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Student number: SML S17099 Specialization: Shipping Management and Logistics (SML)

TYPE OF ASSIGNMENT: Individual Assignment Class of 2017 Term 1 Subject: MGM 103 Financial Management – A triptych in international finance: Shipping Investment – Case Study.

Number of credits: 3 EC Date: 02 May 2017 Given by: Professor Ilias D. VISVIKIS

Word count: 3300 (Excluded table of contents, list of figures, list of abbreviations, reference list, annexes and figures description.)


Table of Contents List of Abbreviations ................................................................................................................. 3 List of Figures ............................................................................................................................ 4 1. Introduction ............................................................................................................................ 7 2. Macroeconomic environment – Fundamentals of maritime economics. ............................... 8 3. Investment appraisal .............................................................................................................. 9 3.1. Discount Cash Flow Approach (DCF) – Long Term Asset Value method (LTAV). .................. 9 3.1.1. Estimation of Beta (b) ......................................................................................................... 10 3.1.2. Re-estimation of Leverage (b) ............................................................................................ 11 3.1.3. Cost of Equity Estimation (CoE) ........................................................................................ 12 3.1.4. WACC Estimation. ............................................................................................................. 12 3.2. Cash Flow Analysis, Net Present Value (NPV) and Internal Rate of Return (IRR) ................. 12

4. Project viability .................................................................................................................... 13 4.1. Bank perspective. ....................................................................................................................... 13 4.2. Investor perspective ................................................................................................................... 13 4.3. Industrial Group Perspective...................................................................................................... 14

5. Further negotiations terms ................................................................................................... 14 5.1. Loan Agreements ....................................................................................................................... 14 5.2. Charter-party renegotiation. ....................................................................................................... 15 5.4. Flag and registry and SPC Domicile. ......................................................................................... 16 5.5. Pre-Delivery Trench................................................................................................................... 17

6. Embedded options................................................................................................................ 17 6.1. Option to Abandon ..................................................................................................................... 17 6.2. Option to expand. ....................................................................................................................... 18

7. Risk factors affecting the asset value ................................................................................... 20 7.1. Business Risk ............................................................................................................................. 20 7.2. Foreign Exchange Risk .............................................................................................................. 21

9. Conclusion ........................................................................................................................... 22 References ................................................................................................................................ 24 Annex A – Initial Cash flow Assumptions .............................................................................. 26 Annex B – Cash flow assumptions with 12/15 Loan term profile. .......................................... 28 Annex C – Bunker cost calculations ........................................................................................ 30 Annex D - Shipping Cash Flow Model.................................................................................... 31 Annex E – Loan Agreement .................................................................................................... 32 Annex F - Hypothetical Project Development ......................................................................... 33 Annex G – Cash Flow for Special Propose Company Nº2 SPC2............................................ 34

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List of Abbreviations ABS

"#

Asset-backed Security. Beta. Bolivar Port Capital Asset Pricing Model. Cost of Equity. Cost of Debt. Charter Party. Debt to Equity Ratio. Earnings Before Income and Taxes Industrial Group. Investor. Internal Rate of Return. Japan Bank for International Cooperation. Japanese Yen Memorandum on Understanding. Loan Agreement. Lagos – Nigeria. Long Term Asset Value. Long Term Cargo Contract. New Buildings. Net Operating Profit After Taxes. Net Present Value. Operative Clauses Outstanding Loan. Profit After Repayment of Loan and Equity. Risk Free Rate.

ROCE SSA SPFAs TC-R TBR US-TB RNL WACC 10yTB

Return on Capital Employment Saldanha –South Africa. Sales & Purchase Forward Agreement. Time Charter Rate Tubarao – Brazil United State Treasury Bond. Rotterdam - Netherlands Weighted Average Cost Capital. Ten Years Maturity Treasury Bond Rate.

! BP CAPM CoE CoD CP D/E Ratio EBIT IG INV IRR JBIC JPY MoU LA LNG LTAV LTCG NB NOPAT NPV OC O/L PARLE

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List of Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7

Regression line of !$%%&' . Pre-delivery trench time Collar graph with Investor´s right to sell the asset. Investor´s right to sale the asset. ECAs direct loan to buyer scheme/ABS Scheme. Regression line between S.Hand Handymax 46.000 dwt and 3yTC-R. SPC & SPC2 Capital Structure .

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11 17 18 18 19 20 22


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“Shipping is one of the major catalysts of economic development… Shipping is a cheap source of transport which can open up wider markets to specialization, offering shipment of even the most everyday products at prices far below those that can be achieve by any other means” Adam Smith (1786).

