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Investment opportunities in the German KG market
Mark Kuchenbecker & Axel Siepmann, Managing Partners
24 February 2010

NAVES Corporate Finance: Independent Corporate Finance Adviser for the German KG Market
Structuring services
· · · Develop and implement risk analysis, liquidity plan, budget plan as well as sensitivity analyses Develop (re)structuring models Renegotiate financing contracts and charter agreements
Cooperation partners:
Investor in more than 600 KGs
Transaction services
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Arrange private equity, mezzanine and debt funding
Structured asset purchases and disposals M&A advisory
NAVES Corporate Finance provides support through the whole process, from planning through to implementation, and ... ...focuses exclusively on the maritime industry ...employs specialists in all areas of corporate finance, structuring and financing ...strong local ,,footprint" in Northern Germany
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Understanding the KG System
1. Debt-/Equity-Structure during Pre-delivery-Phase
Ship Yard
Ship Manager
Joint or several equity placement guarantees
KG House (Equity Arranger)
New order / delivery
Ship Manager / Liner Company
Sale/purchase of vessel
KG SPV
Pre-Delivery-Financing via building instalments Sometimes one instalment (or pro rata) from equity
German Banks
2. Debt-/Equity-Structure after delivery
KG House (Equity Arranger)
Ship Manager
Ship management services
Trustee company (subsidiary of KG House)
30% equity payment trustee services
Equity Investors
About 10-800 per KG
Hired by KG to take care of administrative / operational items Up to 18 years 70% amortizing delivery financing
Liner company
Charter-hire payment
KG SPV
German Banks
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Understanding the stakeholders: Banks Challenges · Reduction of shipping portfolio's size versus increasing loan book resulting from newbuilding pipeline · Banks exposed to "equity risks" following deliveries of newbuildings for which KG houses have not raised the equity (final installment paid by bank) · Number of loan defaults is increasing · Capacity constraints in human resources · Shrinking liquidity and equity capitalization versus increased requirements (Basel II) · Very limited room for new KG-business in the banking sector in the next years · Many banks have also sold KG funds to private investors and will therefore back the KG market Reaction to the crisis · High awareness that shipping is a cyclical industry and selling at the wrong moment destroys value · Disciplined reaction towards their clients (KG houses and shipowners/managers; few forced sales/foreclosures) · Limited ability to provide new loans ­ high ability to support existing loans · Pooling of vessels · Selective forced sales after careful assessment of the market potential (especially in the case historically placed KG funds owning unemployed vessels) · Forced sales may be supported with financing packages · Increased margins & equity kicker
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Understanding the stakeholders:
Ship Managers
Challenges
· · · · · ·
Substantial fleet growth due to newbuildings on order Outstanding placement guarantees Malfunction of KG market endangering business model Limited access to capital markets (usually only bilateral financings) so far Severe fall in freight rates and charter rates reducing management income Banks considering to shift assets from weaker to stronger players
Reaction to the crisis · · · · Limited Equity injection from owners of the business in return for standstill agreement with banks Becoming a service provider to the banks as new "owners" of the vessels Initiation of opportunistic funds with national and international capital Limited preparedness to open shareholder structure for new investors yet
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Understanding the stakeholders: Issuing
houses
Challenges
· At present little placement power, as German private investors with cyclical investment appetite · Limited financings for new project in the German market, including other asset classes · Major source of income are trustee services - declining alongside liquidation of funds ­ however banks understand that these services are essential · Need to avoid insolvency of placed funds in order to maintain reputation with investors · Survive until the market recovers · Remember: it is not the first crisis that the KG industry has experienced! The real estate KG industry has undergone similar crises several times and still exists
Reaction to the crisis · · · · · · Capital increases Standstill agreements and (partial) release from placement guarantees Develop new financing structures and fund concepts such as blind pools Offer placement services for owners (such as banks) and focus on trustee business for the time being Adjust overhead & organisation to reduced business activity Establishing new asset classes to compensate the shipping crisis
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Understanding the stakeholders: German
KG funds
Challenges · Vessels running out of charter are threatened by unemployment an no further operational income as liner companies prefer own tonnage to charter tonnage · Nevertheless OPEX (lay up costs) will occur even if the vessel is unemployed · Many funds are single vessel funds: Negative cash-flows resulting in a liquidity crisis · Banks often refuse to provide these KGs with further liquidity, even though their loan is covered by scrap value · Sale of the vessel requires majority vote in shareholder meeting and in many cases leading to taxation on hidden tax reserves at the time of the sale for KG investors · Threat: KG runs into illiquidity, liquidator will enforce public auction Reaction to the crisis · · · · Pooling of vessels if possible Capital increase/payback of distributions Searching for alternative sources of liquidity Disposal of vessel
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KG Investment opportunities overview
Pre placement Acquiring assets including the financing
Acquisition of unplaced and unchartered vessels at discount Acquisition of chartered vessels with existing financing and attractive LTV without discount Debt financing consortium issues
Post placement Acquisition of debt Provision of debt / mezzanine
Provide debt with double digit yields to KGs with cash flow shortage
Mezzanine financing
Preferred equity
Asset purchase
Providing Mezz to SPVs and/or shipmanagers
Acquisition of performing loans
Fund preferred equity increase and become partner of the retail investors
Buy assets from failed KG restructuring concepts
German market not yet used to high yields
Acquisition of non performing loans (contractual restrictions to sellers)
German banking law
Several tax implications
Current market value versus market expectations
Conversion into equity
Reversion of distributions as collateral Critical mass
Exit strategy to be negotiated
No or very low charter
Critical mass 8

Conclusions
I. II. III.
The KG system will take a hard hit, but it will not collapse as long as tonnage and inheritance tax advantages remain German ship financing banks will remain very disciplined Germany was the largest ,,export nation" for ship financing and will become an ,,import nation" for equity for a while
IV. There are numerous investment opportunities, but you have to approach them "the German way"
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Disclaimer
This presentation is solely intended for its recipient's internal use and for discussion purposes only. The recipient undertakes not to disclose any information contained in this presentation to third parties. The recipient further agrees to ensure that neither the presentation as a whole, nor any of its parts, will be used for any purposes other than those mentioned herein unless prior written consent is obtained from NAVES Corporate Finance GmbH & Co. KG. Any assessments or opinions expressed in this presentation are a true representation of our judgement at the time this presentation was created and are subject to change without notice. Any public domain information used to create this presentation was assumed to be correct and complete without any further verification. This presentation does not constitute a commitment on the part of NAVES Corporate Finance GmbH & Co. KG to execute the transaction nor does NAVES Corporate Finance GmbH & Co. KG have the right to claim to be included in any transaction. This presentation shall not form the basis for any claims against NAVES Corporate Finance GmbH & Co. KG concerning the feasibility of a transaction nor the correctness or completeness of any dates, documentation, information or any other advice given.
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