecured. This may indicate that the companies do not have any assets or revenue
37 stream to secure. Assets used as security cannot be sold in the securitization period, which
reduces the flexibility of the company.
Bonds
Flexibility is a positive trait in a volatile market where
companies need to be dynamic; this may be the reason for
the high percentage of unsecured bonds. The cost related to
contracts may exceed the benefits of securing a bond.
Bonds
The amount of money the company saves by securing the bond
and losing flexibility, may not compensate for the cost related to
the contract. In this study, it has not been taken into account if the
bonds are secured or not, hence, this is considered as a source of
error.
Changes in the Markets
Times are constantly changing the markets and the ship-owning industry has probably gone
through a change as well. Changes in the ship-owning market may have resulted in an analysis
that does not perceive consistency between the variables. The analysis might have given other
results with more consistency if it covered a shorter time period.
Dynamic Market
The study do consider some of the dynamics that exists in the financial markets by including
financial activities in previous quarter as variables. Still, financial activities are most likely
influencing financing decisions in a longer period than one quarter ahead. Including more
variables in the regression analysis to cover such dynamic effects could have improved the
study.
Goodness of Fit
The R2 of the model resulted in a very low number, which means
that the explanatory power of the regression model is not satisfying.
R2 close to zero signalize that other variables might explain better if
a company increases share capital or not. One way to improve the
models goodness of fit is to replace the variables with other
variables by a trial and error session. This is beyond the scope of the
thesis. An R2 closer to one could improve the internal validity of the
thesis.
Taxes and Distress Costs
Miller and Modigliani’s propositions are based on a world without taxes and distress costs.
The companies operate in a world where taxes and distress costs is a concern; these factors
might affect ship-owners in a greater extent than any of the selected variables. The fact that
the study do not examine the impact from taxes and distress costs is considered a weakness.
Conclusion and Further
Work
The objective of the thesis was to find out if any of the three defined financing theories are
recognized in ship-owning companies’ financing strategies. A multiple-case study of 27 ship
owning companies listed on Oslo Børs has been conducted and the financing theories have
been the foundation to discuss the empirical findings in light of the research questions.
Introduction
Significant developments in bank
shipping finance occurred the
subsequent decades. The world
economy growth together with the
need for larger cargo capacities
elevated the amount of requisite
capital investment to levels
beyond the ability of private equity
finance
254
Introduction
Bank shipping finance began to
grow in importance in the 1960’s
with owners in possession of oil
charters from major oil companies
of sufficient duration to cover a
substantial part of the repayment
period.
255
Introduction
To date, with an estimated require-
ment 1 of $207 billion over the
six years 2002-2007 [M. Stopford,
2002], owners have a hard-time
satisfying the industry’s appetite.
The reason for this is that we are
going through a convalescence
period.
256
Introduction
Ship financing has always evolved in consonance
with the commercial market’s trends. As illustrated
in Figure 1, about shipping industry, bankers and
owners have had to deal with many changes in the
commercial environment over the last 50 years.
257
Introduction
There has been a ‘Golden Age’ of
growth in the 1960’s; a ‘bubble’ in
the 1970’s followed by an oil crisis
and a deep recession in the 1980’s.
258
Introduction
Finally the 1990’s were extremely
volatile though less life threatening.
[M. Stopford, 2002] Perhaps the most
interesting point is that with each of
these commercial developments, the
characteristics of finance changed.
259
Introduction
The above graph, illustrates the
world Demand for cargo ships and
the world Supply, which is the
world fleet size. What is interesting
is the evolution of finance.
260
Introduction
Cash: In the 1950’s debt was regarded as a sign of
weakness so the established Greek families along
with European ship-owners, stuck firmly to a policy
based on retained earnings. There was no real need
to borrow, as cash was plenty; the only problem was
finding profitable investments.
261
Introduction
Charter back: As the European and Japanese economies
started to expand in the 1950’s and 1960’s, trade grew
rapidly and it was then that cash would not work. Large
corporations with growing cargo volumes desperately
needed bigger ships and were willing to give long-term
charters to get them. Independent owners used these
charters as security to finance new buildings, which they
registered under low-cost flags of convenience.
262
Introduction
Bankers, who now had access to the expanding
Eurodollar1 market, were happy to offer very high
advances against the security of a time-charter and
the mortgage of a ship.
By the end of the 1960’s about 80% of the
independent tanker fleet was on time charter and
highly leveraged. [M. Stopford, 2002]
263
Introduction
Bubble: As trade grew faster in the
late 1960’s owners found time
charters restrictive and started
ordering ships on their own
account to enjoy the profits of spot
market booms. Unfortunately,
bankers considered ship
mortgages to be sufficient
collateral and disregarded time
charters.
264
Introduction
It was this change in banking strategy
that broke the link between Supply
and Demand. The effect was
disastrous and according to Dr Martin
Stopford, we are still living the
consequences 25 years later. The
figure shows orders escalating to 120
m. dwt in 1973 – a genuine bubble. The
combination of over-production and
collapsing demand
265
Introduction
Distress: In 1980’s the way the
world banking community thinks
about shipping risk, changed com-
pletely. A visible indicator of the
crisis was the volume of modern
tankers in lay up representing 25%
of the fleet in 1984.
266
Introduction
Lack of prudence in the 70’s
expressed its consequences in the
1980’s :
● During the four years 1983 to
1987 borrowers defaulted on
$10 billion worth of shipping
loans.
267
Introduction
● The amount written-off the books by commercial banks and
leasing companies because of defaults by shipping
companies during this period was between $3 billion and $4
billion.
● Experienced ship financial institutions wrote-off 1-5% of
total commitments each year and others as much as 10%.
Several banks disposed of their whole portfolio and
dissolved all links with shipping finance.
268
Introduction
● Three Japanese banks wrote-off $700 million
loans to a single shipping company.
As these events unfolded, banking officers faced
problems for which a ca- reer in commercial banking
could hardly have prepared them. Bankers were edu-
cated in the risks of financing ships in the most
dramatic way possible
269
Introduction
Convalescence: It is how the following period is
known. In the 1990’s bankers and owners had to
practice ‘rehabilitation’. No one knew where needs
for new investment would be satisfied from.
Alternative techniques were ‘taken out of the
cupboard, dusted off and put into practice’.
270
Introduction
Ship funds, IPOs, Bonds, Leasing schemes, private
placements, venture capital and shipbuilding credit
accounted for more than 60% of the capital raised to finance
90’s investments.
In fact, through the 90’s a much sophisticated group of
bankers has emerged from the ship finance business, all
having tremendous experience of the years behind them.
271
Introduction
Out of the methods used in the 90’s some
were a success others failed. It is now that
the shock’s impact has faded and the
finance landscape is blooming again, that
investment is showing its new face. The old
family-owned shipping company is leaving a
new breed of managers to continue its path.
On the other hand, bankers equipped with
credit risk awareness and modern theory
models are here to do business in a much
more complicated framework.
272
The Demand and Supply Side of Shipping
Markets
• Among economists,it is considered a common wisdom
that shipping markets are the markets where the classic
“pig-cycles” can be observed and analyzed
parexcellence since not only the supply side and the
demand side are relatively well-documented, but also
the market results (the freight rates or time charter
rates). It is common understanding that the demand
side of the markets is represented by the need for
freight transport, whereas the supply side consists of
the ships that deliver the commodities. Both sides meet
on the freight market, where the service “transport” is
exchanged most commonly against US$. Stopford
(2009) lists five elements influencing the development
of either one of the sides of this market (see the picture)
• The Demand Side
The seaborne transport of commodities is regularly documented in
statistical publications of leading brokers, NGOs or research
institutes. Quite often though, these statistics are based on
estimates as most publications reporting on international trade
flows do not worry about the volume of goods transported as much
as about their value. Therefore, the figures published on global
seaborne transport volumes sometimes differsignificantly from
source to source and are adjusted several times
The Demand and Supply Side of
Shipping Markets
Among economists, it is considered a common

wisdom that shipping markets are the markets
where the classic “pig-cycles” can be observed and
analyzed par excellence since not only the supply
side and the demand side are relatively well-
documented, but also the market results (the freight
rates or time charter rates).
275
The Demand and Supply Side of
Shipping Markets
It is common understanding that the

