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KS Financing. Ness, Risan & Partners. Marine Money London 20 th January 2010 . This document is for the use of the intended recipient only and should not be copied or distributed to any other person. What is a KS?. Purchase of a vessels into a single purpose vehicle company
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KS Financing Ness, Risan & Partners Marine Money London20thJanuary 2010 This document is for the use of the intended recipient only and should not be copied or distributed to any other person.
What is a KS? • Purchase of a vessels into a single purpose vehicle company • Usually a long term lease to a shipping company • Credit focused, not tonnage focused • Very flexible structure • Short transaction time • Not tax focused • Uncalled capital • Usually 1-20 investors per project with one shipping company as lead investor
The advantages of ”Sale lease back” for shipowners • Up to 100% financing • Share issues are expensive when shares are valued at below NAV • Release of funds to expand/ order new ships • ”Off balance” financing • Cost and time efficient • Risk reduction • Flexible structures, i.e. put/call options
The KS market is returning from low levels Sum of the 4 major Norwegian KS houses
Examplesona recenttransaction Project name: UACC Ross/Bergshav Tanker DIS Project type: Bareboat – 7 years Vessel: 2 x 2009 built LR 1 Product Carriers Projectedreturn 16% p.a. Options: Put & Call (12%/19%) Charterer: United Arab Chemical Carriers Ltd. (UACC)
The right financing is found only by a fundamental evaluation of the needs and objectives at hand Typical Cost Level Advantages Limitations • No cash cost (except dividends) • “Eternal” in nature • Dilutes owners’ control • High demand on return • No tax shield Straight Equity 10-12% • Inexpensive cash component • Potential to issue stock at premium to current price • Split owners’ upside • Sum of interest and conversion may be expensive Convertible Debt 6-12% • Provides good flexibility • No ammortisation • Expensive coupon • Costly to issue High Yield Bonds 8-14% • Off balance sheet • Flexible • No dilution • Competitive leverage due to uncalled capital • May limit company’s upside in assets appreciation • Limited asset control KS financing 8-12% • Low costs • Flexible maturity and depth • Requires collateral/guarantees • Cost of covenants • Limited availability Bank loans 6-8%
Appendix Return potential – historical evidence from tanker and dry bulk
Historical lesson from the dry bulk and tanker marketSecond hand prices versus newbuilding parity* of a 5 year old vessel, USDm USDm Source: Clarkson database, NRP Asset Management ASA Attractive entry points (*the normalised newbuilding price less 20%, 25y vessel life time) Source; Clarkson – web database for data points, NRP Asset Management ASA calculations
Illustration of return potential from asset appreciation • Change in vessel value over the 5 year period following entry using following investment rule; • Acquire vessel 20% below normalised newbuild prices • Exit after 5 years Source: NRP Asset Management ASA Vessel value appreciation potential easily exceeds 50%, rarely losses Source; Clarkson – web database for data points, NRP Asset Management ASA calculations
Illustration of return potential from asset appreciation and charter income • Change in vessel value and aggregate profits from 5 x 1y time charter contracts over the 5 year period following entry (unleveraged “yield”) using following investment rule; • Acquire vessel 20% below normalised newbuild prices • Exit after 5 years Source: NRP Asset Management ASA Return potential before financial leverage exceeds 125% if timing is right Source; Clarkson – web database, NRP Asset Management ASA calculations
NRP – Financial track record on equity contributions for investors
