prepare an analysis to be communicated to the prospective Private Equity investors, analyzing the proposed shipping investment opportunity. The analysis should be based on one of the above shipping Sectors and should combine both a Discussion part (of app
INDIVIDUAL ASSIGNMENT (max 3,000 words)
ABC Maritime Inc. is a traditional, privately owned, family controlled, shipping company. Its principal owner, having sold all of his shipping assets, at the top of the shipping cycle, in 2008, is presently considering the possibility of re-entering the shipping industry. In order to establish a critical mass in his operations, he is interested of acquiring a fleet of at least eight (8) vessels, either in the Dry Bulk, the Container, the Medium Range (MR) Product Tanker or the Liquefied Petroleum Gas (LPG) Tanker sector (the “Sector”).
In order to proceed with this shipping investment and as part of his efforts to reduce his equity capital commitment in this venture, he is considering the possibility of raising part of the necessary equity from institutional Private Equity investors.
The principal has retained you, as a third party shipping industry expert, to prepare an analysis to be communicated to the prospective Private Equity investors, analyzing the proposed shipping investment opportunity. The analysis should be based on one of the above shipping Sectors and should combine both a Discussion part (of approximately 2,000 words) as well as a Financial Analysis part (of approximately 1,000 words).
For the Discussion part of this assignment, items 1(a) and 1(b) below, you are required to make use of publicly available research material, presenting tables and charts to support your arguments and suggestions.
1. The Discussion part should analyze the following key elements for the Sector of your choice:
(a) Economic fundamentals of the specific Sector and why these favor an investment in it.
You are required to make reference to the state of the global economy, analyzing latest global trends and patterns, critically discussing how these affect the demand of the underlying commodity that is transported in the Sector of your choice and how this is expected to affect seaborne trade in that specific Sector. In addition, you should examine the supply side of that Sector, making reference to the trading fleet and comparing this to the existing orderbook, identifying any overcapacity threats, and whether possible barriers to entry may mitigate these threats.
(b) Timing of the investment and how appropriate this is interns of the shipping and finance business cycles.
You are required to analyze freight rates as well as asset values in the Sector of your choice, determine if these are at historical low or high levels (use of graphs is recommended), and discuss, with reference to the shipping business cycle, where we are at present and if there is an upside potential. You should discuss the availability of ship finance making reference to the shipping finance cycle, and analyze the various issues and problems shipping banks may currently have (e.g. non-performing loans, stricter regulatory environment, increased cost of funding, etc.).
(c) Suggested Assets to be acquired and Employment strategy to be followed
You are required to provide details on the type of assets (vessels’ size, price, country of build and age) you recommend to be acquired, in the Sector of your choice, estimating the total capital outlay for this investment. You also need to state your proposed employment strategy (i.e. if these are to be operated under a Time Charter or in the Spot market, providing your estimates on the vessels’ projected daily Freight rates), critically discussing your recommendation in terms of risks and rewards the proposed employment strategy may entail.
(d) Suggested financing strategy to be adopted for the investment
You are required to discuss the financing structure you will employ for the purposes of this investment (i.e. the capital structure you will establish to acquire the fleet of eight vessels). Part of the capital structure will be funded by Equity; part of this will be contributed by the principal and the remaining by the Private Equity investors. The capital structure will be complemented by a Senior Debt term loan facility and you may make any assumptions you consider appropriate for the Amount of Debt you will be raising, its proposed repayment Term, Balloon, Margin, and Frequency of capital installments (semi-annual or quarterly). You should also discuss at least two other forms of ship finance (e.g. Mezzanine, Export Credit Agencies, Public Capital Markets, Chinese ship finance, among others), critically commenting on their suitability for the proposed project.
2. The Financial Analysis part should include the following, for only one vessels, of the Sector of your choice:
You need to clearly state your assumptions on: (a) the period of the analysis; to keep it simple this should be the same as with the repayment Term of the loan, (b) the Vessel’s price at present and at the end of the analysis period, (c) the projected daily Freight rate the vessel will be earning during the period of the analysis, (d) the daily operating expenses of the vessel and their increase per annum, (e) the operating days and the operating expenses days, (f) the financing; i.e. the debt financing amount you will be raising for the acquisition of the vessel, the Libor rate plus the margin that will be applied for the purposes of this financing, the repayment term, the frequency of capital installments and the balloon. All assumptions will have to be in line with those you introduced above; i.e. at the Discussion parts 1 (c) and 1(d).
Note: The Financial Analysis you are required to carry out is similar to the one we examined in our lectures, on the final session of Day 2 “Examples of Second-Hand and Newbuilding Ship Finance” (Example 1: Second-Hand Vessel Financing).
(a) Break Even Calculations: Estimate the minimum break-even time-charter rate required to cover debt
financing cost, as well as operating expenses (OPEX).
As per “Example 1: Second-Hand Vessel Financing” in our lectures, you have to calculate the minimum daily rate (break-even rate) the vessel needs to earn to cover interest, capital and operating expenses. Once you establish that break-even rate you should critically analyze your findings, discussing whether the vessel’s projected earnings (i.e. the projected daily Freight rates) can cover this rate. It is imperative for the daily break-even rate to be covered by the vessel’s projected daily Freight rates, otherwise this investment will be generating negative cash flows.
(b) Capital Budgeting process (investment appraisal): Estimate the Internal Rate of Return (IRR) for the
Prepare a cash-flow projection, establish the Net Cash Flow per period (quarter or semi-annual) and calculate the Internal Rate of Return (IRR) for the Equity that has been committed in the project by both the principal and the Private Equity investors. You are required to critically analyze your findings, advising the principal and the Private Equity Investors whether the equity return (IRR) is acceptable in view of the risk of the project.
Note: The type of analysis you are required to carry out in this section is again as per “Example 1: Second-Hand Vessel Financing” in our lectures.