demand side of the markets is represented
by the need for freight transport, whereas
the supply side consists of the ships that
deliver the commodities.
Both sides meet on the freight market,
where the service “transport” is exchanged
most commonly against US$. Stopford
(2009) lists five elements influencing the
development of either one of the sides of
this market (see Fig. 1.1).
276
The Demand Side
The seaborne transport of commodities is regularly
documented in statistical publications of leading
brokers, NGOs or research institutes. Quite often
though, these statistics are based on estimates as
most publications reporting on international trade
flows do not worry about the volume of goods
transported as much as about their value.
277
The Demand Side
Therefore, the figures published on
global seaborne transport volumes
sometimes differ significantly from
source to source and are adjusted
several times. According to
Stopford (2009), the development
of the demand side is affected by:
278
The Demand Side
● The world economy, as a
higher (or lower) economic
output regularly requires a
higher (or lower) input of
resources and also generates
more (or less) merchandise
available for foreign trade.
279
The Demand Side
● Seaborne commodity trades, which may be subject to
seasonal cycles in the short run (examples can be found
in the crude oil, grain, or container trade) and which on
may evolve in the long run, resulting from:
○ changing industrial demands
○ changing transport policies
○ depletion or discovery of resources
○ relocation of processing plants.
280
The Demand Side
● Average haul and ton miles, being the more
precise measurement of the demand side than the
pure information about the volume of shipped
goods as the distance over which the commodities
are transported can vary widely and often demand
peaks (resulting in a higher volume) have to be
satisfied using more distant suppliers (generating
an even larger impact on the ton miles).
281
The Demand Side
● Random shocks like, wars,
economic downturns, natural
disasters, which can intensify
the impact of seasonal or
economic cycles or mess with
the average haul.
282
The Demand Side
● Transport costs, as the general theory of
maritime trade suggests that trade takes place if
a commodity can be bought more cheaply in a
different country, the ever declining cost of
transport (resulting from the economies of scale)
in itself has helped to boost maritime trade
(Stopford 2009, pp. 140–149).
283
• The World Economy
as a higher (or lower) economic output regularly requires a
higher (or lower) input of resources and also generates more
(or less) merchandise available for foreign trade. Hence,
both the business cycle as well as the trade development
cycle (nations going through a period of transition froma
traditional society to a society of mass consumption and,
hence, develop different consumption/production patterns
of raw materials or merchandise) have a major impact on
the demand for seaborne commodity transport.
Seaborne Commodity Trade
which may be subject to seasonal cycles in the short
run (examples can be found in the crudeoil, grain,or
container trade) and which on may evolve in the
long run, resulting from:
• changing industrial demands
• changing transport policies
• depletion or discovery of resources
• relocation of processing plants.
•
Average Haul and Ton
being the more precise measurement of the demand
Miles
side than the pure information about the volume of
shipped goods as the distance over which the
commodities are transported can vary widely and
often demand peaks (resulting in a higher volume)
have to be satisfied using more distant suppliers
(generating an even larger impact on the ton miles).
• Transport Costs
as the general theory of maritime trade
suggests that trade takes place if a
commodity can be bought more cheaply in
a different country, the ever declining cost
of transport (resulting from the economies
of scale) in itself has helped to boost
maritime trad
•
The Supply Side
The supply side of the markets is represented by the ships that carry the
cargoes. The information about the historical development of the fleet is
quite accurately documented in theleading fleet
registers,forexample,the Clarksons Registerorthe databases of IHS
Fairplay.The future developmentof the fleet can in the short term be
deviated from the orderbook of the yards and assumptions on likely
scrapping activity although the financial crisis of 2008/2009 has shown
that cancellation, slippage, or conversion of orders can play a major role
in the short run.
The Supply Side
The supply side of the markets is
represented by the ships that carry
the cargoes. The information about
the historical development of the
fleet is quite accurately
documented in the leading fleet
registers, for example, the
Clarksons Register or the
databases of IHS Fairplay.
289
The Supply Side
The future development of the fleet can in the short
term be deviated from the orderbook of the yards
and assumptions on likely scrapping activity
although the financial crisis of 2008/2009 has shown
that cancellation, slippage, or conversion of orders
can play a major role in the short run. According to
Stopford (2009), the supply side is affected by:
290
The Supply Side
● The world merchant fleet,
contracting and expanding in
cyclical movements of up to 20
years, and bringing about new
ship types and designs
eventually while phasing out
older designs or vessel types.
291
The Supply Side
● The fleet productivity, which may vary
depending on the use of the vessel. The effective
transport capacity each vessel can provide
during a given period of time is a function of the
speed of the vessel, the time the vessel is caught
up in the cargo handling procedures as well as
the regular or non-regular maintenance.
292
The Supply Side
● The shipbuilding production,
being a cyclical industry, where
a time span between the
placement of the order and the
actual delivery of the vessel can
range up to 4 years.
293
The Supply Side
● Scrapping and losses, which are the counterpart
to the shipbuilding production by reducing the
fleet capacity. While age is the primary factor
driving the demolition of the vessels, there are
other factors like the market prospects, scrap
prices, financial situation of the owners, etc.
which play a role in the decision whether to
scrap a vessel or not
294
The Supply Side
● The freight revenue, being probably
the most important element driving
the supply side. In the long run, there
seems to be an evident correlation
between the earnings of a fleet
segment and the amount of
investment that is taking place in this
particular market. In the short run, the
supply-side reacts to higher freight
revenues by speeding up the operation
and thus delivering more trading
capacity (Stopford 2009, pp. 151–160).
295
The Supply Side
From the viewpoint of a maritime economist aiming
to analyze a shipping market, the most interesting
perspective though would be to look at the
competitive environment of a certain type of vessel.
This analysis has become more complicated or
easier in the second half of the past century –
depending on one’s perspective.
296
The Supply Side
Before the 1950s, the majority of
seaborne trade would be
transported on liner or tramp
vessels of often equivalent sizes
and designs and, hence, the
tonnage could generally be
switched between trades.
297
The Supply Side
Resulting from this as well as from
the introduction of the container,
the highly specialized shipping
markets we are facing today have
evolved. Those shipping markets
offer individual vessel designs,
charterers, and port equipment
(Stopford 2009).
298
The World Merchant Fleet
• contracting and expanding in cyclical movements of
up to 20 years, and bringing about new ship types and
designs eventually while phasing out older designs or
vessel types.
• The Fleet Productivity
which may vary depending on the use of the vessel. The
effective transport capacity each vessel can provide during a
given period oftime is a function of the speed of the vessel,
the time the vessel is caught up in the cargo handling
procedures as well as the regular or non-regular
maintenance. All these elements can change overtime within
vestment in handling technology or changing demand
patterns of the ship buyers.
The Shipbuilding Production
• being a cyclical industry, where a time span between the placement of the
order and the actual delivery of the vessel can range up to 4 years.
Scrapping and Losses
• Which are the counter part to the shipbuilding production by
reducing the fleet capacity. While age is the primary factor
driving the demolition of the vessels,there are other factors
like the market prospects, scrap prices, financial situation of
the owners, etc. which play a role in the decision whether to
scrap a vessel or not.
The
• being probably the Freight
most Revenue
important element driving the
supply side. In the long run, there seems to be an evident
correlation between the earnings of a fleet segment and the
amount of investment that is taking place in this particular
market. Intheshortrun, thesupply-sidereacts to higher freight
revenues by speeding up the operation and thus delivering
more trading capacity.
World Seaborne Trade and Merchant Fleet
Development
• Whilst some figures related to 2011 are still estimated
and revisions of cargo handling statistics are a regular
phenomenon in the runner-up year, it seems that the
total amount of cargo trade has reached a volume of
9.1bn tons and is headed for the 10bn ton milestone in
the near future. As slightly more than 70% of the entire
seaborne trade (see picture on next slide) are raw
materials or energy sources (see Table on next slide)
Total seaborne trade by major
loading categories. Source: ISL 2012
based on Clarksons Research
Trends
• Traditional Bank Dept
in Ship Finance
Conventional ship financing deals with traditional banks
have now become few and far between.
Loan volume for syndicated marine lending was estimated
by Dealogic to be around $50bn in 2016, a significant
decrease from the loan volume of $120bn seen in 2007.
• A number ofTrends
the ship finance banks that historically
in Ship Finance
dominated the market, particularly the European banks,
have been announcing their intention to exit shipping by
actively marketing and selling their shipping portfolios or
allowing existing loans to amortise and not taking on new
business.
• Trends in Ship Finance
Although this has been triggered by the financial crisis, there
are other factors affecting the desire of the banks to shrink
their shipping portfolios. These factors include the increasing
regulation and scrutiny faced by the European banks,
particularly as a result of the Basel regulations and following
the substantial losses made by these banks in the shipping
industry over the course of the last few years.
• Alternative sources of financing
Following the substantial reduction in the availability of financing
from traditional banks, shipowners are increasingly having to turn
to alternative financing sources. This is particularly the case for
small to medium-sized shipowners, as traditional lenders are
generally focusing on larger shipping clients due to regulatory and
risk management requirements.
Alternative• As
sources of financing
a result of this, shipowners are now
becoming increasingly interested in
considering structures such as high-
yield bonds, convertible debt, capital
and operating leases, as well as
preferred equity structures.
• Alternative sources of financing
The last few years have seen some of the larger players within
the shipping market turning to the capital markets in order to
meet their funding requirements. Many of these transactions
have involved the US and Norwegian capital markets, with the
Norwegian bond market being seen as particularly favourable
for shipping assets.
Alternative sources of financing
• Export credit agencies (ECAs) have been common participants in the ship
finance industry in recent years, either via direct lending through bilateral
transactions or co-financings, or through guarantees and insurance policies.
• Private equity entered the shipping industry following the
global financial crisis and has prompted a great deal of
discussion around its long term role in shipping.
• Many private equity funds initially entered into joint ventures
with shipowners. Recently, however, we have seen that a
number of these funds are more interested in buying loans
from traditional banks, at a large discounts, in order to see
immediate profits.
• Along with these more traditional private equity players, a
number of new alternative financing outfits have recently
entered the market. These new entrants are targeting small /
medium-sized shipowners and are directly lending to these
companies through primary or, more typically, mezzanine
financing.
• Alternative finance tends to come with a higher price tag, so
it is often not as attractive to shipowners as traditional bank
debt. However, alternative capital providers may be long-
term players within the shipping industry particularly if
traditional commercial lenders are not be able to re-enter the
industry in the medium term due to the increasingly stringent
regulatory environment.
• Alternative structured capital providers are typically
interested in creative investment structures which will often
involve leasing structures and preferred equity as well as
more traditional debt structures.
• As asset values gradually rise, banking regulation becomes
ever more stringent and new participants enter the market
every sub-sector of the ship finance market, across banks,
funds and individual investors, will continue to feel the impact
of these changes, and no doubt be encouraged to evolve
further.
Dry Bulk Shipping
Markets
● Stopford (2009) defines bulk
commodities as cargoes which
are carried in bulk carriers. Their
common denominators are that
they travel in large quantities
and their physical attributes
allow for easy (automated)
handling.
319
Dry Bulk Shipping
Markets
According to figures from
Clarksons Research in the year
2011, roughly 3.6 bn tons have
been transported on the dry bulk
shipping markets. The volume
comprises of the major bulks: iron
ore, coal, and grain as well as
bauxite/alumina and phos- phate
rock.
320
Dry Bulk Shipping
Markets
The remaining third of the dry bulk trade is
composed of a broad mixture of agricultural
products, forest products, steel products as well as
non-ferrous metal ores or scrap but also cement or
fertilizers. These commodities typically are required
in smaller quantities by the importing industries and
typically show a higher value per ton.
321
Dry Bulk Shipping
Markets
This changed radically around
2002/2003, when China, already
back then the largest producer of
steel, massively increased its
volume of iron ore imports at a
pace that was underestimated by
the largest parts of industry
observes.
322
Dry Bulk Shipping
Markets
According to figures from IHS Fairplay, this unprecedented
ordering boom has led to the dry bulk fleet surpassing the
tanker fleet as the largest segment of the entire world
merchant fleet, reaching a capacity of 602 M dwt early in
2012. The capacity growth of 17.1 % in 2010 and 14.8 % in
2011, respectively, has even surpassed the long term
average capacity growth of the rapidly expanding container
fleet, which grew by 11.5 % over the last 20 years
323
Dry Bulk Shipping
Markets
Whilst having been notoriously undersupplied with tonnage
during the years 2003–2007 and throughout most of 2008
(until the start of the global recession), the supply-demand-
balance on the dry bulk shipping markets has developed in
favor of the shippers in recent years, leaving shipping
investors with relatively poor earrings and – resulting from
the still filled orderbook early in 2012 only with medium-
term hopes for a sustained recovery.
324
Dry Bulk Shipping
Markets
During periods of fundamentally
oversupplied markets, it is not
uncommon for freight rates to
edge up sharply, as tonnage on the
spot markets may be tight
occasionally, resulting from
unforeseen demand spikes.
325
Dry Bulk Shipping
Markets
This has been observable, for example,
late in 2011, when Chinese steel-mills
stockpiled large amounts of iron ore,
sending the Baltic Dry Index and
especially capsize earnings to relatively
high levels but having only a modest
impact on the longer- term time charter
earnings, which incorporate the future
expectations of the market participants –
the latter ones being quite bearish
recently.
326
Dry Bulk Shipping
Markets
Although the longer lasting 1 year time-charter
rates regularly smoothen out the volatility of the
spot-market, time charter rates are quite volatile
too. In the case of bulk shipping time charter-
rates though, the volatility of the nineties is
dwarfed by the scaling required by the 2007 and
2008 spike in earnings
327
Dry Bulk Shipping
Markets
During periods of fundamentally
oversupplied markets, it is not
uncommon for freight rates to
edge up sharply, as tonnage on the
spot markets may be tight
occasionally, resulting from
unforeseen demand spikes.
328
• Liquid Bulk: “The Tanker Markets
When brokers or market reports discuss “the tanker markets”,
they are typically just referring to two particular trades, one being
crude oil, one being the oil products trade. Whilst it is true that
chemicals and liquefied petroleum gasses or liquefied natural gas
or even juices, wine, or beer may travelin vessels referred to as
‘tankers’, these latter vessels are operating in a different and
segmented market with virtually zero overlap.
• After initially having been transported only as refined products,
the crude oil transport soared in the 1950s, 1960s, and early in the
1970s. After the 1970s recession and oil price shock, the seaborne
crude oil trade fell sharply but has recovered since then and
stands—with some distance to the iron ore trade left— as the
largest individual commodity being shipped in bulk.
Liquid Bulk: “The
Tanker Markets”
When brokers or market reports discuss “the tanker
markets”, they are typically just referring to two
particular trades, one being crude oil, one being the oil
products trade. Whilst it is true that chemicals and
liquefied petroleum gasses or liquefied natural gas or
even juices, wine, or beer may travel in vessels referred
to as ‘tankers’, these latter vessels are operating in a
different and segmented market with virtually zero
overlap.
330
Liquid Bulk: “The
Tanker Markets”
After initially having been transported only as refined
products, the crude oil transport soared in the 1950s,
1960s, and early in the 1970s. After the 1970s recession
and oil price shock, the seaborne crude oil trade fell
sharply but has recovered since then and stands—with
some distance to the iron ore trade left— as the
largest individual commodity being shipped in bulk.
331
Liquid Bulk: “The
Tanker Markets”
Early in 2012, the capacity of “the
tanker fleet” has surpassed the
“half-a-billionmilestone”, the
relatively rapid expansion that
becomes noticeable around the
year 2004 is only partly
attributable to the increased
demand dynamics of the emerging
Asian economies.
332
Liquid Bulk: “The
Tanker Markets”
When brokers or market reports discuss “the tanker
markets”, they are typically just referring to two
particular trades, one being crude oil, one being the oil
products trade. Whilst it is true that chemicals and
liquefied petroleum gasses or liquefied natural gas or
even juices, wine, or beer may travel in vessels referred
to as ‘tankers’, these latter vessels are operating in a
different and segmented market with virtually zero
overlap.
333
Liquid Bulk: “The
Tanker Markets”
Looking at the development of time charter markets for
large crude oil tankers in the years 2008 and 2009 leaves the
reader puzzling. Based on the fundamental dynamics (an
economic downturn, colliding with an ongoing fleet
expansion), a more massive downturn in earnings would
have been expected. Yet, especially around the end of 2008,
large crude carriers earned surprisingly strong rates on the
spot markets.
334
Earlyin 2012,the capacity of“the tanker fleet” has
surpassed the “half-a-billionmilestone”, the relatively rapid
expansion that becomes noticeable around the year 2004
is only partly attributable to the increased demand
dynamics of the emerging Asian economies (see Fig.1.7).
• Container Shipping Markets
The clockwork-like double digit growth of the container
shipping markets was fuelled by the globalization of trade flows
as well as the containerization of the
• already existing general cargo flows (see picture on next slide).
Whilst most industry observers expect both these demand
drivers to lose momentum eventually, they still expect the
container traffic to grow super proportionally in relation to the
global GDP. Whilst historically, there have been only few
opportunities to “mis-invest” in an industry with a regularly
reappearing demand growth, the sharp economic down turn of
2008/2009 has set back the long term growth path of the
demand side by approximately3 years.
Development of world container handling 1990–
2011. Source: ISL 2012
Looking at the development of time charter markets for large crude oil tankers in
the years 2008 and 2009 leaves the reader puzzling. Based on the fundamental
dynamics (an economic downturn, colliding with an ongoing fleet expansion), a
more massive downturn in earnings would have been expected. Yet, especially
around the end of 2008, large crude carriers earned surprisingly strong rates on the
spot markets (see picture above).
Container Shipping
Markets
The clockwork-like double digit
growth of the container shipping
markets was fuelled by the
globalization of trade flows as well
as the containerization of the
already existing general cargo
flows.
339
Container Shipping
Markets
Whilst most industry observers expect both these demand
drivers to lose momentum eventually, they still expect the
container traffic to grow super proportionally in relation to
the global GDP. Whilst historically, there have been only few
opportunities to “mis-invest” in an industry with a regularly
reappearing demand growth, the sharp economic downturn
of 2008/2009 has set back the long term growth path of the
demand side by approximately 3 years.
340
Container Shipping
Markets
According to preliminary estimates, world container
handling grew by 7 % in 2011, reaching a new all-time
high of 560 M TEU. Taking into account that at least in
the industrialized economies everything that may
reasonably be transported in a container is nowadays
being carried in such steel boxes as well as that the
soaring market penetration of Chinese manufactures
around 2002–2005
341
Container Shipping
Markets
Early in 2012, the fully cellular fleet has reached a
nominal capacity of 15.6 M TEU, spread among 5,000
units of different size classes, with the largest regular
units in service having slots for as much as 15,500
standard-boxes and a handful of even bigger vessels
currently on order.5 Unlike the more matured dry and
liquid bulk fleets, the containership fleet is still evolving
in its dimensions.
342
Container Shipping
Markets
The strong trade growth fuelled the charter markets,
peaking in 2005. Until early in 2008, the markets
remained in positive territory. Although the fleet
growth was catching up with the demand side, the
ever increasing fuel costs and record high bunker
prices of the years 2007 and 2008 made
“slowsteaming” an economic viable strategy
343
Container Shipping
Markets
Thus, part of the newly built tonnage could be
absorbed in the markets without increasing the
fleet effective transport capacity. Put precisely,
the fleet productivity (supply side) was shrinking
but freight and charter markets remained
relatively stable despite over-proportionate fleet
growth.
344
Container Shipping
Markets
Within a very short time, container ships with an
aggregate capacity close to 1.6 M TEU have been
reported as inactive and have pushed the time
charter markets into a long-lasting trough. The
increase in rates in 2010 came as surprising as the
strong recovery of the demand side. Yet, it proved
to be short-lived
345
Other Specialized
Shipping Markets
Next to the major shipping
markets of dry-bulk, liquid bulk,
and container shipping, various
smaller market segments with
individual ship designs and only
limited overlap exist. The most
important ones are the markets of:
346
Other Specialized
Shipping Markets
● Liquefied gas transportation. It should be
pointed out that the individual commodities
and vessel designs, as well as the parcel sizes
and typical ship sizes, differ strongly from
each other in this sector, as do the demand
and supply mechanisms of the commodities
347
Other Specialized
Shipping Markets
The chemicals trade consists of a
wide mixture of sophisticated
cargoes, which mostly travel in
small parcels, consequently, two-
thirds of all chemical tanker vessels
do not exceed a capacity of 20,000
dwt, whilst having several individual
holds (tanks) for cargoes, ranked in
grade by their hazardous potential.
348
Other Specialized
Shipping Markets
The car/vehicle trade is mainly done with specialized
vessels (PCC pure car carrier or PCTC pure car truck
carrier), which are especially designed for this purpose. They
are constructed as more or less huge multi-storey car park
with capacities up to 8,000 vehicles. In most cases, these
vessels are sailing on relatively fixed routes and in addition
in some cases there also exists a regional feeder network
like, e.g. from the northwest European ports to the Baltic.
349
Other Specialized
Shipping Markets
The reefer trade, being somewhat of a declining
phenomenon, whilst for many years the persistent
belief was that for a large part of the refrigerated
commodities, containerization is not an option, the
reefer fleet is currently declining whilst the reefer-
container fleet is constantly growing. In several ports
the removal of installations for handling of e.g. bananas
as typical cargo for reefer vessels has already started.
350
Other Specialized
Shipping Markets
The general/project cargo trade. The general cargo trade
has experienced a bit of a renaissance despite the
unstoppable success of the container shipping markets,
which have transferred the liner connections between the
major trading partners. Whilst general cargo liner trades
have become a niche business, the general cargo spot
market has benefited strongly from the growth of project
cargo shipments. This sector of the shipping markets is
particularly hard to gauge or quantify.
351
Intra-Competition of Shipping Markets
• The modern merchant fleet is divided into clearly distinguishable vessel designs,
which cater to a particular type of shipping demand. Additionally, major shipping
markets are typically disaggregated by size and each vessel is involved in the
transportation of certain commodities. Yet, there is possible competition from the
adjacent segments within the fleet, as the tonnage is generally substitutable,
particularly in the bulk shipping markets where the spot demand for a vessel size
may occasionally outweigh the spot supply by so much that the freight rates justify
using larger vessels (with a resulting deadfreight) or two (or even more) shipments
using smaller vessels.
Container shipping
market share
• This intracompetition of vessels goes a long way in explaining
why the peaks and troughs of certain vessels sizes are mirrored
by the adjacent segments. When, for example, capesize-
tonnageis in such short supply that shippers start employing two
panamax units, this additional unusual panamax-demandis
driving the rates up for panamax bulkers as well.
Correspondingly,if the spot-rates for the large capesize-vessels
are low, they place a lid on the rate-levels, which the smaller
panamax-bulkers could potentially reach (see picture above).
• On top of the intra-competition there is also a certain amount of
Inter-Competition of Shipping Market
inter-competition from different vessel types, which may be
employed in the same trades. Products tankers, for example, may
be used for crude oil transport, but because the cleaning of the
holds after the crude oil transport is quite expensive and likely to
wear down the coating and the products fleet has higher capital and
operation costs, it is seldom done (read: when the price is right).
Similarly, the chemical tanker fleet will often accept product
cargoes to avoid dead freights or to subsidize the repositioning to a
different trading area.
(this picture) illustrates
how the time charter
rates for multi-purpose
vessels have been
affected by the all-time
highs of the container
shipping markets
(around2 005) as well as
the sky-high earning of
the dry-bulk shipping
markets
Introduction to Loans and Risk Management
• All shipping projects are based on ideas, facts, expectations, and
Considerations
financial data. The attractiveness of a project depends on its terms
and assumptions as well as on the expected results. Apromising
project might easily allure investors and financiers even in periods
where the markets are weak or funds are scarce. The accuracy of
the data provided as well as the rationality of the assumptions
determine the quality of the business plan. Therefore, it is crucial
to present all parameters validly and transparently in the plan, and
test key assumptions by selecting various scenarios and
performing a sensitivity analysis, thus highlighting the possible
limits between success and failure.
Reviewing Loan Calculations
• All loan agreements feature a schedule of payments. The terms of the loan
determine the necessary parameters,
which are:
• the amountof the loan (principal): A (commonlyin USD in shipping projects)
• the interest (yield): r (a percentagebased on Libor and/or Euribor1)
• the duration(tenor): N (commonlyin years)
• the instalments: capital and interest outlays
For simplicity, in the following
example, it is assumed that the
capital should be repaid in equal
annual installments. It is easy to
express the fixed amount of
installments mathematically, given
the A, r and N parameters.
Financial
• The NPV and IRR Criteria
Viability Criteria
Given the schedule of the loan, it is possible to proceed to more
complicated calculations related to the project. In shipping
projects, the NPV, RFR, and IRR criteria are considered more
frequently. The NPV and the IRR are directly interrelated,while
the NPV and the RFR are also conceptually intertwined.
The NPV calculations result in a discounted