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1. Introduction The methodology of case studies allows the student to understand a complex subject through research, binding for collection and analysis of historical data, to achieve a correct result based on theoretical concepts and knowledge. The aim of this assignment is to present a detailed report of the analysis carried out through the tools learned in maritime financial management, quantitative methods, and market analysis. The research begins with a macroeconomic evaluation in 2000 and the repercussions on the derived demand for the seaborne trade, focusing the studies in the dry bulk sector. Subsequently, with the information provided in the case study, the financial assessment was developed through the Long-Term Asset Value (LTAV) method. The result of the analysis allows describing the positions of the three parties involved in the negotiation and their viability. What contractual details are necessary to adjust in further negotiations to be able to carry out the investment, as well as the embedded options available like abandon and expand the investment. Finally, the project concluded recommending a different pre-delivery trench approach, made investment of equity in the money market (term deposit) and the request of a short loan at LIBOR interest rate to cover the shipyard contract, for the initial Special Purpose Company (SPC) and a second SPC (SPC2) to expand the project through a different source of capital. Thus, the strategy was built after the analysis of the Discounted Cash Flow (DCF) and the comparison of the discount rate to the Internal Rate of Return (IRR).

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2. Macroeconomic environment – Fundamentals of maritime economics. World trade, the main factor driving the demand in 2000 for seaborne trade, was at the peak of the global business cycle, after the 1998 recession, with the highest GDP since 1990, 4.3%. Primary commodities trade increased 3.5%, economic growth showed a sustained acceleration in the US and the emerging economies of the Asian continent. Regarding the product description, the average iron ore, coal, and steel trade increased by 14%. Moreover, the crude oil price was located at US$ 28 per barrel, being the highest price since 1985 (WTO, 2001). The year 2000 registered a strong demand for shipping with 22.940 Billion ton-miles, 1.010 Billion ton-miles more than the previous year. The development of the global fleet increased 1.2%, with 2.0% in the dry bulk carriers segment. The supply showed an overcapacity reduction of 4.1 million dwt. In the freight market, main bulks segment rates increased 7.4%, the freight rate for time charters between 3 and 5 years’ time charter contracts, growing above the 63.3% average and the spot market by 11.8% (UNCTAD, 2001). The seaborne trade demand grows by 2%, maintaining the balance in the market in the short term, showing the Baltic Freight Index in recovery. The supply increase by 188 Handymax New Buildings (NB) entering the market, 19% more than the previous year. The average price of NB had a 2% increase concerning 1999, with a value of USD $ 20.5 MM and a strong growth trend of 2.5% projected for the next years. The shipyard market was being led by South Korea, Japan, and China with a share of 39.7%, 27.8%, and 10.5% respectively. During the research, two contracts for the construction of 5 Handymax of 52,000 dwt each, by Pan Ocean Shipping company, were very similar to the case study that will be developed next. The price ratio for investors in 5 Yr. Old second-hand Handymax with relation to the previous year reflected a decrease of -6,7%. The general trend in the short "Business" cycle, for dry bulk - Handymax segment, about shows an increase of 7%. © Clarkson. (2000). The historical data projected for the beginning of 2000 are congruent with the statistics collected in subsequent years. For instance, the 3 Yr Time Charter Rate (TC-R) in Handymax 52,000 dwt, maintained an averaged of USD $ 8,949/day, from 2000 to 2003, reflecting difficulties to break the TC-R of USD $10,000/day barrier, due to a low scrapping rate. However, in Q3-2003, the rapid upsurge trend began until reached a Historic TC-R of USD $ 46,000/day in November 2007. From here, the freight rate attained the top of the cycle and entered into the downturn driven by the economic crisis of 2008.

