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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 London20th 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 • 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
Examples on a recent transaction Project name: UACC Ross/Bergshav Tanker DIS Project type: Bareboat – 7 years Vessel: 2 x 2009 built LR 1 Product Carriers Projected return 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
