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The Funding Gap Myth or Reality?

The Funding Gap Myth or Reality?. Marine Money – 8 th Annual Gulf Ship Finance Forum Dubai – 7 th March 2012 Erik A. Lind Tufton Oceanic. March 2012. Tufton Oceanic.

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The Funding Gap Myth or Reality?

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  1. The Funding Gap Myth or Reality? Marine Money – 8th Annual Gulf Ship Finance Forum Dubai – 7th March 2012 Erik A. Lind Tufton Oceanic March 2012

  2. Tufton Oceanic • 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.

  3. Value of the world fleet – Fleet size by vessel type as at year end 2011 US$841bn Delivered Fleet Total US$ 1,112bn US$271bn Orderbook Source: Various brokers and Tufton Oceanic Limited

  4. Who owns the fleet? – Fleet size by owner type as at year end 2011 US$841bn Delivered Fleet Total US$ 1,112bn US$271bn Orderbook Source: Various brokers and Tufton Oceanic Limited

  5. How the fleet is funded – Fleet size by source of funding as at year end 2011 US$841bn Delivered Fleet Total US$ 1,112bn US$271bn Orderbook Source: Various brokers and Tufton Oceanic Limited

  6. What funding is needed and wanted? In order to assess what funding is needed we should evaluate the current orderbook and “low-cycle” of sale & purchase activity • …..orderbook first In order to assess what funding is wanted we should evaluate the current orderbook + new orders and “mid-cycle” sale & purchase activity

  7. What funding is needed for the current Orderbook? • 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

  8. What funding is needed for the Sale & Purchase market?

  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

  10. What funding is wanted for the Orderbook and Sale & Purchase market? 1. Orderbook • Assumes more newbuilding orders in 2012, 2013 and 2014 for delivery in 2013 onwards to keep orderbook at about 70% of current level 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

  11. Conclusion - What Debt funding is required? Total Bank Loan Portfolios US$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 thing

  12. Conclusion - What Equity funding is required? • 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”.

  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.

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