Ness, Risan & Partners

KS Financing

This document is for the use of the intended recipient only and should not be copied or distributed to any other person.

Marine Money London20th January 2010

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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

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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

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The KS market is returning from low levels

Sum of the 4 major Norwegian KS houses

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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)

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The right financing is found only by a fundamental evaluation of the needs and objectives at hand

Straight Equity

High Yield Bonds

KS financing

Bank loans

Advantages Limitations

• No cash cost (except dividends)• “Eternal” in nature

• Dilutes owners’ control• High demand on return• No tax shield

• Provides good flexibility• No ammortisation

• Expensive coupon• Costly to issue

• Off balance sheet• Flexible• No dilution• Competitive leverage

due to uncalled capital

• May limit company’s upside in assets appreciation

• Limited asset control

• Low costs• Flexible maturity and depth

• Requires collateral/guarantees• Cost of covenants• Limited availability

Convertible Debt• Inexpensive cash component• Potential to issue stock at

premium to current price

• Split owners’ upside• Sum of interest and conversion

may be expensive

Typical Cost Level

6-12%

8-14%

8-12%

6-8%

10-12%

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Appendix

7

Return potential – historical evidence from tanker and dry bulk

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0102030405060708090

1976

-Q1

1977

-Q3

1979

-Q1

1980

-Q3

1982

-Q1

1983

-Q3

1985

-Q1

1986

-Q3

1988

-Q1

1989

-Q3

1991

-Q1

1992

-Q3

1994

-Q1

1995

-Q3

1997

-Q1

1998

-Q3

2000

-Q1

2001

-Q3

2003

-Q1

2004

-Q3

2006

-Q1

2007

-Q3

2009

-Q1

113-115 DWT Aframax tanker Second hand prices

113-115K DWT Aframax Tanker 5 year old second hand prices113-115K DWT Aframax Tanker 5 year old Newbuilding Parity

0102030405060708090

100

1976

-Q1

1977

-Q3

1979

-Q1

1980

-Q3

1982

-Q1

1983

-Q3

1985

-Q1

1986

-Q3

1988

-Q1

1989

-Q3

1991

-Q1

1992

-Q3

1994

-Q1

1995

-Q3

1997

-Q1

1998

-Q3

2000

-Q1

2001

-Q3

2003

-Q1

2004

-Q3

2006

-Q1

2007

-Q3

2009

-Q1

75-77K Panamax dry bulkcarrier 5y Second hand prices

Panamax 73K Bulkcarrier 5 Year Old Secondhand Prices75-77K DWT Panamax Bulkcarrier 5 Year Newbuilding parity

Historical lesson from the dry bulk and tanker marketSecond hand prices versus newbuilding parity* of a 5 year old vessel,

8

(*the normalised newbuilding price less 20%, 25y vessel life time)

Attractive entry points

Source: Clarkson database, NRP Asset Management ASA

USDmUSDm

Source; Clarkson – web database for data points, NRP Asset Management ASA calculations

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Illustration of return potential from asset appreciation

9

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

Vessel value appreciation potential easily exceeds 50%, rarely losses

Source: NRP Asset Management ASA

-100 %

-50 %

0 %

50 %

100 %

150 %

200 %

250 %

300 %

350 %

1976

-Q1

1977

-Q3

1979

-Q1

1980

-Q3

1982

-Q1

1983

-Q3

1985

-Q1

1986

-Q3

1988

-Q1

1989

-Q3

1991

-Q1

1992

-Q3

1994

-Q1

1995

-Q3

1997

-Q1

1998

-Q3

2000

-Q1

2001

-Q3

2003

-Q1

2004

-Q3

2006

-Q1

2007

-Q3

2009

-Q1

75-77K Panamax dry bulkcarrier;Vintage return on vessel investment only; following 5y holding

-100 %

-50 %

0 %

50 %

100 %

150 %

200 %

250 %

300 %

1976

-Q1

1977

-Q3

1979

-Q1

1980

-Q3

1982

-Q1

1983

-Q3

1985

-Q1

1986

-Q3

1988

-Q1

1989

-Q3

1991

-Q1

1992

-Q3

1994

-Q1

1995

-Q3

1997

-Q1

1998

-Q3

2000

-Q1

2001

-Q3

2003

-Q1

2004

-Q3

2006

-Q1

2007

-Q3

2009

-Q1

113-115 DWT Aframax tanker Vintage return on vessel investment only; fol lowing 5y holding

Source; Clarkson – web database for data points, NRP Asset Management ASA calculations

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Illustration of return potential from asset appreciation and charter income

10

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

Return potential before financial leverage exceeds 125% if timing is right

Source: NRP Asset Management ASA

-100 %

0 %

100 %

200 %

300 %

400 %

500 %

1976

-Q1

1977

-Q3

1979

-Q1

1980

-Q3

1982

-Q1

1983

-Q3

1985

-Q1

1986

-Q3

1988

-Q1

1989

-Q3

1991

-Q1

1992

-Q3

1994

-Q1

1995

-Q3

1997

-Q1

1998

-Q3

2000

-Q1

2001

-Q3

2003

-Q1

2004

-Q3

2006

-Q1

2007

-Q3

2009

-Q1

75-77K Panamax dry bulkcarrier;Vintage return on capital appreciation and income; 5y holding

1Y TC less Opex

Gain from vessel

-100 %-50 %

0 %50 %

100 %150 %200 %250 %300 %350 %400 %450 %

1976

-Q1

1977

-Q4

1979

-Q3

1981

-Q2

1983

-Q1

1984

-Q4

1986

-Q3

1988

-Q2

1990

-Q1

1991

-Q4

1993

-Q3

1995

-Q2

1997

-Q1

1998

-Q4

2000

-Q3

2002

-Q2

2004

-Q1

2005

-Q4

2007

-Q3

113-115 DWT Aframax tanker Vintage return on capital appreciation and income; 5y holding

1Y TC less OpexGain from vessel appreciation

Source; Clarkson – web database, NRP Asset Management ASA calculations

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NRP – Financial track record on equity contributions for investors

NRP Finans AS - Track record for vessel sourcing, transaction execution and equity raising

Year of project incorporation 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Contributions from investors (USD mill) 3 100 000 18 752 500 9 475 000 14 090 000 44 275 000 104 086 692 105 201 538 253 402 417 90 671 361 0 28 080 000

Distributions to investors (USD mill) 8 592 231 72 603 166 28 501 000 41 962 946 89 642 735 179 870 976 120 003 230 47 865 500 19 456 000 0 0

Net Asset Value (NAV, USD mill) 0 0 0 0 3 000 000 4 500 000 15 500 000 93 630 000 12 000 000 0 28 080 000

Distribution to investors and NAV 8 592 231 72 603 166 28 501 000 41 962 946 92 642 735 184 370 976 135 503 230 141 495 500 31 456 000 0 28 080 000

Total value / Total contributions 2,77 3,87 3,01 2,98 2,09 1,77 1,29 0,56 0,35 N/A 1,00

Total dsitributions / Total contributions 2,77 3,87 3,01 2,98 2,02 1,73 1,14 0,19 0,21 N/A 0,00

Net vintage IRR p.a. 51,22 % 44,99 % 59,07 % 62,75 % 55,88 % 42,92 % 38,18 % Negative Negative N/A N/A

Projects established 3 5 3 6 12 14 15 21 4 0 3

Projects ended 3 5 3 6 11 13 11 7 3 0 0

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