stream of annual profits or losses using the
following formula:
Risk Management
• In the business jargon, the 5C summarise
the main set of risks to considered,
namely: Collateral, Capital, Conditions,
Character,and Capacity. Capacity refers
to the ability of the owners to repay the
loan and generally to honour the
financial obligations undertaken.
• Project-Related Lending Risks
Credit and Counter-Party Risk
Is the risk associated with breach of obligations or commitments
assumed towards any kind of creditor? Counter-party risk is related to
selecting in appropriate counter parties for conducting business
(counter parties that are unlikely to honour their obligations and
commitments towards the company) and/or relying on a single
counter party for doing business. This can be mitigated only by asking
for credit ranking and establishing risk assessment and monitoring
procedures.
• related to volatility in foreign exchange rates and to the movement
Financial Risks
of interest rates. Various risk approaches mitigate, transfer or
accept the associated risks. A typical issue with foreign exchange
rates is that all revenues generated are in USD but a significant
portion of companies’ expenses are incurred in other currencies,
such as the Yen or the Euro. Monitoring the fluctuation of USD
against other currencies as well as foreign exchange exposure and a
potential adoption of hedging policies are expected.
• The ship finance is oneShip Finance
of a fund raising method backed by
the cash flow generated from an aquisition and operation
of ships. It includes such as financing method relying on the
credit worthiness of the spesific company as shipowner but
this report id drafted for the credit rating method in the
premises of such fund raising solely relying on the value of
the ship and the cash flow generated from the operation of
a ship.
Ship Finance
• The credit rating will be assigned to various financial
instruments such as loan, bond or redemption right of the
investment to a Tokumeikumiai shussi (anonymous
investment association) and in some case a ship finance is
tranched by the degree of an abundance of the cash flow or
the value of the collateral.
• The ship finance has a similarity
Ship Finance
with the Project Finance and
the Whole Business Securitization (WBS)in the sense of that
the fund id raised relying on the cash flow, but as for the ship
finance there are peculiar analytical points in which a unique
situation of the marine transport industry has to be
considered.
•
General Scheme
The shipowner company raises fund by a loan and then purchases, owns and let out a ship to the
• charterer. The charterer pays a charterage to the shipowner company. The shipowner company
repays the
• principal and interest of a loan from the cash flow after deducting necessary expenses from the
charterage.
• The shipowner company is incorporated in abroad such as Panama and in many cases it is SPC for
purely
• limited to owning ships. The eventual administrative and operational entity of the shipowner
company is
• varied as a ship operator (operating company), a shipowner (ship hire out company), a leasing
company
• or a fund management company.
Analytical Points
• The required analyses for the ship finance are briefly classified into (1) grasping the project scheme,
• (2) analysis of the charterer, (3) analysis of the cash flow, (4) analysis of the project structure. The core of
• the repayment resources are the charterage and it is important to analyze the credit worthiness of the
• charterer as well as scrutinizing the spec of the ship and the overall project scheme. Then analysis is to be
• made focusing on what measures are to be taken to mitigate the fluctuating risk of the cash flow.
• Furthermore the contractual relationship is examined in view of whether the generated cash flow is surely
• sized and appropriated for the repayment of a loan or for the case of failure of the repayment whether the
• mortgagor’s right can be swiftly exercised.
Required for the ship finance clasified
1. Grasping the project scheme

Any possible impacts on the repayment resources are exmined by analyzing
the type, size and spec of the ship to which a loan is considered to extend and
also by collecting necessery information about the shipping market situation
and the related laws.
2. Analysis of the charterer
Analysis is made based on the “Rating Methodology (Corporate)” by JCR.
When the charterer is the SPC of a shipping company, in some case guaranty
from the shipping company is required for the payment of the charterage.
3. Analysis of the cash flow
In an ordinary ship finance, during such period when a ship has been let out without
any trouble, the repayment of the loan is made by appropriating the remaining
amount of the cash flow after deduction of necessery cost. For the case when a
certain amount of the loan is still outstanding at the final maturity of the loan (balloon
portion), then the loan shall be repaid fully by refinancing the loan or disposing the
relevant ship. When some repayment trouble occurs during the loan outstanding
period, the loan shall be repaid by a voluntary sale of the ship or an exercise of the
ship mortage.
a) Cash flow Analysis of the ship finance
cash flow from letting out a ship
The following points are examined such as the level of the cash-in, cash-out,
the risk of its fluctuation and the measures to mitigate such risk.
As to the csh-in, the analysis of the charterage is more important. In the
analysis of the level of the charterage and risk of its fluctuatio, the following
points are diligently examined based on the charterhire contract.
b) Cash flow to be received by a sale of a ship
• For this type of cash flow, the outstanding amount of the loan and the LTV of the value of
the ship are important factors. As to the value of the ship, such factors as the book value of
the relevant ship, the evaluation value of the ship and a market price of second handed
ships publicized by research companies are taken into consideration. In the past, the
volatility of the supply and demand of ships, price of new building ships, price of second
handed ships had been relatively high and in many cases those factors had largely
fluctuated within a short period. Therefore a prudent judment is required.
• Also a ship is xpected to be sold in the market or to the relevant charterer. For each case,
the probability of the ralization of the cash flow through the sale and the market situation is
examined.
c) Main indices to be used for analysis
• For the cash flow analysis, important and qualitative indices
are as below.
• DSCR, IRR, LLCR
• Break-even of profit, Equilibrium point of the cash flow when
business conditions deteriorate
• LTV
d) Evaluation of other material risk
• Completion risk
In a ship finance where an interim down-payment is
made during the ship building period,
• Refinance risk of the balloon portion
When a substantial amount remains outstanding on
the final maturity date of the loan , in some case the
repayment of the relevant loan is made not by a
disposition of the ship but by refinancing the loan.
Analysis of the Structure
1. Bankruptcy Remoteness from relaten parties

When the route of the cash flow or the actual situation of the operation is
considered, in some case the bankrupty remoteness from the related parties is
not throughly provided.
2. Mortgage and Maintenance
In a ship finance, since the cash flow generated from a ship
entirely applied to repayment of a loan, it is important whether
the creditor is surely entitled to size the cash flow or whether it
is stipulated in the contract to the effect that the mortgagor’s
right could swiftly be exercised without any obstacle in case of
failure of the repayment of a loan.
• In a standard case, it is expected that the following clauses are incorporated in the
contract;
• • The quality of the ship (including flag and class of the ship) is maintained by the
charter party or
• the loan agreement
• • By the covenants of the loan agreement, SPC would not take any actions which
causes
• unbeneficial events for the repayment of a loan
• • For not causing any trouble to the repayment of a loan, such mechanism as waterfall,
• administration of the cash flow and customer’s account is provided
• • Proper insurance
• • Principle collaterals (ship mortgage, assignment of the charter party and assignment
of the
• insurance) are surely created
4. Points for Monitoring
Even for a ship finance, a constant and regular monitoring and review of the
credit rating would principally be conducted.
• The analysis would be made following to the
aforementioned analytical points, especially
the change
• of the following matters would be scrutinized
most diligently.
• • Voyage record of the ship (including
accident)
• • The operational capability and the credit
worthiness of the related parties
• • The situation in performing the obligations
under the related contracts and any
possibility for change
• of such contracts
• • Change of the exchange rate, the
administration cost of the ship and the
interest rate which would
• cause any affection to the cash flow
• • Change of the external environment such as
a shipping market, legal system and tax
system
About Shipping Finance
Shipping finance is often classified within the Specialised Lending asset class
and is a type of object finance .
• IN terms of order of magnitude for market size, the construction of new
vessels amounts to an underlying new building market valued in three-digit
billions of dollars (about USD 100-125 billion per annum) and the annual
sale-and-purchase activity amounts to a notional of one-fifth to one-fourth
of such amount.
• Ships are mobile units operating in international waters with
global trading patterns. They are the conveyor belt worldwide
industrial and commercial activities, providing transportation
services and floating infrastructure to clients (shippers) across
the globe.
Interest
• A potential significant increaseRate Risk
in the cost of money will
burden the company’s financing expenses, thereby
negatively affecting financial results. In practice,
borrowers and lenders can only monitor the cost of
funding and, when necessary, agree on corrective
measures (i.e. hedgingpolicies).
Vessel (Asset) Values
• The market value of vessels may fluctuate significantly.

Losses may occurwhenthe vessels have to be sold or due to
the writing down of the vessels’ carrying value. Such losses
reducethe company’s earnings and profit margins while
raising tax and depreciation concerns.
Industry-Related Risks
• An investment in the company involves a significant degree of risk for both

equity investors and debt providers, as the decision to support a shipping
project financially involves capturing capital and restraining liquidity for a
relatively long period. There is no assurance that the company’s objectives
will be achieved or that there will be any return of capital. Potential investors
and lending institutions should carefully consider all of the information set
forth in the loan agreement, including the following risk factors, and consult
professional advisors before deciding to invest in the company.
• Cyclicality of the Markets
Risks Relating to the Shipping Industry
The company is exposed to cyclical fluctuations of the shipping
industry throughits charters,which result in the volatility of sales,
profitability andv essel values. The company’s portfolio may comprise
both long-term and short-term charters (including voyage charters)
of vessels as well as pool employment. Since its charters would be
affected by cyclical fluctuations in the relevant shipping industry
segment, the company would be affected indirectly. The shipping
industry is subject to cyclical fluctuations primarily due to changes in
the supply of and demand for different shipping capacities, which
result in the volatility of sales, profitability and vessel values.
Off-Hire and Docking Periods
• In case of off hire and dry dockings, the companyreceives no charter

hire but has to bear all costs incurred during the period. Under the
company’s charter and pool agreements, when a vessel is off hire or
not available for service, the charterer or pool manager would
generally not be required to pay the company the charter hire. The
company would have to cover all costs during such off-hire and
possible repositioning, including the cost of bunkers.
•
Asset Price Fluctuations
The company is exposed to trends inherent in the
shipping industry. Ingeneral, vessel values experience a
degree of volatility. The fair market value of the
company’s vessels can be expected to fluctuate
depending on the economic and market conditions
affecting the shipping industry as well as on
competition from other shipping companies in a largely
fragmented market, from different types and sizes of
vessels and from other modes of transportation.
Political and Work Economy Related Risks
• The vessels call at ports in various countries around the world,
including in emerging markets. Hence, the company’s business is
subject to the political, economic and social conditions of the
countries where these ports are located. For example, the
company will be exposed to the risks of political unrest, war and
economic and other forms of instability, such as natural
disasters, epidemics, widespread transmission of communicable
or infectious diseases, acts of God, terrorist attacks and other
events beyond its control, which may adversely affect local
economies, infrastructures and livelihoods.
• Parties to a Project Financing
Parties and Their Roles
One of the complicating (and interesting) features of most projects is the
considerable number of parties with differing interests that are brought
together with the common aim of being involved to a greater or lesser
extent with a successful project. It is one of the challenges of those
involved with a project to ensure that all of these parties can work
together efficiently and successfully and cooperate in achieving the
project’s overall targets.
• The project company will usually be a company, partnership, limited
Project Company/Borrower
partnership, joint venture or a combination of them. As noted in section
1.5, this will be influenced to a certain extent by the legal and regulatory
framework of the host government. For example, in some jurisdictions it
will be a legal requirement that the holder of a licence or concession be a
company incorporated in that particular country. In other there may be
strict requirements in particular industries as to foreign ownership of
share capital or assets, particularly in strategically important industries.
Sponsors/Shareholders
• The project sponsors are those companies, agencies or individuals
who promote a project, and bring together the various parties and
obtain the necessary permits and consents necessary to get the
project under way. This might be the construction, operation and
maintenance, purchase of the services output from the project or
ownership of land related to the project.
Third-Party Equity Investors
These are investors in a project who invest alongside the sponsors.
Unlike the sponsors, however, these investors are looking at the
project purely in terms of a return on their investments for the benefit
of their own shareholders. Apart from providing their equity, the
investors generally will not participate in the project in the sense of
providing services to the project or being involved in the construction
or operating activities.
• The sheer scale of many projects dictates that they cannot be financed by a
Banks
single lender and, therefore, syndicates of lenders are formed in a great
many of the cases for the purpose of financing projects. In a project with an
international dimension, the group of lenders may come from a wide variety
of countries, perhaps following their customers who are involved in some
way in the project. It will almost certainly be the case that there will be
banks from the host country participating in the financing. This is as much
for the benefit of the foreign lenders as from a desire to be involved on the
part of the local lenders. As with the involvement of local sponsors, the
foreign lenders will usually take some comfort from the involvement of local
lenders.
Construction Company
• In an infrastructure project the contractor will, during the
construction period at least, be one of the key project parties.
Commonly, it will be employed directly by the project company
to design, procure, construct and commission the project facility
assuming full responsibility for the on-time completion of the
project facilities usually referred to as the “turnkey” model.
• Project Financing Documentation
Role of Documentation
The essence of project financing is the apportionment of project and other risks amongst the various
parties having an interest in that project. The way in which this risk allocation is implemented is,
essentially, through the complex matrix of contractual relations between the various project parties as
enshrined in the documentation entered into between them. There is no general body of law in
England (or elsewhere) that dictates how projects must be structured or how the risks should be
shared amongst the project parties.
These documents can conveniently be grouped as follows:

• Shareholder/sponsor arrangements
• Loan and security documents
• Project documents.
• Project Loan Agreement
In most projects this will be a syndicated loan agreement entered into between the
borrower, the project lenders and the facility agent. It will regulate the terms and
conditions upon which the project loans may be drawn down and what items of
project expenditure the loans may be used for. The agreement will contain the usual
provisions relating to representations, covenants and events of default found in
other syndicated loan agreements but expanded to cover the project, project
documents and related matters. The provisions relating to the calculation and
payment of interest will be similar for standard Euro-currency, loans except that in
most projects interest will be capitalised during the construction period or until
project revenues come on stream.
•
Concession Agreements/Licences
In many projects, particularly Build-Operate-Transfer (“BOT”) projects,
the concession agreement will be the key project document as it is the
document that will vest in the project company the right to explore,
exploit, develop or operate, as appropriate, the concession or other
relevant rights to the project. At the other end of the spectrum, all that
may be needed for a project company to be vested with the necessary
legal rights to exploit is a licence. Thus, for example, in an oil and gas
financing in the UK continental shelf, the project vehicle will be a
beneficiary of (or the beneficiary of a share of) a licence issued by the
Department of Energy and Climate Change which entitles it to explore
for and exploit hydrocarbons on the terms set out in the licence (and
certain model clauses applicable to the licence).
• Construction Contracts
In an infrastructure project where the project lenders are taking all or
any part of the construction/completion risk, the construction contract
will be one of the key project documents. There are a number of
standard form construction contracts in use but it is unlikely any of
them will be suitable for a project-financed contract without significant
amendment. The closest to a suitable international standard contract is
probably the “Orange Book” published by FIDIC.
Operating and Maintenance Agreements
• Once the project is completed and
commissioned it will then move into
the operation stage. The operation of
most projects will require an
experienced and skilful operator and
the performance of the operator in the
performance of its tasks will be crucial
to the overall success of the project.
Both the project company and the
lenders will be keen to ensure that the
chosen operator is a company that has
a proven track record of operating
similar projects. Sometimes it is the
case that the project company itself will
operate the project although the
lenders will want to be satisfied that it
has both the experience and the
necessary staffing, in place to
undertake this role.
Fuel Supply Agreements
• Many projects will rely on an essential supply of fuel such as coal, oil, gas
or wood in order to operate the facility. Both the project company and the
lenders will be concerned to ensure that the project has access to a
reliable and secure source of fuel for the entire duration of the project.
Having obtained a secure source of fuel supply, the next key issue will be
whether the project company is able to contract with an agreed supplier
on a long-term basis on a pre-agreed price structure. If the project
company is unable to achieve this, then it will be forced to purchase its
fuel requirements on the spot market, which will expose it to both fuel
availability and fuel price risks.
• Bonds Project Structures
A potential source of finance for projects is the bond market. In the
US, many projects have been funded by bonds and in the UK a number
of the Government’s Private Finance Initiative (PFI) projects were
funded using bonds (the majority with monoline insurance cover and
some where the bondholders were taking pure project risk). However,
whilst the bond market has been an important source of funds for
projects, it is likely that the vast majority of projects will be financed
through loans rather than bonds as loans are seen as more flexible.
“Build Operate Transfer” “BOT” Model
Many projects around the world are structured and financed on the BOT model. There are a great number of varieties (and accompanying acronyms) and some of the more
common are:
• DBFO: design, build, finance, operate
• DBOM: design, build, operate, maintain
• BOT: build, operate, transfer
• DBOT: design, build, operate, transfer
• FBOOT: finance, build, own, operate, transfer
• BOD: build, operate, deliver
• BOO: build, own, operate
• BOOST: build, own, operate, subsidise, transfer
• BOL: build, operate, lease
• BRT: build, rent, transfer
The basis for all projects structured on the BOT model is likely to be the
granting of a concession or licence (or similar interest) for a period of years
involving the transfer and re-transfer of all or some of the project assets.
Forward Purchase Model
• Under this structure, sometimes known as an “Advance Payment Facility”, the project
lenders will make an advance payment for the purchase of products generated by the
project which will be deliverable to the lenders following completion of the project.
The project company will utilise the proceeds of the advance payment towards
financing the construction and development of the project. On delivery of the
products following completion, the lenders will either sell the products on the market
or sell them to the project company (or a related company of the project company)
and use the proceeds to “repay” themselves. Alternatively, the project company may
sell the products as sales agent for the lenders. Some structures entitle the project
company to make a cash payment to the lenders in lieu of delivering products.
Sharing Of Risks
• Identification and Allocation of Risks

The essence of any project financing is the identification of all key risks associated
with the project and the apportionment of those risks among the various parties
participating in the project. Without a detailed analysis of these project risks at the
outset the parties will not have a clear understanding of what obligations and
liabilities they may be assuming in connection with the project and, therefore, will not
be in a position to consider appropriate risk mitigation exercises at the appropriate
time. Considerable delays can occur and expense can be incurred, should problems
arise when the project is under way and arguments ensue as to who is responsible.
Ground Rules
There are some ground rules that should be observed by the parties involved in a project when
determining which party should assume a particular risk:
• A detailed risk analysis should be undertaken at an early stage
• Risk allocation should be undertaken prior to detailed work on the project documentation
• As a general rule, a particular risk should be assumed by the party best able to manage and
control that risk, e.g. the risk of cost overruns or delay on a construction project is best
managed by the main contractor; in a power project, the power purchaser (if a state entity) is
in a better position than others to assume the risks associated with a grid failure and
consequent electricity supply problems for any reason
• Categories of Project Risks
The following is a list of some of the key project risks encountered in
different types of projects. Of course, not all of these risks will necessarily be
encountered in each project, but it is likely that most participants in projects
will need to consider one or more of these risks and decide by whom these
risks are to be assumed and how. It has already been seen in section 3 that,
once these risks have been identified, it is through the various contractual
arrangements between the parties, and insurance, that these risks are, for
the most part, apportioned and assumed.
Legal and Structural Risks
• there is some overlap with both
of these risks with some of the
risks itemised above. Legal risk is
the risk that the laws in the host
jurisdiction (and any other
relevant jurisdiction) will be
interpreted and applied in a way
consistent with the legal advice
obtained from lawyers in the
relevant jurisdiction at the outset
of the project. (Change of law is
really dealt with under political
risks.) Of particular concern will
be the laws relating to security
and, in particular, the security
taken by the project lenders over
the assets of the project.
Insurance Issues
• Role of Project Insurances

Insurance is a very important aspect of most projects and certainly one that will
concern the project sponsors and the lenders equally. From the perspective of the
lenders, they will view the insurances as an integral and key element of their overall
security package for a project. Should a major casualty or disaster occur with respect
to all or a material part of the project, then the lenders may be left with little else to
proceed against! It is, therefore, perhaps surprising that in many project financings
the subject of insurances is often deferred until the last minute and then not always
given the attention it warrants.
• Scope of Cover
Cover will vary between the construction and operating phases of a
project. Details of typical insurance cover applicable to each of these
phases is set out in (picture below). Additional insurance may,
depending on the precise nature of the project, be required. For
example, in projects connected with the development of oil,
insurance against the cost of controlling a blow-out might be
required.
The Project Loan Agreement
• In most project financings the loan agreement is likely to
be the key financing document. Almost certainly
structured on a syndicated basis, there will be a number of
key points for discussion between the parties. The
following are points that are likely to arise in most project
financings and will be important issues for both the lenders
and the project company.
•Warranties, Covenants
In a project financing the and
scope of the warranties, Events
covenants and eventsof
of Default
default will be expanded to cover the project, the project agreements, the
security agreements and (usually) other major project parties. Although it has
already been noted that the remedies available to the lenders following a
default may well be limited, the usual approach is for the lenders to demand
extensive protection through warranties, covenants and events of default. This
is more to do with a desire to be able to control matters should defaults occur
than a desire to be able to accelerate and enforce their security for a seemingly
minor default. That said, there is always a danger that if the warranties,
covenants and events of default are too tightly drawn, minor delays or hiccups
in the project can trigger a default which may necessitate syndicate meetings,
waivers and unnecessary (and expensive) aggravation to all concerned.
Project Bank Accounts
• It has already been noted that one of the key features of project
loan documentation will be the requirement that the project
lenders control all the project cash flows. This control is usually
implemented through the requirement that the borrower (and
other relevant project parties) open a number of bank accounts
with either the facility agent or another bank (the project
accounts bank). These bank accounts will, of course, be charged in
favour of the lenders as part of the overall security package.
Appointment of Experts
• One of the features of project financing is the extensive use of
experts by the lenders. Whilst the lenders themselves (or at
least some of them) will profess expertise in the structuring of
the financing package for a project, there are many technical
areas associated with the project where the lenders will need
the resources of external consultants and other experts. For
example, in an oil and gas project they will need to employ
the services of external engineers who are able to advise
them on the geology of the reservoir, the quantity, quality
and recoverability of the reserves, when mechanical
completion has occurred, etc. Another example would be
traffic forecasting experts for a road or tunnel project.
Information and Acces
The supply of reliable and accurate information in connection with a project is of crucial importance for the
lenders and their advisers. Likewise, access to the project and its facilities will also be important for the lenders
to be able to check regularly on progress and to monitor compliance with the terms of the documentation. The
following are examples of the type of information usually required by lenders:
• Annual accounts and financial statements

• Periodic (e.g. monthly) progress reports during project construction • Architect’s certificates etc.,
accompanying drawdown requests together with supporting invoices
• Copies of material notices and communications received under all project agreements
• Copies of communications from relevant authorities
EQUITY
• Equity is the most important source of finance. In the memorandum of asso-
ciation, a company divides its capital into shares, bearing an equal face or par
value. These shares are distributed amongst the investors or share holders.
Shares are certificates of ownership and can be traded. Shares are also referred
to as stocks. The retained earnings at a profitable year’s end are delivered to
the stockholders according to their equity participation that is, the number of
stocks at their possession. This profit is named dividend. It is up to the
company’s managing board to decide whether to distribute dividends or
withhold retained earnings, to finance expansion.
• Private Equity
Unquestionably, it is the most direct type of capital. Although
larger profit is made with better leverage -that is, small equity
participation in a project- the role of equity should not be
disregarded. As in each case of financing scheme, there is
potential opportunity here too. In the graph below, the value of 5-
year old tankers is shown fluctuating in -a few years- time.
• Private Placement
Still, the concept behind private equity funding is to raise money by
issuing shares, to be traded in a private market. Here too, common
as well as preferred stocks may be issued. It is useful to see the
advantages and disadvantages of private placement against the
public distribution of shares.
Advantages
Disadvantages
- Private equity funding provides the ease of - Usually it is more difficult to obtain
partnering with people who know about the high amounts of money pri- vately, as
industry –not bankers or investors/stockholders.
- The regulatory framework is less strict than in the it is publicly.
case of public placement, where the company - Large investors may monitor the
must fulfill certain criteria. company’s performance more than
- Company’s inner information is not spread at
large.
the public and achieve voting control.
- The brokerage commission and underwriting - Investors cannot easily resell their
fees necessary for the registering and selling of securities.
the stock, are considerably less.
International capital markets assist industry to raise equity capital
to finance expansion. Nevertheless shipping, being traditional and
old fashioned, has not so far exploited the dynamics provided by
the stock markets up to the extent that it is possible. Oslo, New
York, Tokyo and London hold major capital markets where shipping
issues are traded. Until recently, the listing in the Athens Stock Ex-
change of shipping companies other than the few Greek passenger-
transporting was forbidden. Now however, a new form of legal
entity has been introduced that enables such a listing, indirectly.
Shipping companies’ stocks may be traded through a special type
of holding company developed for this reason.
Sources of Finance and Capital Structure in
• Τhe inherently capital-intensive nature of the shipping industry places at
Shipping
the forefront of the shipping finance research agenda issues directly
associated with shipping financial management decisions, such as the
financing choice and optimal capital structure. The sector’s distinctive
characteristics, among which capital intensiveness, play a key role in these
decisions. Contracting a single new-building vessel typically requires
capital expenditure of more than $40mil (depending on size, type and
market conditions), aggregating to total investment of around $130 billion
per annum, while there is also an active second-hand S&P market, adding
further to the heightened demand for capital.
Public Debt and Shipping Bond Pricing
Financing shipping projects by tapping the public debt

market has gained popularity after the 1990s. Sea
Containers Ltd. was the first shipping company to issue
public debt of $125 million back in 1992. (picture above)
shows that bond issues account, on average for 14% of the
total capital raised for shipping investments over the period
2007-2017. Issuing public debt has gained pace as a source
of funding for the shipping industry for several reasons.
• Public Equity and IPO Performance
It was only in the 1990’s that the shipping industry started tapping the equity
market as a funding source and since then a growing number of shipping companies
consider public equity capital a vital source of capital. As (picture below) illustrates,
the estimated share of public equity, which includes both IPOs and follow-on offers
(as well as private placements and preferred equity), in shipping finance is about 8%
during the period 2007-2017. The comparative advantage of equity financing over
debt comes from its strategic flexibility; that is, it comprises a sustainable financial
management strategy regardless of shipping market conditions, offering continuity
in funding. This section reviews the empirical evidence on public equity financing
and shipping IPO performance.
•
Shipping Funds and their Performance
Shipping funds constitute a distinct source of finance for the shipping industry.
Vessels financed through shipping funds are off-balance sheet assets, and thus,
offer financial flexibility and tax benefits to shipping companies. The German
Kommanditgesellschaft (KG) and Norwegian Kommandittselskap (KS) have
been widely regarded as the most popular forms of shipping funds, as from
2000 to 2008 alone, approximately €20 billions of equity investment in
commercial ships has been raised in the German KG market alone.
•
Shipping Investment and Valuation
This section focuses on the drivers of shipping investments, along with the
most common valuation methods (capital budgeting) employed within the
shipping paradigm. One of the instrumental factors determining the success
of a company is the economic growth and value creation it achieves through
internal investment (CAPEX) and inorganic growth (Mergers and Acquisitions).
Investment decisions are of critical importance to the value of a business, and
especially so in the shipping industry given the large amounts of capital
required and the excess volatility in service rates and asset values.
Key Drivers
• A company’s of Shipping Investment Decisions
value is conditional on the combined value of the assets it
holds. Equally, the value of a shipowning company can be derived by
taking the present value of the vessels in its fleet. The primary scope of
the investment appraisal process within the maritime framework is to
reach value enhancing investment decisions based on the interactions
among key industry factors, such as: freight rates, newbuilding and
scrapping volumes, demand for shipping services, newbuilding and
second-hand vessel prices, ship-building costs, bunker fuel prices, among
others (see Strandenes, 1984; Beenstock, 1985). Accordingly, a large part
of the literature has focused on the drivers of shipping investment
decisions.
Behavioural biases
• A strand of research andtoshipping
has attempted explain shippinginvestments
investments
on the basis of heuristics related to human behaviour, such as risk
attitudes, market sentiment, intuition and gut feeling. While
heuristics-induced decision-making enables shipowners to respond
quickly to the shortlived investment opportunities in the shipping
markets, such behaviour may also lead to systematic errors or
cognitive biases under certain conditions (Gigerenzer, 1991), which
can be reflected in the rather unpredictable and relatively frequent
shipping market collapses.
• Investment Valuation Methods
The empirical evidence reviewed in the previous section suggests that
shipping investment decisions tend to be driven by a multitude of factors,
which renders shipping investment valuation a particularly challenging task.
This section reviews the literature on the most commonly employed
shipping valuation approaches. The investment appraisal process deals with
estimating a project’s future cash-flows by taking into account their degree
of uncertainty and is typically utilised as a tool to make capital budgeting
decisions and facilitate company value maximisation.
Cost of Capital and Sources of Risk in Shipping
• One of the instrumentalInvestments
inputs in investment valuation is
the cost of capital. In DCF valuation for instance the
expected cash-flows during a project’s life – which
effectively determine the value of an investment – are
discounted by the cost of capital (or required rate of return)
in order to adjust for their riskiness.
Corporate Governance
• Given the high degree of capital intensivenessof Shipping Companies
associated with the shipping industry along with
the more recent trend of attracting external
funding from public equity, bond markets and
private investors, the governance of ship-owning
has become a focal area of research. The role of
corporate governance is especially important for
publicly listed shipping companies where the
separation of ownership and control becomes
more pronounced and information asymmetry
and conflicts of interest between shareholders
and managers give rise to agency problems.
Risk Measurement and Management in
• As highlighted earlier in the paper, operating within the shipping
Shipping
industry entails significant business, operational and financial
risks. Perhaps the most important source of risk for a shipping
company is the freight-rate risk, which refers to the variability in
the earnings of a shipping company due to changes in freight
rates. This is because volatility in the freight market has a direct
impact on the profitability of the company.
Freight rate volatility and volatility spillovers
• The building block
across shipping segments
of financial risk management in shipping lies on the
business risk shipping companies face, which is primarily associated with
their cash-flow generating ability. Cashflows in the shipping business are
dependent on the ability of the shipping company to charter its vessels in
attractive freight rates and receive payment of the agreed freight rates on
time; along with its ability to time correctly the vessel S&P market and
benefit through asset-play (trading of ships).
• Measuring Market Risk in Shipping
A number of studies have focused on the quantification of market
risk in shipping freight markets. Develop a framework for the
measurement of market risk in shipping, by employing two
alternative risk measures: Value-atRisk (VaR) and Expected
Shortfall (ES). The authors provide an in-depth assessment of the
forecasts produced by alternative VaR and ES models for short-
and medium-term risk exposures in the tanker sector.
Managing Business Risks in Shipping with
• Despite the very significant
Freight Derivatives
risks involved in the shipping business
and the importance of effectively managing them, utilising financial
derivatives as a way to mitigate such risks has a relatively short
history. Freight derivatives allow for managing exposures in freight
rates, while bunker fuel derivatives are used to manage exposures to
fluctuations in bunker fuel prices. Nonetheless, studies devoted on
freight derivatives are notably less than the ones devoted on other
commodity derivatives markets.
Price discovery, economic market
relationships and forecast performance
• One of the most important research questions in the freight derivatives