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3. Investment appraisal Before start with the financial assessment, it is necessary to synthesize the essential characteristics of the SPC, which will be shaped for the integration of the parties involved in the project, the investor, the industrial group and the bank (INV-IG-BK). The SPC is defined as the asset itself, the study and the financial calculations will be made based on one 50.000 dwt bulk carrier vessel. The selected place for the construction was the Japanese shipyard Mitsubishi H.I., Top 6 of the world ranking. The reason was based due to the Japanese consolidation with 27.8% of the new building order book in 2000 (Š Clarkson, 2000) and the further proposal to build the remaining 5 ships, a subject that will be discussed in the option to expand. Moreover, zero corporate rate will be considered during the initial WACC calculations due to the Panamanian policies regarding shipping companies flying the country’s flag, and generating utilities from foreign activities. However, it is necessary for the SPC to locate a legal representative in Panamanian territory, being feasible the contracting of a law firm for this purpose. As well as the asset utilization rate in the investor's cash flows. Also, the fuel consumption, route analysis, port charges, tugs and cargo handling costs will be included in the IG cash flow (See Annexes A, C, D). The above with the purpose of describing in detail the different variables that are necessary to consider for the financial analysis. 3.1. Discount Cash Flow Approach (DCF) – Long Term Asset Value method (LTAV). To perform the financial assessment, the discount rate it is necessary to calculate, the approach for this calculation is based on Weight Average Cost of Capital (WACC) in formula (3.5). To calculate this rate is necessary divided the equation into two parts; the Cost of Equity (CoE) and the Cost of Debt (CoD). The CoE is calculated through the Capital Asset Pricing Model (CAPM) model (3.1.1); The result of this model is the expected return of the asset. The most important variable of the CAPM model is beta (b), and this variable allows to capture the asset risk against the market risk. Furthermore, the b is dynamic and therefore, to develop a reliable financial appraisal, and an accurate discount rate that encompasses the business and the financial risk, the b must include the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL). That is, for the final calculation of the cost of capital and subsequently the WACC, the b to be used in this case study is the leverage beta.

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The second part of the WACC is the cost of debt. This information will be extracted from the case study. Given these points, the formula (1.5) will be performed to achieve the discount rate and then calculate the NPV and the IRR of the project and determine if the opportunity cost of capital is higher than the current value of the investment. 3.1.1. Estimation of Beta (b) The estimation of the beta was performed in EViews9SV software by using an Ordinary Least Squares Estimator (Figure 1). The Baltic Freight Index (BFI) was selected as the independent variable that allows covering the segment risks of the dry bulk market at that time. According to the historical analysis based on information from the Baltic Exchange (2017) consents to conclude that this index in 1990 did not have similar that those established in the case study. However, from 1991, the route of the Tubarao-Rotterdam was included with a weight of 5% of the total index, in 1993, the route increased its weight to 7.5% according to the amendments made by the Baltic Exchange. On October 15, 1996, the Baltic Handymax Index was created based on Handymax vessels of 43,000 dwt, less than 15 years old bulk carrier. Also on October 9, 2000, the Baltic Handymax Index (BHMI) was activated, but those indexes were not taken into account because the data does not allow to cover a complete business cycle. Consequently, the independent variable consider was the market returns defined as 183 observations from the period between Jan-1985 to Mar-2000 (monthly data). So the dependent variable, which reflects the behavior of the returns of the asset, is represented by the 3 year’s T/C R for a 45,000 dwt Bulk carrier in the same period. The regression was corroborated through the calculation (3.1.1) obtaining the same result. (3.1.1) ()*+, = . + !0123 + 4' ()*+, = 0.1660123 + 0.00129

!$%%&' =

;<= >? , >A BC" >A

!$%%&' =

0,00098423 0,00590714

!$%%&' = 0,166

10

(3.1.1a)


Figure 1: Regression line showing the degree of riskiness, represented by the line slope. Elaborate by David Restrepo.

3.1.2. Re-estimation of Leverage (b) The calculations made so far, only consider the SPC business risk. For this reason, it is vital for the reliability of the analysis to include financial risk. The unleveraged beta should be calculated through the DFL (3.1.2); this means that the b of the asset, Asset b must be multiplied by one minus the difference of Debt to Equity Ratio (D/E R).

!,IJ?'K = !$%%&' 1 + !,IJ?'K = 0,166 1 +

85% 15%

!,IJ?'K = 1,1107

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L M

(3.1.2.)


3.1.3. Cost of Equity Estimation (CoE) The risk-free rate ("# ) consider during the assessment was the 10 years US Treasury Bond (10yTB) due to the majority of the INV´s investment was in this type of bonds, so the aim is attaining an IRR higher than this financial instrument. The 10y-TB average for 2000 was estimated to take it as "# obtaining the value of 6,66% (United State Department of Treasury, 2017). ", = "# + !, ∙ "A − "#

(3.1.3)

", = 6,66% + 1,1107 ∙ 10% − 6,66% ", = 10,37%

3.1.4. WACC Estimation. The discount rate estimation, take into account the CoE through (3.1.3.), the CoD resulting from the sum of LIBOR plus Spread.

