8 th Annual Gulf Ship Finance Forum

1. 8th Annual Gulf Ship Finance Forum • Islamic Finance and Bond Finance: alternatives or compliments to traditional finance • Mohammed Paracha • Alex Roussos • Norton Rose (Middle East) LLP • 7 March 2012

2. Contents Today we will look at: • 1. The relevance of Islamic finance in today’s global economy • 2. Basic principles of Shari’ah • 3. Principal structures used in Islamic finance • 4. Combining Islamic equity and conventional debt • 5. Accessing the capital markets • 6. Conventional bonds • 7. Convertible bonds • 8. Structured finance techniques • 9. Sukuk

3. Why is it relevant? • Growing demand for finance in many industrial sectors • Islamic finance as a credible alternative source of funds • Islamic finance needs tangible assets • Islamic economic theory fully supports financing in many industrial sectors where they add value and benefit to society • Economic growth throughout the Muslim world • Right deal, right place, right time… Dub#1879023

4. The starting point….. • The Christian faith was not without its own warnings against unfair behaviour in the commercial context: • “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury” (Exodus 22:25) • “Thou shalt not give him [they brother] thy money upon usury, nor lend him thy victuals for increase” (Leviticus 25:37) • “He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved” (Psalm 15) • “He that hath not given forth upon usury, neither hath taken any increase … he is just, he shall surely live” (Ezekiel 18:8-9) • Although it is probably true to say that such prescriptions do not now apply in the secular world of modern finance Dub#1879023

5. What is Shariah? • Shariah - the principles of Islamic Law. Two main sources • The Qur’an - the sacred book that records the word of God as revealed to the Prophet Muhammad (PBUH): “… give up what remains of your demand for usury, if you are indeed believers. If you do not, take notice of war from Allah and His Apostle…” (Qur’an 2:278-279) “… God has permitted trade and forbidden interest…” (Qur’an 2:275) • The Hadith - the body of documents that records the Sunnah (the practice) of the Prophet Muhammad (PBUH) Dub#1879023

6. The main rulings of Shariah in finance • Riba - the prohibition against the charging of interest but it is wider than this - usury or unjust enrichment • Gharar - uncertainty - there must be full disclosure (e.g. certainty as to the subject matter or price of a contract) • Maisir - speculation or gambling - “obtaining something without risk/hard effort” • Unethical Investment - certain products prohibited (e.g. alcohol, armaments, pork) and activities (e.g. gambling, entertainment, hotels) Dub#1879023

7. murabaha The key difference in practical terms loan agreement Bank Borrower ‘one product’ ‘many products’ ijara Istisna’a with ijara Istisna’a Dub#1879023

8. Asset Murabaha based ship financing (1) $100 Seller Financier (2) Title (3) Title (4) $110 Customer Security • NB: • Fixed term contract • Difficult to restructure • Suits short term financing only • Can be syndicated Dub#1879023

9. Commodity Murabaha ship financing Payment of purchase price Payment of purchase price Plus premium (deferred) Payment of purchase price Vendor Financier Customer Third Party Sale of commodity Sale of commodity Sale of commodity Funds utilisation Acquisition of vessel/working capital Dub#1879023

10. Istisna’a or manufacturer financing $100 Financier Manufacturer 2nd istisna’a Title 1st istisna’a $110 Title • Notes • Allows finance to be provided for pre-delivery or manufacturing process • Late delivery can be problematic • Security can be given • Sale or lease at delivery? Customer Dub#1879023

11. Ijara (finance lease) financing (1) Purchase Price Seller Financier (2) Title Grant of options (3) Lease (4) Rent Customer Dub#1879023

12. Istisna’a with forward ijara Step 1: (2) Title Customer Financier ‘during construction’ • Procurement Agreement • to build ship/stage payments Step 2: put option/purchase undertaking call option/sale undertaking ‘post-construction’ (3) Head Lease Financier Customer (4) Rental (5) Sub Lease Operator Dub#1879023

13. Combining Islamic equity & conventional debt DEBT EQUITY Financier Islamic Investor Loan Agreement $ Equity Contribution Islamic Head Lease SPV Owner Option arrangements Sub-lease Lessee Dub#1879023

14. Accessing the capital markets • Why tap the bond markets? • wider pool of investors, more liquid • easier access to funding / potentially better pricing terms • long tenors • build relationships with banking community • Good match for ship financing where longer term funding may be required • Restrictions on bank lending following credit crisis Dub#1879023

