Residual Value Insurance (“RVI”)

gia.org.sg

Residual Value Insurance (“RVI”)

SHIP FINANCE

18 September 2007

- Cheong Chee Tham -


Equity Financing

� Global maritime shipping industry is capital and

asset intensive in nature.

� Shipowing and financing of ships are critical

components within the international maritime

industry.

� Conventional financing – mortgage/debt financing

-- secured borrowings combined with owners’equity.

2


Developments

Equity Financing

�Since 2003 -- Rise in asset price, charter rates

many ship owners begin to use alternative

sources of equity capital

eg. public offerings

& leasing (ie using third party equity)

� Employment of professional CFOs

� Understanding cost of capital (WACC)

�Also ship owners are beginning to realise

ownership and control of vessels need not rest

with same party

3


Bareboat charter

� Own vessels

� Do not operate

the vessels

� Lease vessels to

third parties

under fixed rate

Bare boat

charters

Tonnage providers

Time charter

� Own vessels

� Operate vessels

under fixed-rate

charters with

third parties

Value chain

4

Ship operators

� Own vessels

� Operate vessels

� May lease-in

vessels under

BBC or TC

Shippers

� Require

movement of

materials and

finished goods

through supply

chain


Equity Financing

� What constitute Equity Financing?

� Raising of capital via offering of shares from

private/public domain.

5


Recent IPOs

� May 2007 Rickmers Maritime Trust – US$175M (SGX)

� April 2007 Akebono Shipping Fund 1 – Closed end fund

� March 2007 First Ship Lease Trust - US$342M (SGX)

� May 2006 Pacific Shipping Trust – US$99.9M (SGX)

� October 2006 Danaos Corporation - US$204M

(NASDAQ & SGX)

� April 2006 Omega Navigation Enterprise – US$204M

(NYSE)

� August 2005 Seaspan Corporation $600M (NTSE)

6


Equity Financing

Business Times 12 September 2007

7


OVERVIEW EQUITY FINANCING/LEASING

Leasing –

Finance &

Operating

(incl. Tax

leases)

Business

Trusts

Initial Public

Offering

(“IPO”)

Raising

Equity

Private/

Closed-end

Funds

8

Nowegian KS

Market

(Primarily bareboat

charters)

German KG

Market (Time

charters)


Why Equity Financing?

Everyone knows debt is cheaper

� Lower overall cost of financing

� Diversify funding sources/ reach out to other

markets

� Public Profiling

� subject to regulatory requirements

9


Periodic

distributions

Lease rentals

Business Trust Structure

UNITHOLDERS

TRUST

VESSELS

LESSEES

Ownership

Trust Deed

Fees

Ownership

Lease

10

TRUSTEE-

MANAGER


Business

Trust Act

Advantage

Overview of Business Trusts

�Requires �Requires registration of of Business Trust (by MAS)

�Requires �Requires a single Trustee-Manager that is is a company – cannot carry

out other businesses other than managing and operating the BT

�At �At least half of of the directors of of the Trustee Manager must be

independent

�Governed �Governed by the Trust Deed between the Trust and Trustee-Manager

�Ability �Ability to to pay dividends out of of cash profits rather than accounting

profits

Why BT �Suited �Suited for structures with large stable income generating assets

11


MARITIME INSURANCE


Protection &

Indemnity

MARITIME INSURANCE

Hull & Machinery

13

War Risk


Marine

Disasters –

Oil Spills,

environment

mishaps

Business

Interruptions

MARITIME INSURANCE

Mechanical

Failure

Operation

of Vessels

Damage

14

Collision

Loss of

Cargo


Maritime Insurance

Normally taken up by the Operators of the vessels

rather than the financiers:

Lessor – Bareboat charters – insurance taken

up by lessee

Lessor – Time charters – insurance taken up

by lessor for those related to the

vessel; and lessee for those related

to cargo.

15


Maritime Insurance

Typically, a financier would require:

(i) An assignment of insurance policies

(ii) Named as a co-beneficiary/co-assured

� H&M & War insurance – typical requirement for

each vessel to be covered up to at least Fair

Market Value or 110%-130% of the SLV

� Protection & Indemnity insurance – third party

liabilities.

16


Maritime Insurance

� Passive Investor’s Interest Insurance (“PII”)

A type of policy to cover situations where

(a) the relevant operator’s primary policy

has declined a claimed

(b) fails to to respond within the designated

time allowed.

Mirrors the vessel’s primary insurance

(H&M, War Risks and P&I); secondary coverage

Taken up mainly by Lessors or Lenders

17


Appendix


Residual Value Insurance (“RVI”)

What is RVI?

What is the role of RVI in ship finance?

An RVI provider indemnifies the policy holder

against a loss (in value of the vessel) that might

occur if the sale proceeds/value of the vessel

is less than the insured residual value at a

specific point in time (normally at the maturity of

the financing period).

19


Residual Value Insurance (“RVI”)

An RVI provider indemnifies the policy holder against a loss (in

value of the vessel) that might occur if the sale proceeds/value

of the vessel is less than the insured residual value at a specific

point in time (normally at the maturity of the financing period).

Original Vessel

Cost

Time

20

Fair Market

value

Maturity

Forecasted RV

Insured RV

Indemnity


Residual Value Insurance (“RVI”)

Shipping is cyclical

RVI is one method of managing this risk

Reluctance of lenders & investors to assume

residual risk of the vessels because of the

volatility of the market

RVI provider is in effect acting as a third party

guarantor to secure a minimum residual value

21


Residual Value Insurance (“RVI”)

Advantages

Transfer of risk

Provides downside protection

Lenders: lower the repayment profile

for borrower

� May be costly

� No consistent providers of such RVI

22


THANK YOU

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