"R$** =

MSTUV( LWXV ∙ ",IJ?'K + ∙" ∙ 1 − \* MSTUV( + LWXV MSTUV( + LWXV Z&['

"R$** =

15% 85% ∙ 7,173% + ∙ 7,797% ∙ (1 − 0%) 15% + 85% 15% + 85%

(3.5)

"R$** = 8,01%

3.2. Cash Flow Analysis, Net Present Value (NPV) and Internal Rate of Return (IRR) To estimate the Net Present Value and the subsequent IRR was required elaborate the cash flow analysis (Annex A); including the subtraction of depreciation and flag state registration fees. According to Harwood (2006), the Panamanian authorities establishes an annual tax of US$0.1 per ton or fraction, and only during the first year of registration a tariff of US $ 3,000 plus US$0,1 per ton or fraction (Page 232). Additionally, we calculated the earnings before income and taxes (EBIT), allowing to consolidate Net Operating Profit After Taxes (NOPAT). The last assumption to include into the cash flow was the 343 maximum number of available running days in years with dry-docking and class renewal (Albertijn, Drobetz, & Johns, 2016).

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The preliminary conclusion during the LTAV overall calculation shows that the SPC accumulated net cash flow yields a value of US $ 2'150,596; The D/E R generate high interest on principal, and under these circumstances, the net cash flow does not cover the balloon payment. Although the NPV of the project is negative the 26,28% IRR is higher than the 8.08% WACC, tolerating the INV´s option to accept the project only under the asset player behavior.

4. Project viability 4.1. Bank perspective. The BK profits are represented by the interest on the principal of US$9´115,000 during the loan term. The debt hedge i.e. asset risk, in a market downturn scenario, should be discussed and traded by the option to abandon, which will be discussed in detail in section 6.1. Besides, the BK will receive an introductory fee of US $ 1,000,000 and a 10% profit after repayment of loan and equity (PARLE). Measures that the BK considers mitigated the project and corporate risk as well. However, the net cash flow only guarantees the payment of the balloon by selling the asset, and to the bank credit committee as a minimum requirement, the net cash flow cushion achieve the final payment. This result makes the project unworkable and it necessary to adjust the project in further negotiations. 4.2. Investor perspective The INV position is clear regarding the project considering two behavior criteria. First, the INV intend to acquire the vessels for their operation during the Charter Party (CP), that is to say, based on a long horizon strategies, to generate profits through the regular vessel operation. The Second criterion, which is called asset-player, who interact in the sale and purchase market (S&P) with the intention of generating dividends by buying when the market is in decline (cheap) and selling the assets when it reaches the peak in the market. These types of investors are private owners with small or medium companies (Kavussanos & Alizadeh, 2002c). Regardless of the case study information, it can be assumed that the INV belongs to the second criterion described above. Assuming a strategy with the optionality to sell the asset when the conditions permit obtaining at least 10% IRR. Nevertheless, to achieve this, the negotiation of

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the ceiling price suggested by the bank in the memorandum of understanding (MoU) will be discussed in 6.1. 4.3. Industrial Group Perspective The position of the IG is based on guaranteed the movement of cargo at a determined rate, the aim of this strategy is to stabilize the costs associated with the long-term cargo contract (LTCG). The values in the LTAV analysis are more favorable from the IG perspective considering the following. First, the revenue generated by LTCG is unknown, i.e., IG cash inflow, to build a more realistic presumption of the financial condition, although the voyage and cargo-handling cost were estimated, are not enough to conclude that the project can generate losses. Second, the IG is incurring a deficit of US $ 182,500 in annual TC-R, through the US$500 premium, which is very low considering the high volatility of the freight rates. Finally, the IG must receive a 40% of PARLE, which is constituted as a backup to cover the INV optionality to abandon the project.

5. Further negotiations terms 5.1. Loan Agreements The Loan Agreement (LA) is critical for this capital-intensive and long-term investments, is constituted as the backbone of the relationship between the parties. The BK is called as the lender and the SPC as the single borrower, being able to use the format of the London Market Association as the standard document to materialize the LA. Spoullos (2016) considers that the most relevant provisions of the LA are the operative clauses since they are the measures that protect the bank from all associated project risks. The legal representation should be established and factual representation as well, however, since the INV and the IG are clients of the bank and have sufficient financial condition and assets that support the debt in case of default (p. 215). The conditions precedent, it could be argued that this partially cover, since the memorandum of understanding (MoD) and a financial statement are included in the study. However, a detailed charter party and a shipbuilding contract its need to be bound to advance in the negotiation.

