Leasing Leasing – Still an alternative for Middle East Owners?– Still an alternative for Middle East Owners?

Marine Money DubaiMarch 2012

Setting the Scene

• January 2012: 5,623 Vessels on Order.(Source: Clarksons ShipYard Orderbook Monitor, Feb 2012

•Approximately 50% of which has not been financed.

•Number of lenders have been significantly reduced.

•All main shipping sectors are depressed.

•No immediate hope of recovery in 2012.

Agenda

The lease advantage

How does it compare to bonds?

Market Players – who is out there…..?

Can it work in today’s market?

How is the SCB lease different?

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1. Key Advantages of Leasing Solutions

100% funding – preserves equity capital, room to do more projects with the same equity base

Off-balance sheet accounting treatment (operating lease)

Transfer of residual risk (operating lease)

Implicit lease cost attractive

Hedge against technical obsolescence

Funding diversification

Flexibility

Lessor takes all the financing-related costs and risks

1. Operating Lease vs Loan

Loan Lease

Gearing 60-75% 100%

Accounting treatment On balance sheet Off balance sheet*

Residual risk Residual risk with client Residual risk with SCB

Market Value testing on delivery

Yes and therefore might reduce gearing

No

Value Maintenance Clause Yes No

Market disruption Yes No

Tenor 2 years pre + 5-7 years post 2 years pre + up to 12 years post

2. Operating Lease vs Bond

2. Operating Lease vs Bond

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3. Market Players

Many of the traditional providers of lease products have found it difficult to conclude business during the later years mainly due to limited availability of senior debt which they require to leverage up the project and achieve acceptable returns on the equity invested.

Type Finance Availability

Limited Partnerships such as KS houses and KG houses Low

Listed trusts such as FSL and Rickmers Trust Low

Private Equity Funds Medium

Distress Funds Medium

Banks and other Financial Institutions High

Although a different structure altogether, owners chartering out their vessels today at low rates for longer term provide competition.

But…….there is a but…………

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4. Leasing Today

Leasing is becoming more prominent.

Discrepancy between asset prices and charter rates makes it more challenging to structure leases.

Still a useful tool for releasing equity.

Requires a realistic positive forward view.

Consideration for Lessors:

Asset Risk

Credit Risk

Technical Risk

Residual Risk (Operating Lease)

Upside

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4. Leasing Today - Pricing

60/40 Equity Cost

10% 15% 20%

Debt Cost

4% 6.40% 8.40% 10.40%

6% 7.60% 9.60% 11.60%

8% 8.80% 10.80% 12.80%

80/20 Equity Cost

10% 15% 20%

Debt Cost

4% 5.20% 6.20% 7.20%

6% 6.80% 7.80% 8.80%

8% 8.40% 9.40% 10.40%

Base/fixed costs for lessee should be attractive compared to their Weighted Average Cost of Capital (WACC) and compare favorably to other financing options.

5. How is the SCB Lease Different?

Pure operating lease.

One counterparty - no 3rd party financier with own interests.

No LTV clauses to be passed on to charterer.

Flexible entry.

Pre-delivery finance available.

Sizeable deals possible.

Counterparty is an AA- financial institution with a lot more to offer.

Private nature.

Islamic structures possible.

CONCLUSION

Leasing – there to bridge the gap……..