The Funding GapMyth or Reality?

Marine Money – 8th Annual Gulf Ship Finance Forum

Dubai – 7th March 2012

Erik A. Lind

Tufton Oceanic

March 2012

Page 2

Tufton Oceanic is a Fund Manager in the Maritime, Offshore Oil Service and Energy industries and today has equity funds under management of $1.6bn and Tufton and its managed Funds own a total of 26 vessels with total value of about $0.6bn as at 31-Dec-11.

Vessel supply / demand fundamentals are key to our analysis and understanding of the health of the industry and in forming our views on the outlook for the various segments and sub-segments into which we invest.

We believe that the impact of the coincidence of the extreme adverse supply / demand fundamentals which we are now experiencing has been made considerably worse by the lack of traditional sources of debt and equity to the industry.

We therefore need to study and evaluate not only the supply and demand for vessels but also the supply and demand of capital in order to more fully understand the current situation.

Tufton Oceanic

Page 3

Value of the world fleet – Fleet size by vessel type as at year end 2011

21%

24%

14%

7%

33%

Dry Wet Container General Cargo Offshore

US$841bn

Delivered Fleet

30%

18%16%

4%

32%

US$271bn

OrderbookTotal

US$ 1,112bn

Source: Various brokers and Tufton Oceanic Limited

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Who owns the fleet? – Fleet size by owner type as at year end 2011

US$841bn

Delivered Fleet

US$271bn

Orderbook

Source: Various brokers and Tufton Oceanic Limited

35%

60%

6%

Public Co. Private Co. Govt.

38%

57%

5%

Total US$ 1,112bn

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How the fleet is funded – Fleet size by source of funding as at year end 2011

US$841bn

Delivered Fleet

US$271bn

Orderbook

Source: Various brokers and Tufton Oceanic Limited

6%

7%

18%

51%

19%

Government Bonds / Other Public Equity Bank Debt private Equity Unfunded Orderbook

5%

10%

17%

16%

52%

Total US$ 1,112bn

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What funding is needed and wanted?

…..orderbook first

In order to assess what funding is needed we should evaluate the current

orderbook and “low-cycle” of sale & purchase activity

In order to assess what funding is wanted we should evaluate the current

orderbook + new orders and “mid-cycle” sale & purchase activity

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What funding is needed for the current Orderbook?

For delivery in

$ bn 2012 2013 2014 + beyond Total Avg.

p.a.

Total Orderbook 144 80 47 271 90

Unfunded Orderbook 55 55 32 142 47

… by new debt 40 47 27 115 38

… by new equity 15 8 5 28 9

• Total orderbook (US$271bn delivered) reviewed for year of build and stage payments

• Assumptions made as to funding of current assets under construction

“new” annual debt and equity requirement of approx. US$38bn debt and approx. US$9bn equity pa average over the next 3 years

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What funding is needed for the Sale & Purchase market?

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

0

3000

6000

9000

12000

15000

18000

21000

24000

27000

30000

33000

36000Tankers & Bulkers - S&P Turnover

Annualised Turnover as % of Fleet (Left Axis)

Annualised Turnover in USD (Right Axis)

USD Billion

Sources: Clarkson, Tufton

Page 9

What funding is needed for the Sale & Purchase market?

• “Low-cycle” approx. 3% volume turnover

• Applied to current value of the delivered fleet = US$25bn per annum

• Assuming 50% gearing leading to:

• US$12.5bn p.a. required from debt

• US$12.5bn p.a. required from equity

Page 10

What funding is wanted for the Orderbook and Sale & Purchase market?

For delivery in

$ bn 2012 2013 2014 + beyond Total Avg. p.a.

Current orderbook funding req. 55 55 32 142 47New orderbook funding req. 8 46 51 105 35Total funding required 63 101 83 247 82… by new debt 34 64 61 159 53… by new equity 29 37 22 88 29

• Assumes more

newbuilding orders in

2012, 2013 and 2014 for

delivery in 2013

onwards to keep

orderbook at about 70%

of current level

1. Orderbook

2. Sale & Purchase

• “Mid-cycle” approx. 7% volume turnover

• Applied to current value of the delivered fleet = US$59bn per annum

• Assuming 60% gearing leading to:

• US$35bn p.a. required new debt

• US$24bn p.a. required new equity

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Conclusion - What Debt funding is required?

$ bn 2012 2013 2014 + beyond Total Avg p.a.

Need 52 60 40 152 51 Want 69 99 96 264 88

Total Bank Loan PortfoliosUS$bn • 2009-11 gross run off = US$73bn p.a.

• New lending/entrants = US$33bn p.a. Net reduction = $40bn p.a.

• Current “Need” is within scope of recent gross run off, other factors

• Lower S&P - unlikely

• Orderbook slippage – possible

• Yard credits - possible

• Lack of available debt capital should constrain new orders over the next few years – no bad thing2007 2008 2009 2010 2011 2012 2013 2014

0

100

200

300

400

500

600

700

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Conclusion - What Equity funding is required?

$ bn 2012 2013 2014 + beyond Total Avg p.a.

Need 27 21 17 65 22

Want 53 61 46 160 53

• Public Market recent average approx. US$8bn p.a.

• PE rumoured to have up to US$10bn allocated

• Deep Pockets ? Unknown but potentially sufficient to fill the “need”

• All the above is “smart money” with alternative investment opportunities; therefore

can be there but needs the right incentives – “sensibility” & “pain”.

Page 13

Conclusion

• Should be sufficient debt and equity capital to fill current “needs”.

• Attractive investments are and will continue to be there for opportunistic capital (but

are also there in other industries).

• Lack of additional capital should constrain the orderbook in the short term with the

sale and purchase market being relatively elastic.

• More slippage will cure any minor Gap if it appears.

• Responsible reaction to ordering, pricing and capital structuring.

• Most ship types currently at yard breakeven levels. Further pricing falls should not

therefore be a function of the lack of capital but caution prevails due to shipyard over

capacity.