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The covenants are tools that allow activating certain conditions that can be presented throughout the life of the project; the case study focuses on possible covenants breaches, manifested by a deterioration in the price of the asset that does not allow to cover the O/L. To hedge this, the BK must implement a warning signal based on Minimum Value Maintenance (5.1) Clause (VMC) or asset cover ratio (ACR). According to the calculation developed in 5.1, the ACR at the end of the loan term is 2,03%. ^__WV ;<=W" >CVU< = ^;> =

`&%%&a `baJ& `baJ& c# d/f

$13´500.000 $6´650.000

^;> = 2,03%

Clause 11, events of default, covers specific situations that need to be considered due to the high risk. Before these events, the bank has the power to demand payment of the remaining debt or O/L, accumulated interest for lay payment or any other type of sum included inside the LA. Finally, a critical point is the clause 14, that is directly related to the options embedded in the study, the mandatory prepayments, which are considered when the vessel is sold or the total lost. The LA list including all the clauses was described in Annex E, highlighted the gaps in the case study. To make the project feasible for all three parties, the proposal of this case study is to increase the loan term to 12 years, with a balloon payment of US $ 5'400,000 and maintaining the profile to 15 years. This measure, although it seems insignificant, increases the liquidity of SPC cash flow by 90%. The opportunity cost of capital remains stable whit this loan conditions and the profits after re-payment of loan and equity remains equal to keep the risk balance among the willingness of doing business in the negotiation table. 5.2. Charter-party renegotiation. The Charter Party (CP) should cover as many eventualities as possible, and the BIMCO "Gencon" format could be used for this purpose.

Emphasizing the importance of the

commitments of the parties, part I, such as the available date for loading, loading, and unloading port, laytime and demurrage rate, payments of loading and discharge, etc. In part II of Gencon, should be stipulated, penalties for non-performance and administrative clausal.

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Provided theses formal consideration above, the TC-R should consider, first, the period due to the amount of uncertainties, should maintain the 10-year period but, with the re-negotiation option in the year 5. Second. The CP must define a profit split margin, which tolerates covering the business risk. The following assumption is made, if the freight rate in the spot market, increases over US$15,000 TC-R, the difference will be covered by the parties (INV-IG). This measure allows the INV to receive compensation for the real value that is being negotiated in the market and the time. Otherwise, the market falls to a value much lower than the agreed TC-R, i.e. US$7,500, implies, given the positive correlation between the freight rate and the asset value, that the expiration of the floor price can be enabled to avoid losses to the SPC by guaranteeing the O/L payment. The freight rate fluctuation is directly related to the embedded option of selling the asset, which will be explained in 6.1. 5.4. Flag and registry and SPC Domicile. One of the options that have a direct impact on the cash flow of the SPC is the flag registration. According to historical analysis, by the year 2000, 84.54% of the Japanese fleet was registered under the foreign flag (UNCTAD, 2001, p.30). In this sense, it is made the assumption that the SPC registration under the Panamanian flag is the correct decision of the three parties involved. The registration country decision has two approaches, the historical trend in 2000 of Japanese ship-owners and the SPC operational benefits. According to UNCTAD, on January 2001, Panama was consolidated as the first country in open registry, with a share of 11.3% of the total world fleet registered under its flag. Also, the trend indicates that, of the total of ships belonging to Japanese ship-owners, 42.5% was registered under the Panamanian flag. This information allows assuming that historically the decision to register the SPC under the Panamanian flag is consistent with the behavior of the market at that time (pp. 30-34). The second approach considers the registry benefits for the SPC. Registration under Panamanian flag allows to hire crews of any nationality, which directly impacts the cash flow; No fees of registry survey in NB ships and grants a discount of 20% in annual taxation on fleets between 5 to 50 vessels. In this sense, the registration of the SPC under Panamanian flag is the correct decision in the project.

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5.5. Pre-Delivery Trench. According to the ship construction terms, to guarantee the NB option, it is necessary to make an installment of US$5'640,000. To meet this condition, the SPC, before signing the contract with the shipyard, will invest through the BK, US $ 3'000,000 equity in the money market as a term deposit, 37% to 14 months and 63% at 19 months, at LIBOR interest rate. Likewise, SPC will request an additional short loan from BK to cover the $ 2´640,000 deficit that needs to be covered for the cancellation of the contract with the shipyard. This financial movement allows, first, to pay the US $ 348,480 of interest generated by the short loan. Second, cover the coupon payment of 5% annually to the shareholders. Figure 2, the timeline detailing the Pre-Delivery Trench.

Figure 2. Pre-delivery trench Time. Elaborate by David Restrepo.

6. Embedded options 6.1. Option to Abandon Given the circumstances that the INV is facing the greater risk in the investment, it is necessary to consider the call option to sell the asset in the future. Starting with the investor´s right described in the point Nº6 in the MoU and comparing the different rates IRR, plus the change in the loan term, a strike price of $12.5MM is fixed, where the INV IRR is at 10,2%. Although it is preferable for the IG to keep a wider collar price, it is understood that the loan term negotiation gives the SPC greater security of maintaining the liquidity necessary to cover the

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contract. And it's acceptable for the BK position also. The floor price is calculated based on the O/L plus if the value exceeding the maximum permitted loan to value ratio, without premium, both parameters calculated at the end of the initial loan term (10 years). See figure 3-4.