literature is whether trading activity in the derivatives market leads observed
fluctuations in the corresponding spot market. Several empirical studies
have been published on this issue, investigating if the derivatives market
contains information regarding the future evolution of the spot market this
could be exploited by shipping market participants for realizing profits by
trading in both markets. One important feature that makes the shipping
derivatives market distinct from other commodity and financial derivatives
markets, investigated in the mainstream finance literature, is that the
underlying asset (freight service) is a non-storable commodity.
Market microstructure effects in freight
• A series of studies have investigated
derivativesvarious special topics on
freight derivatives. For example, the relationships across freight
derivatives returns, trading volume, volatility and trading
characteristics. To this end, Kavussanos, et al. (2004a) explore the
effect of FFA trading on the spot market volatility of the dry-bulk
Panamax segment. The results indicate that after FFA trading was
introduced, the spot price volatility was reduced across all
investigated routes. In addition, FFA trading in dry-bulk Panamax
routes exerted a decreasing pressure on the asymmetry of
volatility; while notably improving the quality and speed of
information flow in the spot market.
•
Freight options pricing
Despite the fact that FFA contracts provide reasonable hedging
effectiveness and allow market participants to “lock” a fixed freight rate
over a period of time, they lack the flexibility to offer to their users the
option to maintain the hedge if the market moves against them, but to
also participate in the market when market conditions are favorable. This
led to the creation of the freight options contracts, which in exchange for
a fee (premium) provide this type of flexibility to their users. Empirical
investigations of freight options are mainly concentrated on their pricing
mechanism.
Survey conduction
• Questionnaire design
Financial Institutions function in a competitive environment with their
clientele not restricted by the borders of states. This way they are
subjected to the same rules of trade that administer all industries
worldwide. However, the corresponding product here is money and so
100% of the competition, “provides” substitute products
• Quality
The bank adopting this approach into its activities must be
emphasiz- ing on ISM matters and the total quality management
system ISO 900x. This way, this bank will finance newbuildings
erected in traditionally ship- manufacturing countries according to
the safety regulations towards the environment and the crew.
Approval from a demanding registry and a satisfactory insurance
contract are therefore substantial.
Assurance
• This approach dictates special care to the basic elements of credit
(5C’s). Being this way, a perplexed covenant comprising of many
clauses including all possible outcome of the project is expected.
Furthermore, institutions that have focused into this issue, receive
reliable timely updates of the market provided by international
independent analysts and may even maintain an ad hoc market
analysis department.
Financing Types
• The most commonly used financing methods in the dry-bulk
shipping segment are exhibited in the right graphic having been
categorized according with the three major types of capital: 1)
Debt financing, 2) Mezzanine Financing, 3) Equity Financing.
Although financing through Debt and Equity capital has been a
common practice for years, financing by raising Mezzanine
capital is almost a new entry in the shipfinance.
DEBT FINANCING
• Although the term debt is widely used to refer to banking
institutions, a company may raise funds through debt from either
commercial lending markets or international capital markets.
Thus, this chapter is dedicated to the forms of financing treated as
debt on a firm’s balance sheets. Generally speaking, debt financing
charges interest rates, which are in principal lower than the
shareholders’ required return, thus, making instantly the debt’s
cost of capital lower than the equity’s.
COMMERCIAL LOANS
• Commercial loans encompass every loan granted by a bank or
syndicate of banks to a borrower. In financing through
commercial loans, the ship-owning company borrows money (the
loan) from the commercial lending institutions (banks) on an
either floating or fixed interest rate for a shorter or a longer
period of time. The terms, clauses and types of each loan differ to
a great extent depending on several factors analyzed below, as
each case is treated separately.
•
Bilateral & Syndicated Loan
In bilateral loan there is a single lending institution, which loans a
single borrower; consequently there are just two contractual parties.
The whole amount of money derives by only one source obliging the
creditor to bear the entire credit risk. Factors as the credibility of the
borrower, the market’s momentum, the desirable exposure to a
particular market, the investment proposal as well as the level of
funds required, are 10 determinants of whether the loan will be
concluded or not.
Senior & Subordinated debt or loan
• If a company liquefies or goes bankrupt the first debt paid
will be the senior, consequently, senior debt ensures the
creditor that he will get repaid at priority. There is a worth
mentioning exception though, marine liens are paid always
at first. Meaning that any maritime claim that arises either a
cargo or a ship lien will automatically put in a second position
the loan’s repayment.
Secured & Unsecured loan
• The debtor may secure the loan by providing a guarantee to

the creditor. When a loan is secured and if a debtor’s default
occurs, the creditor will be eligible to seize the collateral,
serving as guarantee. The collateral can be either the vessel per
se or other vessels or even other company’s assets (cross-
collateral). Without regards to exceptions, the ship-owner will
pay lower interest rate by concluding secured loans and higher
by concluded unsecured.
•
Recourse & Non-Recourse loan
This differentiation occurs when the debtor has already defaulted and the
creditor, after seizing the collateral(s) securing the loan, has not yet
gained his money back from the sale. Commonly, this situation appears in
a bear market when the vessel’s market value stands at lower levels than
the initial loan amount spent for purchasing the vessel; such a period was
in 2009-2011. The difference between purchase and market value of the
vessel, provided the former coincides with the loan value, constitutes the
money actually owed by the borrower to the lender.
PANEL COMPANIES’ FINDINGS
• Wishing to examine the application of bond’s financing in the panel
companies the first issue to measure is the cost. For comprehending
and evaluating the cost of a bond, two different rates must be
found: the bond’s coupon rate and the yield to maturity (YTM). The
coupon rate as mentioned before is the nominal bond’s rate stated
in the indenture while the yield to maturity is the effective rate of
the investment reflecting the investment’s risk.
• LEASING
Ship financing through leasing constitutes a non-conventional way of
financing having more similarities to debt rather than equity financing.
Leasing does not entail any firm’s equity dilution, since the lender, called
the lessor, has no ownership of company’s shares but does have
ownership only of the ship or the ships he has financed. Analyzing lease-
financing structure, on the one hand, there is a company, called the
lessee, that wishes to operate or purchase a vessel but has no capital and
on the other hand, there is a financial provider, called the lessor, being
able to purchase the vessel and lease it through a lease deed to the
lessee.
Financial lease
• The lessor purchases the vessel, usually as nominated by the lessee,
and offers her to the lessee on a defined, long-term bareboat
charter. For this period of charter, the lessor receives defined lease
payments, paid by the lessee. The terms governing the bareboat
charter are agreed between the contractual parties, but in every case
the bareboat charterer, who identifies with the lessee, has to bear all
the expenses and risks that the vessel’s operation entails.
Operating leasing
• The major differences of operating and financial leasing are
summing up to three critical points: the duration of the lease
agreement, the balance sheet treatment and the residual risk.
Owning to the operating leasing own nature of granting the
right to the lessor merely for operational management, such
agreements concern shorter timeperiods than that of financial
leasing, normally ranging between 5 and 7-year contracts.
• SHIP-LOAN VERSUS SHIP-LEASING
If a comparison was to be made between leasing and another form
of financing sharing some relatively similar attributes, that would
be with financing through commercial loan. By comparing these
two ship-finance methods, the advantages and drawbacks of
leasing will be adequately presented. Suppose that a shipping
company pursues to acquire a brand new fuel-efficient vessel and
has only two ways to achieve it, either by concluding a loan or by
engaging in a leasing agreement
• MEZZANINE FINANCING
Between the conventional debt and equity financing there is another
form intervening and sharing characteristics from both, the so-called
mezzanine or hybrid financing. In essence, any type of financing that
borrows features simultaneously from both core types of financing
constitutes a hybrid financial instrument. Such instruments in their initial
form may be towards either the debt side or the equity side. Based on
this distinction they are categorized in debt mezzanine capital and in
equity mezzanine capital.
SENIOR
• Subordinated SUBORDINATED DEBT
debt is by
definition the debt, which in a
default or liquidation scenario
will be paid after the senior or
collaterized debt. Therefore, it
bears greater risk and requires
higher rate as a compensation
for undertaking it. The adjective
senior before the subordinated
has been put to express that this
debt will be serviced prior all the
other subordinated types of
capital.
•
CONVERTIBLE BONDS
A widely used sub-category of bonds’ financing is that of convertible
bonds. As their name implies, these bonds provide the ability to be
converted, under certain terms though, to common shares of the issuing
company. At their issuance, they are simple bonds functioning just like a
straight bond and making coupon payments regularly, usually in a semi-
annual basis. When a conversion into shares takes place, the same bonds
will cease acting as a fixed income security by paying coupons but they
may pay dividends according to what the convertibles’ initial reported
prospectus stipulates.
• Dryships Inc PANEL FINDINGS
Among the examined shipping companies, only Dryships embarked on financing
through convertible bonds’ issuance during the period from 2006 through 2013.
Indeed, on November 2011 and on June 2010 Dryships issued convertible senior
notes to raise capital up to $460 million and $240 million respectively. The
amounts do not constitute a separate agreement but they refer to the same
notes having a total amount of $700 million outstanding. In the below table the
important futures of this issuance are stated
• CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock is actually an equity mezzanine capital being
more like an equity capital, but also sharing similarities with debt to the
extent that its holder will receive promised dividends until he converts
the preferred into common shares. In essence, by owning convertible
preferred stock an investor owns a company’s proportion just like a
common equity shareholder with different, though, terms. A preferred
stock shareholder actually holds a fixed income security given the fact
that he is going to be paid regularly with the form of dividend.
EQUITY FINANCING
• Equity financing addresses to every single company, from a small-scale

private company to a large public corporation, since equity capital refers
to every capital invested in the company for acquiring in return a
proportional ownership of the company. Therefore, equity investors can
be a single entrepreneur investing his own money to set a business, a
venture capitalist investing in a promising start-up or a public investor
wishing to invest his money in a public entity for receiving dividends and
realizing capital gains.
• INITIAL PUBLIC OFFERING (IPO)
The Initial Public Offering (IPO) is a private company’s first offer of its shares to
the public investors. In other words, IPO is the first sale of its shares to the
public getting thus access to capital markets. Entering though in the equity
markets is not a one-day task but it needs a lot of time and effort instead so as
the private company not only to become, but also to remain, public. In fact,
there are two stages, the Pre-IPO and PostIPO stages incorporating certain
requirements, which shall be met for firstly preparing the company for the IPO
and secondly continuing to trade as a public entity.
SPECIAL PURPOSE ACQUISITION COMPANY
(SPAC)
• Special Purpose Acquisition Company is a blank check company formed for

raising funds through an IPO & acquiring in specific due course vessels or
an operating company. In other words some sponsors, in shipping for
instance mainly the shipowners or managing directors, create this
company, which in essence is a Special Purpose Vehicle (SPV), in order to
enter into the equity capital markets.
How this entrance in equity markets will be
materialized?
• The Sponsors appoint an underwriter or a syndicate of underwriters better

specialized in this particular formation to undertake the registration and
sale of the SPAC’s stocks to public. The preparation for the SPAC’s IPO
takes less time than that of a conventional company considering only that
the SPAC’s does not usually contain even assets in its balance sheet while
the conventional shipping company is encumbered with vessels. Essential
point in the SPAC is that a future plan must be established and
communicated to the public regarding the use of the IPO proceeds.
• PRIVATE EQUITY
Private Equity constitutes another sub-category of equity
financing. In plain words, Private Equity, or abbreviated PE, is
capital infused directly in companies without having to be listed
on the public exchanges. PE can be either retail or institutional
investors acting solely or pooling a fund. By financing through PE,
companies remain private while enjoying liquidity, materialize
their growing plans and refinance or repay their indebtedness.
PANEL COMPANIES’
• Each company CAPITAL STRUCTURE
of the group has different types of capital employed
creating a different capital structure evolving during the examined time
span. This capital structure differentiation lies on multiple factors such as
future growth plans, management decisions, company’s creditability,
current shipping market’s condition, existing interest rates etc. In fact,
there is no focus on what were the reasons leading each company to its
current capital structure, however they will be mentioned, but on whether
this capital structure accommodates each company’s needs bringing the
maximum benefit with the least cost. Notice that cost refers to both
money and loss of flexibility terms.
• The need for regulation Credit Institutions
A loan agreement is the important link between the bank and the borrower
(ship-owner). Sometimes it is very difficult to come into an agreement satisfac-
tory to both loan officers and borrowers. Both parties have different points of
view and opposite interests. In general an owner would like to see from the side
of the bank:
- a minimal equity contribution, so if the project goes right, he will