15. Accessing the capital markets (1) Plain vanilla bonds (i) Structures/methods of issuance • direct issuance by borrower • use of an SPV structure • stand-alone vs. medium term note programme • private placement vs. global offering • trustee vs. fiscal agency structure (ii) Key parties • issuer/borrower • guarantor (typically encountered in SPV structure) • arrangers/lead managers/dealer group • trustee • paying agents • registrar • investors Dub#1879023

16. (iii) Key documents • prospectus/offering circular (including terms and conditions of the securities) • dealer/subscription agreement • trust deed • agency agreement • mandate letter (iv) Key considerations for issuers • responsibility for offering document • the diligence process • reps/warranties and covenants in the dealer agreement and the terms and conditions • no security required • ratings • listing and continuing obligations Dub#1879023

17. (2) Convertible bonds (i) Key features and differences with plain vanilla bonds • What are convertible bonds? • documentary and diligence process is much the same • however, main difference is that a CB allows the holder to convert the debt to equity during a specified period in the future (the conversion period) • Examples of recent convertible bond issuances: • USD150 million convertible bonds issued by Hanjin Shipping Co. Ltd in 2011 • USD110 million convertible bond issuance by Genco Shipping & Trading Limited in 2010 • determining the conversion price and the role of conversion price adjustment events • offering document to contain disclosure on the company’s share capital and rights attaching to shares • issuer call option and change of control provisions • key restrictions in doing a CB Dub#1879023

18. (ii) Advantages and disadvantages of issuing convertible bonds • from the issuer’s perspective • comparatively cheap method of funding • funding now for equity issued later • relative ease and speed of issuance • lower repayment risk • but risks of no conversion and dilution • from the investor’s perspective • allows investors to hedge their investment risk and collect coupon during the life of the bonds • downside risk relating to drop in share value, inability to liquidate or inability to convert Dub#1879023

19. (3) Sukuk Structures • Shariah–compliant bonds • Key characteristics • asset-based instruments • must comply with laws of issuer’s and obligor’s jurisdictions, governing law, as well as principles of Shariah • main structures encountered: Ijara, Mudaraba, Murabaha, Wakala • MT Venus Globy Sukuk example • the importance of obtaining a fatwa • Documentation • diligence and disclosure similar to conventional debt • Islamic documentation in addition to capital markets documents • Current market • liquidity and innovation Dub#1879023

20. Owner Venus Navigation Ltd. BVI Head Charter Call and Put Options 2nd Mortgage $ Investment & $ Rent Security Assignment 2nd Owner Assignment Assignment of Mortgage 2nd Accounts Deed Agency & Trust Deed Sukuk investors $ Profit Offering Memo. Sakk Instrument Subscription Ag. Head Charterer Al Safeena I Limited Jersey SPC $ Investment $ Rent Intermediate Charter 100% shares Service Agency Ag. 2nd Int. Charterer Assignment Call Option 2nd Accounts Deed Charitable Trust Jersey Intermediate Charterer Venus Shipping SA Pan $ Rent Sub-Charter Sub-Charterer Vela International Marine Ltd [Lib] “Venus Glory” Al Safeena Ijara Sukuk • Notes • Parting with possession and charging for use (usufruct) • Enables a floating rate to apply • Rental values may vary • Insurance & maintenance • Call option granted in a separate contract • On exercising the call the Lessee can make a final payment to acquire title to the asset Dub#1879023

21. (4) Structured finance • Covered bonds: key characteristics • asset-backed securities assets, essentially comprising mortgages or other retail or commercial loans • assets ring-fenced for investors in bankruptcy • can benefit from a credit rating which is higher than that of the issuer • used by shipping financiers e.g. HSH Norbank’s EUR 500 million covered bond (June 2010) • Securitisation/off-balance sheet structured bonds • banks: true sale of shipping loans to offshore SPV which issues secured bonds • shipping companies: can use these structures to finance or re-finance vessels or to securitise the cash flow generated by charter agreements (i.e. utilising the revenue stream). Title transferred to SPV which in turn issues the bonds. Bonds are secured over the vessels, earnings accounts, insurance policies and charter agreements. • what a typical securitisation structure looks like: Dub#1879023

22. “Classic” true sale structure Note Trustee Servicer sale of pool of loans interest + principal Issuer Noteholders Obligors Originator £ £ + deferred consideration £ Hedge Provider Security Trustee Liquidity Provider Dub#1879023

23. Conclusion • Significant opportunities for shipping companies and financiers • Bonds, convertibles, Sukuk, structured finance solutions all available to industry participants • Diversification necessary in current global economic conditions • Islamic finance and capital markets can complement traditional financing or independently fund the shipping industry Dub#1879023

24. Disclaimer • The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose (Middle East) LLP on the points of law discussed. • No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates. Dub#1879023