Figure 3. Collar graph with Investor´s right to sell the asset at year 10. Elaborate by David Restrepo.

Figure 4. Investor´s right to sale the asset. Elaborate by David Restrepo.

6.2. Option to expand. Considering that the INV have good relationships with the Japanese shipyard and his interest of INV to take advantage of the opportunity to renew its fleet. It can be assumed that the initial investment made to finance the ship (or 5 sister vessels) opens the possibility of ordering the

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remaining five vessels without initial cost. Hence, the financial leverage will be requested through a bank consortium between the BK and the Japan Bank for International Cooperation (JBIC) Export Credit Agency (ECAs) under the direct loan buyer/importer scheme. Despite the fact that in 2000 the role of ECAs in shipping finance was rather limited (Alexopoulos & Stratis, 2016) the scenario lends itself to covering the requirements and guidelines of an ECAs. However, regarding with the OECD ECAs Arrangement, Annex 1, Chapter 2 Provision, NÂŞ8. It will be necessary to create an additional SPC (SPC2) integrated by the INV and the IG only, with domicile and Japanese flag, to comply with the provisions mentioned above. The DCF approach was calculated in Annex G. Thus, the ECAs will cover 80% debt, in exchange, the equity will be covered through Asset-backed Securities (ABS), for this, SPC2 will have the same shareholding share but, the Bank will assume the role of the issuer of the bonds. The annual coupon for ABS investors will be 8% p.a. due to the low Commercial Interest Reference Rate (CIRR) that allow the SPC to have this dividend margin for their shareholders. See figure 5.

Figure 5. Export Credit Agency direct loan to buyer scheme/Asset back securitization scheme to illustrate the 80/20 gearing ratio inception for the second SPC2. Elaborate by David Restrepo. Note: Adapted from (Alexopoulos, L., & Stratis, N., 2016, p. 196) & (Stopford, 2009, p. 309).

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7. Risk factors affecting the asset value The main risks that affect the asset value are described, making a comparison with the informal categorization described in Kavussanos & Visvikis (2006, p.27) since this approach refers to the balance sheet and cash flow to identify the risk sources.

7.1. Business Risk The business risk is generated by the volatility of the freight rate since the freight is the direct income produced by the asset, i.e., the vessel. Therefore, the different factors affecting the cash flow and more precisely the Earnings Before Interest and Taxes (EBIT) are sources of risks itself due to the higher variability (Kavussanos & Visvikis, 2006). Thus, OPEX is a source of risk and need to have been managed and accurately calculated in the cash flow. During the study, different factors that should be considered by the IG and the INV in the voyage cost and operating cost respectively. The specific costs and its preponderance are detailed in Annex G. The bunker price, for instance, itâ&#x20AC;&#x2122;s part of the business risk as well, due to the oil prices volatility, this fluctuating factor can be hedge by Bunker Derivate

Contracts

Calculation

of

(BDC). bunker

consumption, possible routes and costs are detailed in Annex C. Considering that for this study, the freight rate it is the most important risk factor in the value of the asset, a

regression

was

made

to

calculate how much the value of 3 years TC-R, affects the costs of a second hand Handymax bulk carrier.

The OLS estimation

Figure 6: Regression line between Y(t) Second-hand Handymax bulk carrier 46.000 dwt and X(i) 3 Year Time Charter Rate. Method: Ordinary Least Squares - OLS Period: Abr/86 - Jun/14 Sample: 339 (Monthly data). Equation estimation developed through EViews9SV Software. Elaborate by David Restrepo Note. Data extracted from (Š Clarkson, 2017).

shows that the freight rate explains positively 67% the value of the second-hand vessels. Other comments in figure 6. The hedging tool for this risk is partially cover by the profit split margin

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explained in 5.3. However, parties involved can also negotiate a Sales & Purchase Forward Agreement (SPFAs). 7.2. Foreign Exchange Risk The exchange rate risk also affects INV cash flow, not only in the fluctuation of the value of the asset (Kavussanos & Visvikis, 2006, p. 322). Consequently, because the liquidity of the INV is represented in US-TB, and the payments to the Japanese shipyard must be executed YEN (JPY). The OPEX, specifically the cargo handling and port charges could be paid in South African Rand (ZAR), Euros (EUR) or Brazil Reals (BRL), etc. All of these transactions entail a source of risk that must be hedged through currency forwards, choosing this hedging tool as it allows long-term tailor-made contracts (page 324).