make a very high return on the investment,
- a minimum collateral recourse to himself or to investors, which
mini- mises losses if the project goes wrong,
- a maximum loan period to match the life of the asset,
moratoriums, balloon and bullet terms,
- cheap finance in terms of interest,
- fast response time, advises and other financial products from the
bank and
- minimal documentation.
Credit Policy
• The commercial banks’ loan policies as a whole, contain a
uniformity regarding their strategic approach. Different
factors affect the activity of the individual bank though. It
should be noted that all financial institutions generally tend to
specialize on specific types of loans and markets operating a
structured loan portfolio, developing their experience and
confidence in their ability to manage credit risk.
Legal Regulations
• banks may be subjected to. For example, the amount of loan to be granted to a shipping company is limited, de-
pending on debt-equity ratios such as the ratio of deposits to the total loans at the time being.
The Portfolio Proportion
that has already been allocated to shipping loans. When many ship-owners have been offered credit,
the bank may choose to save loan power to support the existing loans in case it is required in a
distress or a low market.
• Not all banks are loyal to their clients up to the same extent. Some, once
they have granted a loan, will intensively support the project both in good
and in bad times.
• Forms of risk
RISK
For an efficient risk management, a comprehensive
approach must be adopted to enable the risk manager
achieve the desired outcome. This is why risk has been
divided into 4 fractions named after the sector they affect.
They are listed below and are brought together by the
departments that asses, measure and manage the total risk
to which an enterprise is exposed to.
• Credit risk the risk that a counterparty might become unable, or less
likely, to fulfil its contractual obligations.
• Business risk the risk that change in the variables of a business plan will
destroy that plan’s viability, including quantifiable risks such as business
cycle or demand estimation risk, and unquantifiable risks such as step
changes in com- petitor behaviour or technology.
• Market risk the risk to a financial position from changes in market
factors such as interest rates, foreign currency value, and/or prices of
commodities or equity.
• Operational risk the risk of loss due to physical catastrophe, technical
failure and human error in the operations of a firm including fraud,
failure of management and process errors.
Some shipping financing deals are structured
on multiple assets and/or tranches:
Fleet financing is a way for ship-owners to raise a revolving credit
facility, whereby the drawing under the loan is controlled by a Value-to-
Loan covenant to be tested at drawing (borrowing base). Alternatively,
(or in combination with the former structure), a term-loan on multiple
vessels is often used to turn to the syndicated loan market in order to
raise substantial amount of financing and achieve economies of scale in
terms of financing transaction costs. In any case, the loan is split in
tranches by vessel for ease of loan management and lenders take a
pro-rata share in the loan. Sale of any collateralised vessel by the ship-
owner will generally lead to an early repayment under the loan
enabling the maintenance of the same value-to-loan level.
• In the case of Export Credit Agency (ECA) financing, a
commercial loan tranche can be combined with the ECA loan
to allow for a longer tenor / slower amortisation than a 12-
year full-pay-out OECD-conventional ECA financing. ECA
financing and commercial loans generally have pari passu
treatment and share same security package.
• Financing with tranches benefiting from a differing level of
subordination is not very common:
• o In a few case of a stressed newbuilding market, a shipyard can
offer seller-loan type financing to borrowers. Such financing are
secured on the assets, but based on a second-ranking mortgage
and subordinated bullet repayment.
• o When these types of financing are implemented, securities will
generally be differentiated (2nd ranking mortgage, 2nd ranking
assignment of earnings, 2nd ranking insurance assignment, etc.)
and an intercreditor agreement will co-ordinate both first and
second mortgagees’ rights (2nd mortgagee being generally deeply
subordinated and having no rights to arrest vessels, but rather buy-
out rights of the first mortgagee).
The risk benefits of the structures underlying
Shipping Finance deals
Shipping finance benefits from tools enabling the
tight supervision and management of the exposure
• Shipping finance relates to long life assets and from

the fundamental underlying global trade in raw
materials or finished goods, thus enabling visibility of
underlying cash flows over the long run.
• Operational Risk
Counting something, or controlling it, means
putting a line around it. Soon, regulators and
RAROC (Risk Adjusted Return On Capital)
analysts will need to decide whether to
include, say, strategic business risks or
reputational risk in their allocation of
regulatory and enterprise-wide capital.
Yet managers too, will need to know whether

their assessment of operational risk in a
business line should include, for example, the
risk of a trader misunder- standing a
sophisticated financial model. Some experts
are sure that model risk should be included;
while others are sure it forms a more natural
component of market risk. Operational risk
definition holds some key problem areas.
Reputational risk
• Model Risk
Model risk is the risk arising out of the wrong selection, application, or
implementation of a model. To the extent that a bank knowingly and properly
assumes the risk of applying a proprietary model up to a given level of
exposure, managing model risk is the primary concern of business lines and
the market or credit risk management team. To the extent that a model is
deliberately or foolishly misapplied, implemented with the wrong data feeds,
or relied upon in a way that falls short of best practice, risk managing model
risk additionally becomes the concern of operational risk and audit teams.
But the line between these two sets of risks is hard to draw.
Extreme credit/market risks
• Some practitioners, looking through the history of major market and credit losses,
have begun to wonder whether all major losses that come as a surprise to the
stakeholders in a firm are, in essence, operational risks. According to this logic, if the
institution has lost more money than it intended to put at risk then necessarily
something has gone wrong in risk reporting and corporate governance. If the most
important lessons that can be learned from the failure lie in these areas, rather than
in the measuring or interaction of a credit or market risk, then the failure might best
be treated as a failure in operational or enterprise-wide risk management.
Business Risk
• Many institutions argue that this risk is quite distinct from operational risk
in terms of identification and risk management - and that managing it
forms a core competence of senior executives. Banks are fiercely resisting
the idea that they should reserve regulatory capital against business
strategic risk in addition to the capital they might have to reserve for core
operational risks.
• Risk models potential
Risk models are of key-importance to ship-owners as well.
Fundamental investment decisions are simplified up to a
substantial extent; choosing the market, the charter (SPOT or time-
charter) and the finance options (high-yield bond or bank debt)
have proxy values that simplify the decisions. Even freight traders
need to assess and monitor risks to evaluate the performance of
the market.
Problems with models
• If regulatory risk management fulfils its objectives there will
be no systemic failures, but the converse is not true; absence
of systemic failures does not mean that the system works.
Should senior management discover that the risk model is
faulty, it may be too late to do anything about it
Correlation risk
• As it will be further discussed in chapter 2.1 on modern portfolio theory, the

total amount of risk in a portfolio depends on the likelihood of several
things going wrong at the same time. Correlations appear to be much lower
if they are estimated at a time when financial markets are rapidly climbing.
Contemporary developments
• Modern portfolio theory

As investors in loans, banks must earn a sufficient high economic return on the
capital that supports the loan portfolio. If not, the bank should shift the capi-
tal to some other business.
The main issue in MPT is the aspect of correlation. Combining the assets (loans) in a
portfolio, the investor can end up with a risk that is lower than the weighted average of
the risks of the individual assets. The implication of this is of course, dramatic; an
investor can increase expected return without increasing risk overall. There are however
difficulties in applying MPT to credit portfolios, that escape the purpose of the essay
and shall not be analyzed here.
Securitizations
• It is the process of converting bank assets into securities that are
backed by the assets’ performance. In short, this technique
requires the creation of a legal entity [Special Purpose Vehicle
(SPV)] which holds the underlying assets. The balance sheet of this
SPV includes a pool of loans or bonds in the asset area and
securities of varied payment priority as liabilities.
• Employment Commercial Bank Loans
the bank requires or demands or seeks for a long-term em-
ployment of the vessel. A contract of affreightment, a long lasting
bareboat chartering, a secured employment in general is very
important for the banker, since it is possible to predict the income of
the vessel during the first years, when the repayments are
considerably higher. Especially when the market is weak or there are
signs that the market will sink, such a security can be a crucial factor.
• First Mortgage
the first mortgage is a form of negative security. Practi- cally
means that the bank, the lender (mortgagee) has priority in a
claims sequence and that he can take possession of the asset,
if the borrower (mortgagor) fails to fulfil his pre-agreed
financial obligations. The mortgagee can either, manage
and operate the asset on his account until the loan amounts
are repaid or, sell the asset to recover outstanding pay-
ments.
• Second mortgage
it is an additional mortgage on the asset, given to the
lender, who provides financing, apart from the primary
one. It is not a desired security for the bank, but if
there is an assured employment included in the plan,
then it can be an invaluable tool for the ship-owner to
improve his financial strength.
• Assignment of Income
it is an agreement, where the
borrower assigns to the lender a
portion of the revenue. In the case
that the vessel has time charter
agreement, then a specific
percentage of the hire may be depos-
ited directly on an account of bank by
the charter.
• Assignment of the Insurance
it is an agreement, where in case of loss or
damage the insurance company and the P&I
club will cover all remaining payments. This
agreement is more complicated, since the
underwriting of the risk costs in premiums and
involves third parties.
• Corporate or personal guarantees
this is an agreement, where the lender demands guarantees
from the owning company or the owner himself. In the case of
a very rich owner, this agreement may be very important for
both parties, since the owner is binding the plan with his
belongings and reputation and the bank assures the personal
interest and prudent management of the owner.
• Security Maintenance clauses
there are some clauses in the agreement, which protect the bank,
in the case, where the remaining value of the asset is less than the
outstanding loan. Most commonly, such clauses include also
personal or corporate guarantees.
Pros and Cons of LEASING
• Advantages for the Lessor

• Tax allowance based on •‘big Diadvantages
ticket’ depreciation for the
• Stable stream of repaymentsLessor
and return on investment
• Direct ownership of the asset – no mortgage
– Taxenforcement
allowance based on
‘big ticket’ depreciation
– Exposure to third-party
claims
– Operator may involve
the asset in first-priority
liabilities
• Advantages for the Lessee
• 100% financing
• exposure is known and stable
• Off-balance sheet. Good for companies with high gearing and nar- row
borrowing limits
• Disadvantages for the Lessee

- Ownership forfeit
- Not applicable in all cases
Ship Financing
Example of Shipping
Company
d’Amico International Shiping
d’Amico International Shipping S.A.

(DIS) is the d’Amico division operating
in the Product Tanker sector, listed
since 2007 on the Milan Stock
Exchange. It has a modern fleet
specialized in the transport of refined
petroleum products, serving the main
petroleum companies and trading
companies. Endorsing MARPOL/IMO*
regulations, the Company can also
transport vegetable oil and other
chemical products.
Financial Report of d’Amico
International Shiping
Fleet
The DIS Group controlled as at 31 December 2017, either through ownership or charter
arrangements, a modern fleet of 55.5 product tanker (December 31, 2016: 52.8). The product
tanker vessels of the DIS Group range from approximately 36,000 to 75,000 dwt.
The following tables sets forth information about the DIS fleet on the water as at December 31,
2017.
Operating performance
Revenue was US$ 391.0 million in 2017 compared with US$ 347.1 million
realized in the previous year. The increase in gross revenues compared
with the previous year was mainly a consequence of the higher number
of vessels operated on average by DIS in 2017
Cash Flow
As we seen on the table below, DIS’ Net Cash Flow for 2017 was negative
for US$ (2.5) million vs. US$ (20.1) million in 2016. During the year, gross
capital expenditures for US$ 148.1 million, were partially compensated
by US$ 105.0 million proceeds from disposal and US$ 51.7 million
positive financing cash flow.
Net Debt
The following table shows the Net Debt at the end of the fourth quarter
2017 compared with the figures at end of the third quarter of the same
year. The substantial increase in current financial debt from 30
September 2017 is due to the reclassification of US$ 44.2 million
outstanding debt on the three additional vessels classified under Assets
held for sale as at the end of December 2017.
Consolidated Income Statement
From the table on the right we can see the

different between the amount of revenue from
year 2016 and 2017 is different. There is
escalation amount of revenue from 2016 to
2017. Also from this table we can see that the
voyage cost is increasing from year 2016 to
2017.
Financial Income
From the table on the right we can see

the different between the amount of
financial income from year 2016 and
2017. There is escalation amount of
financial income from 2016 to 2017.
Costs for Operating the Business
From table on the right we can see that the

cost for time chrater, direct operating, and
administrative tend to increase from year
2016 to 2017. Only general and
administrative cost that decreasing form
2016 to 2017. This table also provide the
amount of money that this company get
from disposal of vessels from year 2016
and 2017.
Consolidated Statement of Cash Flows
Table on the right provide us with the

data of depreciation, current income
tax, and financial charges. We can see
that the amount of monye that this
company pay for income tax in year
2016 is much bigger compared by 2017.
The amount of deprecisation is
increasing from year 2016 to 2017.
Table on the right also provide us with

the data of net cash flow from
activitites. The amount of this data is
collected by summarizing the amount
of money that used for movement in
inventories, amount receivable, taxes
paid and so on.
Table on the right also provide us with the data

of net cash flow from investing activitites. The
amount of this data is collected by
summarizing the amount of money that used
for acquisition of fixed assets, proceeds from
disposal of fixed assets and so on. We can see
that the amount of net cash flow from investing
activities is increasing from year 2016 to 2017.
Table on the right also provide us with

the data of net cash flow from financing
activitites. The amount of this data is
collected by summarizing the amount
of money that used for dividends paid,
share capital increase, treasury shares
and so on. We can see that the amount
of net cash flow from financing
activities is decreasing from year 2016
to 2017.
Voyage Cost
Voyage costs arise from the

employment, direct or through our
partnerships, of DIS’ vessels, through
voyage charters or contracts of
affreightment. When vessels are
employed through time charters they
do not incur voyage costs.
OTHER DIRECT OPERATING COSTS
Other direct operating costs include

crew costs, technical expenses,
technical and quality management fees,
insurance costs and sundry expenses
originating from the operation of DIS’
owned and bareboat chartered vessels.
GENERAL AND ADMINISTRATIVE
COSTS
As we see on the table below total of
administrative cost is decreasing from
year 2016 to 2017. Personnel costs in
2017 relate to on-shore personnel
salaries. Personnel costs also
comprises the amount of US$ 1.2
million (2016: US$ 1.6 million) relating
to directors fees and an amount of US$
1.0 million paid to senior managers
including the CEO and other managers
with strategic responsibilities.
Financing Ships
Ships tie up a lot of capital. Container-ships and
tankers can cost up to $150 million each, about
the same as a jumbo jet, while LNG tankers, the
most expensive ships, cost $225 million each.
Because the ships are internationally mobile and
their owners can choose their legal jurisdiction,
shipping companies are able to adopt less formal
corporate structures than are found in most other
businesses employing such large amounts of
capital.
Where does the money to finance ships come
from?
• This brief historical review has touched on many ways of

