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Im shipping finance_01
1. Strictly Private and Confidential
Illiquid Markets & Real Assets Series:
Shipping Finance & Restructuring
New Approaches for Structuring & Valuation
Dr. Marcel Martin
2017
Not to be Distributed
2. Shipping Finance & Restructuring: Building New Partnerships
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Underlying Risk/Reward
“Shipping risk/reward” not yet sufficiently “communicated” and “marketed”:
Corporate risk/reward: Heterogeneous business models (from fully integrated logistics group to narrowly focussed operators); limited
accessability: Few listed players, non-listed players closely held and historically not open to external capital.
Asset risk/reward: Perceived as very cyclical and risky; few visible efforts to customise exposure profiles according to investors preferences.
Target Investor Segments
► PE (Equity/Mezz): Deep in size, ambitious, require rational pricing, understand the asset class somewhat, current structures not acceptable.
► Insurance / Pension funds: Deep in size, moderate return ambitions, long term horizon, require rational pricing, do not yet understand the asset
class, currently no suitable product available.
► Family offices / Operators: Have in fact driven a number of actual transactions due to incumbency effects and externalities; not scalable to the
actual funding requirements across the industry.
Structuring Requirements
“Proper” reflection/modelling of the underlying risk/uncertainty. Issue: “Scenarios” proposed by the sellers are typically too optimistic, not
enough scenarios are incorporated into the analysis.
Consistent pricing of all liabilities in a “vanilla” setting (priority in the capital structure corresponds (under all circumstances) to priority in the
order of servicing cashflows (“waterfall”); monotonic ordering of all liabilities across the risk/reward space). Issue: This structure is very valuable
as a benchmark case, both on a stand-alone basis as well as for comparison purposes vis-à-vis “non-vanilla” structures.
Consistent pricing of all liabilities in a “non-vanilla” setting (priority in the capital structure does not (under all circumstances) correspond to
priority in the order of servicing cashflows (“waterfall”); potentially non-monotonic ordering of all liabilities across the risk/reward space). Issue:
Absent proper modelling of the underlying uncertainty and the provision of the vanilla benchmark case, investors will typically outright reject the
non-vanilla structure due to either perceived “inherent inconsistency” or simply lack of transparency.
Full transparency & communication of origin of seller’s structuring requirements. Issue: The (presumed) accounting requirements determining the
structural features the “junior note” (to be held by the bank) must possess are not understood or communicated and therefore are not part of the
marketing/structuring/negotiation. This limits potential tradeoffs among structural features across different liabilities, further lowering the
probability of executing a successful transaction.
Key Issues for Successful Origination, Structuring & Execution
3. Shipping Finance & Restructuring: Building New Partnerships
Key Points
► Financial investor: Fair risk-adjusted return target.
► Operator: Profitable commercial & technical management revenue stream & economies of scale from larger portfolio.
► Restructuring Bank: Reduced loss of value relative to outright sale of vessels.
Draft - Confidential
Core requirements key transaction parties
3
Financial Investor Operator Restructuring Bank
Entry ticket into attractive asset
class
Significant expansion of fleet with corresponding synergies
across the existing franchise
Classification of restructured instruments as
debt:
Not cumulative: Subordinated below all other
debt claims; profit participating returns; loss
participation; long term instrument.
Fair financial risk/reward exposure
with reasonable isolation from asset
class specific tail risk / reward
Acquisition of profitable revenue streams “Full” valuation of new instruments at par in a
“base case” scenario
Positioning for / expectation of
further dealflow subsequent to
establishment of viable structure
Best placed to manage asset class specific tail risk / reward Long term stable & sustainable structure which
minimizes risk of having to make further
“adjustments” over the life of the transaction
Return expectations must be
reasonable
Must assume the equity position Must acknowledge & respect core interests of
other parties
Must accept subordination below Mezzanine
investor
4. Shipping Finance & Restructuring: Building New Partnerships
Draft - Confidential 4
Accounting Requirements
Under German GAAP (HGB, GoB etc.), classification of Mezzanine Capital / Junior Note (“Genussrechte” i.w.S.) as debt instruments if at least one of
the following criteria (IDW/HFA 1/1994) can be avoided:
1) Strict Subordination (“Absoluter Nachrang”): In insolvency or liquidation claims are repaid once all other non-equity claims have been satisfied.
2) Profit-related remuneration (“Erfolgsabhaenginge Verzinsung”): Returns on respective instruments are driven by positive excess cashflows of
relevant accounting periods and can only be paid out of “distributable funds” (effectively capital components deemed by applicable statutes to be
distributable).