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9. Conclusion All things considered, the project is viable for all three parties according to the following considerations. Two SPCs were created, the first under registration and Panamanian flag, the second under registration and Japanese flag, the capital structure in figure 7.

Figure 7: SPC & SPC2 Capital Structure. Elaborate by David Restrepo.

Therefore, it is concluded that the first financial analysis did not meet the expectations. The Loan term/profile 12/15, generating a net cash flow of 12 years with the capacity to cover the final payment and also a higher opportunity cost of capital. The changes hedge the pre-delivery trench for the first installment with the short loan and the equity investment in the money market in forms of deposit, helps to yield the shareholders profits from the beginning of the project. The Bank, despite the term loan extension, maintained the profit share distribution of 10%, generating profits above expectations whit US$10´768.662 of interest on principal after year 12. Furthermore, the creation of SPC2 under the ECAs, grant another business with Japanese government coverage acting in the consortium, not to mention the intangibles represented in have this deal on their records.

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Financial appraisal makes provision for balancing financial charges to arrive at a transaction under the concept win to win. The modification of the loan, gives greater liquidity to the SPC cash flow and entitle the project approval by the banking credit committee due to the better risk financial assessment. The investor with the participation in the two SPCs, projects the expansion of its fleet, ensures a long-term operation contract with hedging options for risk mitigation in case of disadvantageous scenarios, allows to make profit acting like asset player and maintains a higher opportunity cost of capital in the investment than the US treasury bonds. And finally, the IG, giving its consent in the project, not only secures its cargo contract in the long term, but also, it will obtain dividends that should be able to cover the eventual INV option to abandon the project, and hence, cover its transport demand in the spot market.

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References Albertijn, S., Drobetz, W., & Johns, M. (2016). Maritime Investment Appraisal and Budgeting. In M. G. Kavussanos & I. D. Visvikis (Eds.), The international handbook of shipping finance, theory and practice (pp. 285-313). London: Palgrave Macmillan. doi:10.1057/978-1-137-46546-7 Alexopoulos, L., & Stratis, N. (2016). Structural Finance in Shipping. In M. G. Kavussanos & I. D. Visvikis (Eds.), The international handbook of shipping finance, theory and practice (pp. 191-211). London: Palgrave Macmillan. doi:10.1057/978-1-137-46546-7 Brodosplit. (2003). Handymax bulk carrier technical specifications [Brochure]. Author. Retrieved April 10, 2017, from http://www.brodosplit.hr/Portals/17/Bulk.pdf. © Clarkson. (2000). The Clarkson Shipping Review & Outlook (Rep.). London: Clarkson Research Studies. doi:1 3 6 0 - 8 0 6 1 © Clarkson. (2000). World Shipyard Monitor (Vol. 7, Ser. 12, Rep.). London: Clarkson Research Studies. doi:1358-8788 © Clarkson. (2017, April 7). 3 Years TC-R/45,000 dwt Bulkcarrier [Excel]. London: Clarkson Research Service Limited. © Clarkson. (2017, April 7). Baltic freight index [Excel]. London: Clarkson Research Service Limited. Harwood, S. (2006). Shipping Finance. 3ij Edition. London: Euromoney Publications. http://proxy.wmu.se/login?url=http://www.dawsonera.com/abstract/9781843744603 Kavussanos, M. G., & Visvikis, I. D. (2006). Derivatives and Risk Management in Shipping. Edinburg: Witherby Publishing Group. Kavussanos, M. G., & Visvikis, I. D. (Eds.). (2016). The international handbook of shipping finance, theory and practice. London: Palgrave Macmillan. doi:10.1057/978-1-13746546-7 OECD. (2017). Arrangement on Officially Supported Export Credits (TAD/PG(2017)1, pp. 37-41) (OECD, Export Credits Division,). Smith, A. (1786). An inquiry into the nature of causes of the wealth of nations (4th ed.) (S. M. Soares, Ed.) [Digital]. Retrieved April 5, 2017, from https://www.ibiblio.org/ml/libri/s/SmithA_WealthNations_p.pdf