financing shipping, showing how the financial techniques
employed have changed from one decade to another.
• First the source: the money comes from corporate or personal
savings which need to be invested. Some corporations and
individuals handle the investment themselves.
• These professional fund managers in column 3 of Figure 7.2 have
two options. They can invest the money or they can lend it. The
investor commits funds to a business venture in return for a
share of the profits.
• One method open to fund managers is to place the funds directly
with companies which need finance. The lender, which might be
a pension fund or an insurance company, negotiates a financial
agreement to suit both borrower and lender/
The financial markets buy and sell packaged
investment funds
• An alternative is to use the financial markets. Each of the
three markets are money markets, bond markets, and
equuity markets.
• Money markets trade in short-term loans (less than a year).
The ‘market’ consists of a loose network of banks and
dealers linked by telephone and computers who deal in any
short-term debt such as bankers’ acceptances, commercial
paper, negotiable certificates of deposit, and Treasury bills.
• Bond markets trade in interest bearing securities with a
redemption date of more than a year, often 10 or 15 years.
Companies issue bonds or debentures, via a dealer, and to
make it tradeable a bond must have a credit rating.
• Equity markets trade in equities. This allows creditworthy
companies to raise capital by means of a ‘public offering’ on
the stock market.
Definition of ‘shipowner’ and ‘shipping
• Before proceeding duscussing aboutcompany’
ship financing we should know the
difference between shipowner and shipping company. A shipowner is an
individual who owns a controlling interest in one or more ships. Meanwhile a
shipping company is a legal organization which owns ships. It may be a legal
partnership, company or corporation in a jurisdiction with enforceable laws of
corporate governance.
FINANCING SHIPS WITH PRIVATE FUNDS
The most obvious way of financing ships is with the owner’s private resources.
The advantage is that close friends and relations who understand shipping are
more likely to tolerate the volatility of its returns.
FINANCING SHIPS WITH BANK LOANS
Bank loans are the most important source of ship finance. They provide
borrowers with quick and flexible access to capital, while leaving them with
full ownership of the business. There are three main types of loans available.
Those are mortgage-backed loans, corporate loans, and loans made under
shipyard credit schemes.
Mortgage-backed Loans
A mortgage-backed loan relies on the
ship for security, allowing banks to
lend to oneship companies which
would not otherwise be creditworthy
for the large loans required to finance
merchant ships.
The borrower is a one-ship company
registered in a legally acceptable
jurisdiction such as Panama.
Trend Extrapolation
Because time series mix trends and cycles, extrapolation must be carried out with
care. A forecast based on one phase of a cycle, for example between points B1 and
B2 in Figure 17.5, is highly misleading because it suggests faster growth than the
true trend A1A2. In fact the cyclical component Ct changes from negative at B1 to
positive at B2. Just after point B2 the cycle peaks and turns down, so it would not
be correct to extrapolate this trend.
Time Series Analysis
Now we will analyse a time series in a
different way, known as ‘decomposition
analysis’. Figure 17.6 shows a 16-year series
for the freight rate for grain from the US
Gulf to Japan. Brokers watch this series
carefully for signs that rates are moving in
or out of a cycle. We have three
components to think about: the trend;
some big cycles which seem to peak in
1995, 2000 and 2004; and what looks like
short-term volatility which may turn out to
be seasonal.
The next step is to calculate the seasonal
cycle by averaging the deviation from the
trend for each calendar month, to produce
the pattern shown in Figure 17.7. By the
magic of statistical analysis the random
fluctuations of the dotted line in Figure 17.6
are transformed into the well-defined
seasonal cycle in Figure 17.7. The cycle in
Figure 17.7 can be used to ‘correct’ trend
forecasts and make allowance for seasonal
factors. The dip over the summer is quite
significant.
Regression Analysis
Regression analysis is a useful statistical technique for
modelling the relationship between variables in the
shipping market. Spreadsheets make estimating
regression equations straightforward and, with so much
data available in digital form, regression analysis has
suddenly gained a new lease of life. Developing big models
has become much easier, but regression can also be used
for simple jobs. So it is worth looking carefully at the
application of this technique. There are excellent
textbooks which discuss the methodology in detail, so here
we will only deal with the broad principles
Multiple Regression Analysis
Regression analysis can be extended by adding more explanatory variables. Continuing with
secondhand prices, we can construct a time series model to forecast the price of a five-year-old
Aframax tanker using the data shown in Figure 17.9. This time series starts in 1976, showing many
fluctuations in the price over the years which the model needs to explain.
When we compare the
estimated past values shown by
the dotted line in Figure 17.10, it
is clear that the fit is reasonably
close. Throughout the 22-year
period the equation explains the
main cycles in second-hand
prices very well. Its weakness is
that it sometimes overestimates
the second-hand price at the
peak of cycles, and
underestimates it at the trough.
These are quite significant
differences.
Probability Analysis
The basic technique involves taking a sample of
data, either a time series or a cross section, and
calculating the number of times a particular event
occurs. For example, if the basic data is a time
series of tanker freight rates, you calculate how
often during the sample period freight rates were
above or below a particular level. If VLCC freight
rates exceeded $60,000 per day 10 times in a data
series with 100 entries, then on the basis of this
sample, you can say there is a 10% chance that
freight rates will exceed $60,000 a day As an
example, suppose we take a time series of monthly
earnings for tankers and bulk carriers, and analyse
them into the histograms shown in Figure 17.11.
Ship Finance
The ship finance is one of a fund raising method backed by the cash flow generated
from an acquisition and operation of ships. It includes such a financing method relying
on the credit worthiness of the specific company as shipowner but this report is
drafted for the credit rating method in the premises of such fund raising solely relying
on the value of the ship and the cash flow generated from the operation of a ship.
General Scheme
Although the financing scheme varies in each project, the basic scheme of the core
part is as bellows,
The shipowner company raises fund by a loan and then purchases, owns and let
out a ship to the charterer. The charterer pays a charterage to the shipowner
company. The shipowner company repays the principal and interest of a loan from
the cash flow after deducting necessary expenses from the charterage. The
shipowner company is incorporated in abroad such as Panama and in many cases
it is SPC for purely limited to owning ships.
Analytical Points
The required analyses for the ship finance are briefly classified into (1) grasping the
project scheme, (2) analysis of the charterer, (3) analysis of the cash flow, (4) analysis of
the project structure. The core of the repayment resources are the charterage and it is
important to analyze the credit worthiness of the charterer as well as scrutinizing the
spec of the ship and the overall project scheme. Then analysis is to be made focusing on
what measures are to be taken to mitigate the fluctuating risk of the cash flow.
Following to the examination of the foregoing points, in the premises of no material defect to
the project structure, the credit rating will be assigned by taking account of the analyses of
the chaterer and the cash flow.
• Grasping the Project Scheme
Any possible impacts on the repayment resources are examined by analyzing the type, size
and spec of the ship to which a loan is considered to extend and also by collecting necessary
information about the shipping market situation and the related laws.
• Analysis of the Charterer
Analysis is made based on the “Rating Methodology (Corporate)” by JCR.
When the charterer is the SPC of a shipping company, in some case guaranty from the
shipping company is required for the payment of the charterage.
• Analysis of the Cash Flow
In an ordinary ship finance, during such period when a ship has been let out without any
trouble, the repayment of the loan is made by appropriating the remaining amount of the
cash flow after deduction of necessary costs. For the case when a certain amount of the loan
is still outstanding at the final maturity of the loan (balloon portion), then the loan shall be
repaid fully by refinancing the loan or disposing the relevant ship. When some repayment
trouble occurs during the loan outstanding period, the loan shall be repaid by a voluntary sale
of the ship or an exercise of the ship mortgage.
Therefore in a cash flow analysis of the ship finance, it is essential to
analyze the cash flow which is to be received either from a sale of or
let out a ship.
• Cash Flow from letting out a Ship
In an analysis of the cash flow from let out a ship, the following
points are examined such as the level of the cash-in, cash-out, the
risk of its fluctuation and the measures to mitigate such risk. In
addition to a standard case analysis, by assuming various scenarios
of stress and by utilizing a cash flow sheet, a quantitative analysis
will be made so as to assess the capability for debt services.
• As to the cash-in, the analysis of the charterage is most
important. In the analysis of the level of the charterage and risk
of its fluctuation, the following points are diligently examined
based on the charterhire contract.
• Whether the charter hire period covers the entire period of the
loan?
• Whether the level of the charterage is fixed for the entire period
of the charter hire contract and whether any adverse change of
the contract for the shipowner company is restrained?
• Whether the off-hire or the cancellation clause in the relevant
contract is deviated from a standard clause.
When the currency of the charterage differs from the currency of the loan, it is examined
whether resilience for the exchange fluctuation is secured? In the situation where the shipowner
company receives the charterage in US$ then converts to Yen and applies the proceeds to the
repayment of a loan, the shipowner company owes a currency exchange risk.
Actually there is a risk that the cash-in amount in term of Yen will be decreased when Yen is
appreciating. In this case, it is examined under which exchange rate level the shortfall of the loan
repayment will occur. And also if any counter measure to mitigate such risk is provided under the
situation of Yen appreciation, the efficacy of such counter measures is assessed.
Industry-Related Risks
• An investment in the company involves a significant degree of risk for both

equity investors and debt providers, as the decision to support a shipping
project financially involves capturing capital and restraining liquidity for a
relatively long period. There is no assurance that the company’s objectives
will be achieved or that there will be any return of capital. Potential investors
and lending institutions should carefully consider all of the information set
forth in the loan agreement, including the following risk factors, and consult
professional advisors before deciding to invest in the company.
• Cyclicality of the Markets
Risks Relating to the Shipping Industry
The company is exposed to cyclical fluctuations of the shipping
industry throughits charters,which result in the volatility of sales,
profitability andv essel values. The company’s portfolio may comprise
both long-term and short-term charters (including voyage charters)
of vessels as well as pool employment. Since its charters would be
affected by cyclical fluctuations in the relevant shipping industry
segment, the company would be affected indirectly. The shipping
industry is subject to cyclical fluctuations primarily due to changes in
the supply of and demand for different shipping capacities, which
result in the volatility of sales, profitability and vessel values.
Off-Hire and Docking Periods
• In case of off hire and dry dockings, the companyreceives no charter

hire but has to bear all costs incurred during the period. Under the
company’s charter and pool agreements, when a vessel is off hire or
not available for service, the charterer or pool manager would
generally not be required to pay the company the charter hire. The
company would have to cover all costs during such off-hire and
possible repositioning, including the cost of bunkers.
•
Asset Price Fluctuations
The company is exposed to trends inherent in the
shipping industry. Ingeneral, vessel values experience a
degree of volatility. The fair market value of the
company’s vessels can be expected to fluctuate
depending on the economic and market conditions
affecting the shipping industry as well as on
competition from other shipping companies in a largely
fragmented market, from different types and sizes of
vessels and from other modes of transportation.
Political and Work Economy Related Risks
• The vessels call at ports in various countries around the world,
including in emerging markets. Hence, the company’s business is
subject to the political, economic and social conditions of the
countries where these ports are located. For example, the
company will be exposed to the risks of political unrest, war and
economic and other forms of instability, such as natural
disasters, epidemics, widespread transmission of communicable
or infectious diseases, acts of God, terrorist attacks and other
events beyond its control, which may adversely affect local
economies, infrastructures and livelihoods.
• Parties to a Project Financing
Parties and Their Roles
One of the complicating (and interesting) features of most projects is the
considerable number of parties with differing interests that are brought
together with the common aim of being involved to a greater or lesser
extent with a successful project. It is one of the challenges of those
involved with a project to ensure that all of these parties can work
together efficiently and successfully and cooperate in achieving the
project’s overall targets.
• The project company will usually be a company, partnership, limited
Project Company/Borrower
partnership, joint venture or a combination of them. As noted in section
1.5, this will be influenced to a certain extent by the legal and regulatory
framework of the host government. For example, in some jurisdictions it
will be a legal requirement that the holder of a licence or concession be a
company incorporated in that particular country. In other there may be
strict requirements in particular industries as to foreign ownership of
share capital or assets, particularly in strategically important industries.
Sponsors/Shareholders
• The project sponsors are those companies, agencies or individuals
who promote a project, and bring together the various parties and
obtain the necessary permits and consents necessary to get the
project under way. This might be the construction, operation and
maintenance, purchase of the services output from the project or
ownership of land related to the project.
Third-Party Equity Investors
These are investors in a project who invest alongside the sponsors.
Unlike the sponsors, however, these investors are looking at the
project purely in terms of a return on their investments for the benefit
of their own shareholders. Apart from providing their equity, the
investors generally will not participate in the project in the sense of
providing services to the project or being involved in the construction
or operating activities.
• The sheer scale of many projects dictates that they cannot be financed by a
Banks
single lender and, therefore, syndicates of lenders are formed in a great
many of the cases for the purpose of financing projects. In a project with an
international dimension, the group of lenders may come from a wide variety
of countries, perhaps following their customers who are involved in some
way in the project. It will almost certainly be the case that there will be
banks from the host country participating in the financing. This is as much
for the benefit of the foreign lenders as from a desire to be involved on the
part of the local lenders. As with the involvement of local sponsors, the
foreign lenders will usually take some comfort from the involvement of local
lenders.
Construction Company
• In an infrastructure project the contractor will, during the
construction period at least, be one of the key project parties.
Commonly, it will be employed directly by the project company
to design, procure, construct and commission the project facility
assuming full responsibility for the on-time completion of the
project facilities usually referred to as the “turnkey” model.
• Project Financing Documentation
Role of Documentation
The essence of project financing is the apportionment of project and other risks amongst the various
parties having an interest in that project. The way in which this risk allocation is implemented is,
essentially, through the complex matrix of contractual relations between the various project parties as
enshrined in the documentation entered into between them. There is no general body of law in
England (or elsewhere) that dictates how projects must be structured or how the risks should be
shared amongst the project parties.
These documents can conveniently be grouped as follows:

• Shareholder/sponsor arrangements
• Loan and security documents
• Project documents.
• Project Loan Agreement
In most projects this will be a syndicated loan agreement entered into between the
borrower, the project lenders and the facility agent. It will regulate the terms and
conditions upon which the project loans may be drawn down and what items of
project expenditure the loans may be used for. The agreement will contain the usual
provisions relating to representations, covenants and events of default found in
other syndicated loan agreements but expanded to cover the project, project
documents and related matters. The provisions relating to the calculation and
payment of interest will be similar for standard Euro-currency, loans except that in
most projects interest will be capitalised during the construction period or until
project revenues come on stream.
• Bonds Project Structures
A potential source of finance for projects is the bond market. In the
US, many projects have been funded by bonds and in the UK a number
of the Government’s Private Finance Initiative (PFI) projects were
funded using bonds (the majority with monoline insurance cover and
some where the bondholders were taking pure project risk). However,
whilst the bond market has been an important source of funds for
projects, it is likely that the vast majority of projects will be financed
through loans rather than bonds as loans are seen as more flexible.
“Build Operate Transfer” “BOT” Model
Many projects around the world are structured and financed on the BOT model. There are a great number of varieties (and accompanying acronyms) and some of the more
common are:
• DBFO: design, build, finance, operate
• DBOM: design, build, operate, maintain
• BOT: build, operate, transfer
• DBOT: design, build, operate, transfer
• FBOOT: finance, build, own, operate, transfer
• BOD: build, operate, deliver
• BOO: build, own, operate
• BOOST: build, own, operate, subsidise, transfer
• BOL: build, operate, lease
• BRT: build, rent, transfer
The basis for all projects structured on the BOT model is likely to be the
granting of a concession or licence (or similar interest) for a period of years
involving the transfer and re-transfer of all or some of the project assets.
Forward Purchase Model
• Under this structure, sometimes known as an “Advance Payment Facility”, the project
lenders will make an advance payment for the purchase of products generated by the
project which will be deliverable to the lenders following completion of the project.
The project company will utilise the proceeds of the advance payment towards
financing the construction and development of the project. On delivery of the
products following completion, the lenders will either sell the products on the market
or sell them to the project company (or a related company of the project company)
and use the proceeds to “repay” themselves. Alternatively, the project company may
sell the products as sales agent for the lenders. Some structures entitle the project
company to make a cash payment to the lenders in lieu of delivering products.
Sharing Of Risks
• Identification and Allocation of Risks