3) Loss Participation (“Verlustteilnahme”): Respective claims participate in running losses by being written down as losses occur and may only be
replenished from positive excess cashflows of future accounting periods.
4) Long term maturity (“Langfristigkeit”): Respective capital components must be available for funding on a long term basis. While there is no fixed
minimum maturity given by respective statutes in his context, in practise for maturities exceeding 7 years this criteria is deemed to be satisfied.
Under IFRS, a contractual obligation to distribute liquid funds / cash outside the discretion of the company leads to classification of Mezzanine Capital /
Junior Note (“Genussrechte” i.w.S.) as debt instruments. The probability
Solution Components
Classification of Mezzanine Capital / Junior Note (“Genussrechte” i.w.S.) as debt instruments if at least one of the following criteria (IDW/HFA 1/1994)
can be avoided:
1) Strict Subordination: Financially-driven capital providers (senior & mezzanine debt) will not consent to a dilution of this principle.
2) Profit-related remuneration: Key point of focus: If the Junior Note (JN) is structured to receive a share of positive excess returns outright this
criterium cannot be avoided. If the remuneration of the JN is set at a fixed rate but subject to excess returns being positive and of a given size
(PAYE/PIK) there may be scope to avoid this criterium.
3) Loss Participation: Key point of focus: Should be avoidable on a running basis as only positive free cashflow is allocated to respective claims. At the
exit/maturity date a potential “default” (non-repayment of principal) may occur. However this is not a contractual feature and subject to this not
occurring in a base case scenario this criterium should be avoidable.
4) Long term maturity: Cannot be avoided due to the inherent motivation to participate in long horizon market recovery.
Key Requirements Restructuring Bank
5. Current Distressed / Restructuring Opportunities: Shipping
Draft - Confidential 5
Target Structure A: Investor Mezz & Bank Junior Note
Vessels 100%
Super Senior Debt 19/25%
A Sea BnB Holding L
Senior Debt 19/25%
Mezzanine 30/40%
Junior Note 25/80%Intangibles 50%
Contingent Working Capital
0-10%
Equity 7/10%
Mezzanine
Final Maturity: 10yrs
Coupon/IRR: [10/ 12.6] %
Amortisation: Bullet
Profit share: [21/21]% (Running/Exit)
Super Senior Debt
Coupon: USD3mLibor + [3.0]%
Final Maturity: [10]yrs
Amortisation: Linear [10*4 installments yrs 1-10]
Senior Debt
Coupon: USD3mLibor + [4.0]%
Final Maturity: [10]yrs
Amortisation: Bullet
Equity Note
Final Maturity: 10yrs
Coupon/IRR: [0/3.1]%
Profit share: [5/5]% (Running/Exit)
Junior Note
Final Maturity: 10yrs
Coupon PIK/IRR: [5/6.9]%
Profit share: [74/74]% (Running/Exit)
Transaction Costs 0-4%
Key Points
Liablility side / capital components as % of Total Assets / FMV
6. Current Distressed / Restructuring Opportunities: Shipping
Draft - Confidential 6
Target Structure B: Investor Mezz & Bank Combo Note
Vessels 100%
Super Senior Debt 19/25%
A Sea BnB Holding L
Senior Debt 19/25%
Mezzanine A 19/25%
Junior Note 25/80%Intangibles 50%
Contingent Working Capital
0-10%
Equity 7/10%
Mezzanine A
Final Maturity: 10yrs
Coupon/IRR: [7-8/12.1] %
Amortisation: Bullet
Profit share: [16/16]% (Running/Exit)
Super Senior Debt
Coupon: USD3mLibor + [3.0]%
Final Maturity: [10]yrs
Amortisation: Linear [9*4 installments yrs 2-10]
Senior Debt
Coupon: USD3mLibor + [4.0]%
Final Maturity: [10]yrs
Amortisation: Bullet
Equity Note
Final Maturity: 10yrs
Coupon/IRR: [0/3.9]%
Profit share: [9/9]% (Running/Exit)
Junior Note
Final Maturity: 10yrs
Coupon PIK/IRR: [5/7.0]%
Profit share: [75/75]% (Running/Exit)
Transaction Costs 0-4%
Mezzanine B
Final Maturity: 10yrs
Coupon/IRR: [5/0] %
Amortisation: Bullet
Profit share: [0/0]% (Running/Exit)
Mezzanine B 11/15%
Key Points
Liablility side / capital components as % of Total Assets / FMV