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Spoullos, K. (2016). Key clauses of a shipping loan agreement. In M. G. Kavussanos & I. D. Visvikis (Eds.), The international handbook of shipping finance, theory and practice (pp. 213-229). London: Palgrave Macmillan. doi:10.1057/978-1-137-46546-7 Stopford, M. (2009). Financial performance and investment strategy. In Maritime Economics (3rd ed., pp. 217-267). London: Routledge. doi:978-0-415-27557-6 UNCTAD. (2001). The review of maritime transport 2001 (Rep. No. E.01.II.D.2). New York: United Nations Publications. doi:0566-7682 US.Dpt. Of Treasury. (2017, February 1). Daily treasury yield curve rates. Retrieved April 1, 2017, from https://www.treasury.gov/resource-center/data-chart-center/interestrates/Pages/TextView.aspx?data=yieldYear&year=2000 Visvikis, I. D. (2017, March 30). MGM103 Maritime Financial Management/Lecture 3 - Bank Loan Legal Considerations [PDF]. Malmรถ: World Maritime University. World Trade Organization, WTO. (2001). International trade statistics 2001 (Rep.). Geneva: WTO Publications. doi:92-870-1220-2

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Annex A â&#x20AC;&#x201C; Initial Cash flow Assumptions


Annex B â&#x20AC;&#x201C; Cash flow assumptions with 12/15 Loan term profile.


Annex C â&#x20AC;&#x201C; Bunker cost calculations

Table 1c: Based on calculations of. 51.000 dwt Handymax bulk with Main Engine Split-MAN-B&W 6S50MC and selected maximum continuous rating 8,580 kW/127 rpm. Elaborate by David Restrepo Note. Technical Data extracted from (Brodosplit. 2003).

Notes: Bunker consumption in the Tubarao - Rotterdam (RNL) and Bolivar - RNL for South America routes and Lagos - RNL and Saldanha - RNL for the Wes Africa routes were calculated. With a 2000 price of 380 bunker-Rotterdam (US$ 147.3/ton). The average distance was 5521 Nautical Miles (NM) and the annual bunker cost was US $ 1'553,720.; given the oil price volatility, the IG risk related with the cash-flow projection for this cost may cause serious damages to the financial balance.


Annex D - Shipping Cash Flow Model.

Elaborate by David Restrepo Note. Adapted from Brodosplit. (2003)/ Kavussanos, M. G., & Visvikis, I. D. (2016)/Financial performance and investment strategy. In Maritime Economics 3rd ed. (M. Stopford, 2009, pp. 217-267)


Annex E â&#x20AC;&#x201C; Loan Agreement Loan Agreement Clauses

Status

1 Definitions and Interpretation 2 The Loan and its Purpose 3 Conditions Precedent and Subsequent 4 Representations and Warranties 5 Repayment and Prepayment 6 Interest 7 Flag 8 Fees 9 Security Documents 10 Covenants 11 Events of default 12 Set Off and Lien 13 Assignment, Syndication and sub-participation 14 Payments, Mandatory Prepayments 15 Notices 16 Miscellaneous 17 Law and Jurisdiction 18 Headings and Contents page 19 Letter of Offer Appendix A: Form Of Drawdown Notice Appendix B: Form Of Mortgage Appendix C: Form Of Deed of Covenants Appendix D: Form Of Assignment Appendix E: Form Of Guarantee

Complete Partially covered Pending Unmentioned

Table 1e: Loan Agreement Clauses. Elaborate by David Restrepo Note. Adapted from MGM103 Maritime Financial Management/Lecture 3 - Bank Loan Legal Considerations [PDF] (Visvikis, I. D.,2017, March 30).


Annex F - Hypothetical Project Development Taking the benefit of historical data, a regression was developed to analyzed the market value depreciation, between the vessel price and the vessel age. An outlier identified with the red arrow is clearly observed; However, if the time frame is interpreted, it can be determined that it corresponds to the period between 29-Oct-07 and 20-May-08, where the historic peaks of the BDI with 11,623 and 11,793 index points respectively occurred. Comparatively the price of Handymax 56K 5-Year-Old Secondhand Prices was US$75 MM on this period.

Figure 1f: Market value depreciation of Handymax bulk carrier since 2002. Equation estimation developed through EViews9SV Software. Elaborate by David Restrepo Note. Data extracted from (Š Clarkson, 2017).

Hence, after the aforementioned, it can be assumed that the INV invested its option to sell the asset between 2007-2008, with an IRR between 27.9% and 32.3%. See table below.


Annex G – Cash Flow for Special Propose Company Nº2 SPC2


Financial Management – A triptych in international finance: Shipping Investment – Case Study.  

The research begins with a macroeconomic evaluation in 2000 and the repercussions on the derived demand for the seaborne trade, focusing the...

Financial Management – A triptych in international finance: Shipping Investment – Case Study.  

The research begins with a macroeconomic evaluation in 2000 and the repercussions on the derived demand for the seaborne trade, focusing the...

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