The essence of any project financing is the identification of all key risks associated
with the project and the apportionment of those risks among the various parties
participating in the project. Without a detailed analysis of these project risks at the
outset the parties will not have a clear understanding of what obligations and
liabilities they may be assuming in connection with the project and, therefore, will not
be in a position to consider appropriate risk mitigation exercises at the appropriate
time. Considerable delays can occur and expense can be incurred, should problems
arise when the project is under way and arguments ensue as to who is responsible.
Ground Rules
There are some ground rules that should be observed by the parties involved in a project when
determining which party should assume a particular risk:
• A detailed risk analysis should be undertaken at an early stage
• Risk allocation should be undertaken prior to detailed work on the project documentation
• As a general rule, a particular risk should be assumed by the party best able to manage and
control that risk, e.g. the risk of cost overruns or delay on a construction project is best
managed by the main contractor; in a power project, the power purchaser (if a state entity) is
in a better position than others to assume the risks associated with a grid failure and
consequent electricity supply problems for any reason
• Categories of Project Risks
The following is a list of some of the key project risks encountered in
different types of projects. Of course, not all of these risks will necessarily be
encountered in each project, but it is likely that most participants in projects
will need to consider one or more of these risks and decide by whom these
risks are to be assumed and how. It has already been seen in section 3 that,
once these risks have been identified, it is through the various contractual
arrangements between the parties, and insurance, that these risks are, for
the most part, apportioned and assumed.
Legal and Structural Risks
• there is some overlap with both
of these risks with some of the
risks itemised above. Legal risk is
the risk that the laws in the host
jurisdiction (and any other
relevant jurisdiction) will be
interpreted and applied in a way
consistent with the legal advice
obtained from lawyers in the
relevant jurisdiction at the outset
of the project. (Change of law is
really dealt with under political
risks.) Of particular concern will
be the laws relating to security
and, in particular, the security
taken by the project lenders over
the assets of the project.
Insurance Issues
• Role of Project Insurances

Insurance is a very important aspect of most projects and certainly one that will
concern the project sponsors and the lenders equally. From the perspective of the
lenders, they will view the insurances as an integral and key element of their overall
security package for a project. Should a major casualty or disaster occur with respect
to all or a material part of the project, then the lenders may be left with little else to
proceed against! It is, therefore, perhaps surprising that in many project financings
the subject of insurances is often deferred until the last minute and then not always
given the attention it warrants.
• Scope of Cover
Cover will vary between the construction and operating phases of a
project. Details of typical insurance cover applicable to each of these
phases is set out in (picture below). Additional insurance may,
depending on the precise nature of the project, be required. For
example, in projects connected with the development of oil,
insurance against the cost of controlling a blow-out might be
required.
The Project Loan Agreement
• In most project financings the loan agreement is likely to
be the key financing document. Almost certainly
structured on a syndicated basis, there will be a number of
key points for discussion between the parties. The
following are points that are likely to arise in most project
financings and will be important issues for both the lenders
and the project company.
•Warranties, Covenants
In a project financing the and
scope of the warranties, Events
covenants and eventsof
of Default
default will be expanded to cover the project, the project agreements, the
security agreements and (usually) other major project parties. Although it has
already been noted that the remedies available to the lenders following a
default may well be limited, the usual approach is for the lenders to demand
extensive protection through warranties, covenants and events of default. This
is more to do with a desire to be able to control matters should defaults occur
than a desire to be able to accelerate and enforce their security for a seemingly
minor default. That said, there is always a danger that if the warranties,
covenants and events of default are too tightly drawn, minor delays or hiccups
in the project can trigger a default which may necessitate syndicate meetings,
waivers and unnecessary (and expensive) aggravation to all concerned.
Project Bank Accounts
• It has already been noted that one of the key features of project
loan documentation will be the requirement that the project
lenders control all the project cash flows. This control is usually
implemented through the requirement that the borrower (and
other relevant project parties) open a number of bank accounts
with either the facility agent or another bank (the project
accounts bank). These bank accounts will, of course, be charged in
favour of the lenders as part of the overall security package.
Appointment of Experts
• One of the features of project financing is the extensive use of
experts by the lenders. Whilst the lenders themselves (or at
least some of them) will profess expertise in the structuring of
the financing package for a project, there are many technical
areas associated with the project where the lenders will need
the resources of external consultants and other experts. For
example, in an oil and gas project they will need to employ
the services of external engineers who are able to advise
them on the geology of the reservoir, the quantity, quality
and recoverability of the reserves, when mechanical
completion has occurred, etc. Another example would be
traffic forecasting experts for a road or tunnel project.
Information and Acces
The supply of reliable and accurate information in connection with a project is of crucial importance for the
lenders and their advisers. Likewise, access to the project and its facilities will also be important for the lenders
to be able to check regularly on progress and to monitor compliance with the terms of the documentation. The
following are examples of the type of information usually required by lenders:
• Annual accounts and financial statements

• Periodic (e.g. monthly) progress reports during project construction • Architect’s certificates etc.,
accompanying drawdown requests together with supporting invoices
• Copies of material notices and communications received under all project agreements
• Copies of communications from relevant authorities
• LEASING
Ship financing through leasing constitutes a non-conventional way of
financing having more similarities to debt rather than equity financing.
Leasing does not entail any firm’s equity dilution, since the lender, called
the lessor, has no ownership of company’s shares but does have
ownership only of the ship or the ships he has financed. Analyzing lease-
financing structure, on the one hand, there is a company, called the
lessee, that wishes to operate or purchase a vessel but has no capital and
on the other hand, there is a financial provider, called the lessor, being
able to purchase the vessel and lease it through a lease deed to the
lessee.
Financial lease
• The lessor purchases the vessel, usually as nominated by the lessee,
and offers her to the lessee on a defined, long-term bareboat
charter. For this period of charter, the lessor receives defined lease
payments, paid by the lessee. The terms governing the bareboat
charter are agreed between the contractual parties, but in every case
the bareboat charterer, who identifies with the lessee, has to bear all
the expenses and risks that the vessel’s operation entails.
Operating leasing
• The major differences of operating and financial leasing are
summing up to three critical points: the duration of the lease
agreement, the balance sheet treatment and the residual risk.
Owning to the operating leasing own nature of granting the
right to the lessor merely for operational management, such
agreements concern shorter timeperiods than that of financial
leasing, normally ranging between 5 and 7-year contracts.
• SHIP-LOAN VERSUS SHIP-LEASING
If a comparison was to be made between leasing and another form
of financing sharing some relatively similar attributes, that would
be with financing through commercial loan. By comparing these
two ship-finance methods, the advantages and drawbacks of
leasing will be adequately presented. Suppose that a shipping
company pursues to acquire a brand new fuel-efficient vessel and
has only two ways to achieve it, either by concluding a loan or by
engaging in a leasing agreement
• MEZZANINE FINANCING
Between the conventional debt and equity financing there is another
form intervening and sharing characteristics from both, the so-called
mezzanine or hybrid financing. In essence, any type of financing that
borrows features simultaneously from both core types of financing
constitutes a hybrid financial instrument. Such instruments in their initial
form may be towards either the debt side or the equity side. Based on
this distinction they are categorized in debt mezzanine capital and in
equity mezzanine capital.
SENIOR
• Subordinated SUBORDINATED DEBT
debt is by
definition the debt, which in a
default or liquidation scenario
will be paid after the senior or
collaterized debt. Therefore, it
bears greater risk and requires
higher rate as a compensation
for undertaking it. The adjective
senior before the subordinated
has been put to express that this
debt will be serviced prior all the
other subordinated types of
capital.
•
CONVERTIBLE BONDS
A widely used sub-category of bonds’ financing is that of convertible
bonds. As their name implies, these bonds provide the ability to be
converted, under certain terms though, to common shares of the issuing
company. At their issuance, they are simple bonds functioning just like a
straight bond and making coupon payments regularly, usually in a semi-
annual basis. When a conversion into shares takes place, the same bonds
will cease acting as a fixed income security by paying coupons but they
may pay dividends according to what the convertibles’ initial reported
prospectus stipulates.
• Dryships Inc PANEL FINDINGS
Among the examined shipping companies, only Dryships embarked on financing
through convertible bonds’ issuance during the period from 2006 through 2013.
Indeed, on November 2011 and on June 2010 Dryships issued convertible senior
notes to raise capital up to $460 million and $240 million respectively. The
amounts do not constitute a separate agreement but they refer to the same
notes having a total amount of $700 million outstanding. In the below table the
important futures of this issuance are stated
• CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock is actually an equity mezzanine capital being
EQUITY FINANCING

• INITIAL PUBLIC OFFERING (IPO)
The Initial Public Offering (IPO) is a private company’s first offer of its shares to
(SPAC)

materialized?

• PRIVATE EQUITY
PANEL COMPANIES’
• Each company CAPITAL STRUCTURE
of the group has different types of capital employed
CONVERTIBLE PREFERRED STOCK
• Convertible Preferred Stock is actually an equity mezzanine capital being
EQUITY FINANCING

INITIAL PUBLIC OFFERING (IPO)
• The Initial Public Offering (IPO) is a private company’s first offer of its shares to
(SPAC)

materialized?

• PRIVATE EQUITY
PANEL COMPANIES’ CAPITAL STRUCTURE
• Each company of the group has different types of capital employed
Credit Institutions
• The need for regulation
A loan agreement is the important link between the bank and the borrower
(ship-owner). Sometimes it is very difficult to come into an agreement satisfac-
tory to both loan officers and borrowers. Both parties have different points of
view and opposite interests. In general an owner would like to see from the side
of the bank:
- a minimal equity contribution, so if the project goes right, he will

make a very high return on the investment,
- a minimum collateral recourse to himself or to investors, which
mini- mises losses if the project goes wrong,
- a maximum loan period to match the life of the asset,
moratoriums, balloon and bullet terms,
- cheap finance in terms of interest,
- fast response time, advises and other financial products from the
bank and
- minimal documentation.
Credit Policy
• The commercial banks’ loan policies as a whole, contain a
uniformity regarding their strategic approach. Different
factors affect the activity of the individual bank though. It
should be noted that all financial institutions generally tend to
specialize on specific types of loans and markets operating a
structured loan portfolio, developing their experience and
confidence in their ability to manage credit risk.
Capital structure is a key issue in
finance , it shows the company’s
debt willingness. Below are four
tables showing the debt/equity ratio
for the companies in this study, the
tables are established based on
numbers from the companies’ 2012
annual reports and profit
The average for the offshore segment is 2.1,
the LNG and LPG segment 1.37, the bulk
segment 1.122 and the tank segment -1.16. In
comparison, the ten largest companies in
Norway in 2011, ranked by revenue, had an
average debt/equity-ratio of 3.07.
The four segments in the ship-owning industry
have all a debt/equity-ratio below the average
for Norway’s top ten companies.
This indicates that the ship-owning industry in general is less
leveraged than the largest companies in Norway are. The
volatile market in the ship-owning industry may be a reason
for the difference
The debt/equity ratio expresses the degree to which a
business is geared to sustain losses before it affects the
lenders. In a volatile market, the cash flow will have
significant variations, high degree of leverage can be hard to
operate in the stage of a trough.
Propositions
The principal of Miller and Modigliani’s two propositions is
based on a world without corporate taxes. Proposition I states
that it is irrelevant how a firm chooses to arrange its finances.
Propositions
In other words, different capital structure cannot change the value
of the firm and no capital structure is any better or worse than any
other capital structure for stockholders. Cost of capital is also
unaffected by the firm’s capital structure (Ross, Westerfield et al.
2007).
Propositions
Proposition II states that the cost of equity depends on the
required rate of return on the firm’s assets, the firm’s cost of
debt and the firm’s debt/equity ratio (Hillier, Clacher et al.
2011).
Propositions
Miller and Modigliani’s propositions is often referred to as the
traditional financing principle. It argues that the firm’s overall
cost of capital cannot be reduced as debt is substituted for
equity, even though debt appears to be cheaper than equity.
Propositions
When the firm adds debt, the remaining equity becomes
risky and then when the risk rises, so will the cost of equity
capital.
Propositions
According to Ross, Westerfield et al. (2007), Miller and
Modigliani have a convincing argument that a firm cannot
change the total value of its outstanding securities by
changing the proportions of its capital structure.
Propositions
This indicates that managers cannot change the value of a firm by
repackaging the firm’s securities. Though this idea was considered
revolutionary when originally proposed in the late 1950s, the Miller
and Modigliani approach and proof have since met wide acclaim and
been challenged by other theories.
Theory
The theory of capital structure has been dominated by the search for
optimal capital structure where the company is eager to reach an
optimum. Optimums normally require a tradeoff, for example
between the tax advantages of borrowed money and the costs of
financial distress when the firm finds it has borrowed too much
(Shyam-Sunder and C. Myers 1999).
Theory
Optimum varies between companies and finding it involves
advanced calculations and is dependent of the market cycles.
Theory
According to the trade-off model, each firm balances the
benefits of debt, such as the tax shield, with the cost of debt,
such as distress costs. The optimal capital structure for a
company varies, however the debt/equity ratio for asset-
based industries tends to be approximately two.
Theory
The optimal capital structure depends on whom it is going to
benefit. Changes in capital structure benefit the stockholders if and
only if the value of the firm increases. In the presence of corporate
taxes having debt is positive related to the firms value.
A leveraged firm pays less in taxes than the all-equity firm
does. In addition, the value of a leveraged firm is greater than
13 the value of an all-equity firm, because the value of the firm
is the sum of debt and equity. The illustration in figure 1
conveys this example in a simple matter.
Tax deductions on the company’s earnings, due to debt, gives
the company greater profit. Why different companies choose
different capital structures is often a result of the company’s
or the manager’s attitude to debt.

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Maritime Business

La ode muhammad ronaldo amrin (04211640000088)

- Assignment of Shipbuilding Contract

- Maritime Mortgage on Vessel

• Export Credit Insurance Packing Credit

The offshore segment consists of companies that operate an

Companies in the Liquefied Natural Gas and Liquefied Petroleum

Tankers transport liquids in bulk with cargo space consisting

The value of a bond is fluctuating and it is assumed that this can

Among economists, it is considered a common

It is common understanding that the

The NPV calculations result in a discounted

1. Grasping the project scheme

1. Bankruptcy Remoteness from relaten parties

• The market value of vessels may ﬂuctuate signiﬁcantly.

• An investment in the company involves a signiﬁcant degree of risk for both

• In case of off hire and dry dockings, the companyreceives no charter

These documents can conveniently be grouped as follows:

• Identification and Allocation of Risks

• Role of Project Insurances

• Annual accounts and financial statements

Financing shipping projects by tapping the public debt

• One of the most important research questions in the freight derivatives

• The debtor may secure the loan by providing a guarantee to

• Equity financing addresses to every single company, from a small-scale

• Special Purpose Acquisition Company is a blank check company formed for

• The Sponsors appoint an underwriter or a syndicate of underwriters better

- a minimal equity contribution, so if the project goes right, he will

• Shipping finance relates to long life assets and from

Yet managers too, will need to know whether

• As it will be further discussed in chapter 2.1 on modern portfolio theory, the

• Modern portfolio theory

• Advantages for the Lessor

• Disadvantages for the Lessee

d’Amico International Shipping S.A.

From the table on the right we can see the

From the table on the right we can see

From table on the right we can see that the

Table on the right provide us with the

Table on the right also provide us with

Table on the right also provide us with the data

Table on the right also provide us with

Voyage costs arise from the

Other direct operating costs include

• This brief historical review has touched on many ways of

• An investment in the company involves a signiﬁcant degree of risk for both

• In case of off hire and dry dockings, the companyreceives no charter

These documents can conveniently be grouped as follows:

• Identification and Allocation of Risks

• Role of Project Insurances

• Annual accounts and financial statements

• Equity financing addresses to every single company, from a small-scale

• Special Purpose Acquisition Company is a blank check company formed for

• The Sponsors appoint an underwriter or a syndicate of underwriters better

• Equity financing addresses to every single company, from a small-scale

• Special Purpose Acquisition Company is a blank check company formed for

• The Sponsors appoint an underwriter or a syndicate of underwriters better

- a minimal equity contribution, so if the project goes right, he will

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