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Shipbuilding contracts and related ship finance issues

Chairman: Ian Gaunt Hon. Secretary, LMAA Panellists: Alun Hatfield - Clarksons Financial Services Michael Stockwood Ince & Co Simon Curtis - Curtis Davis Garrard LLP

Wednesday 28th April 2010

International House, 1 St Katharines Way, London, E1W 1UN


LSLC - MARITIME BUSINESS FORUM International House, 2nd Floor, 1 St Katharines Way, London, E1W 1UN Tel: 020 7063 9737 ~ E-mail: shipping @shippinglbc.com ~ Fax: 020 7481 2149 Chairmans Tel: 020 7063 9736 ~ Chairmans E-mail: asheppard@shippinglbc.com Web-site: www.london-shipping-law.com

Issues for discussion:


BIMCO standard shipbuilding contract Governing law, forum and jurisdiction issues Impact of West Tankers and EU Reg 44/2001 Impact of Cross border Insolvency Regulations Refund Guarantee deficiencies CA decision Stocznia v Gearbulk Holdings Impact of recent developments on the financing of newbuildings

PART A Common Issues in Shipbuilding Contract Arbitrations Ian Gaunt

PART B Ship Finance A changing environment Alun Hatfield

PART C Damages and determination of Shipbuilding Contracts Gearbulk v Stocznia Gdynia Revisited Michael Stockwood

PART D Enforcing the refund guarantee -Practical problems Simon Curtis

PART E CURRICULA VITAE

PART A Common Issues in Shipbuilding Contract Arbitrations Ian Gaunt

London Shipping Law Centre 28 April 2010

Common Issues in Shipbuilding Contract Arbitrations Ian Gaunt MA (Cantab), FCIArb, DiplCArb, Hon Secretary LMAA

Summary:

The boom in shipbuilding orders for all classes of ships in the period 20032008 has been followed by an equally dramatic fall in freight rates in late 2008 and the termination of many shipbuilding contracts. This has inevitably resulted in a large number of references to arbitration of shipbuilding disputes, particularly in 2009. Most of the arbitrations in this field involving international contracts are subject to English law and conducted in London, many of them under the Terms of the London Maritime Arbitrators Association. In the arbitration proceedings preliminary issues often arise as to the correct interpretation of poorly worded arbitration clauses. Common features of disputes include: alleged failures to meet deadlines for stages of construction prescribed by the contract allegations that delays are, or are not, excusable as force majeure or permissible delay allegations that ships when tendered do not comply with the technical specification, and disputes as to the materiality of alleged discrepancies allegations that parties have made representations about their intentions with regard to the exercise of rights of cancellation, which have allegedly been relied on by the other party to their detriment.

In the majority of cases the disputes also involve financial instruments such as refund guarantees, and their interpretation. Can a claim be made for a refund of instalments paid, and therefore under a refund guarantee, and also for damages more generally? This issue has recently been considered by the English Court of Appeal in Stocznia Gdynia SA v Gearbulk Holdings Ltd1. Issues relating to cross border insolvency and jurisdiction often need to be considered. This is particularly relevant to the possibility of a stay of proceedings and to the issue of security for costs. Finally, the question of enforcement of an award will be crucial. Where does the unsuccessful party have assets and can the courts of the country where those assets are located be relied on to enforce the award? This is particularly the case in China where there is so far limited experience of enforcement of arbitration awards.

Shipbuilding disputes: A typical scenario Owner terminates/rescinds/cancels contract for: 1. Delay 2. Non compliance with specification. Builder gives notice of arbitration and appoints arbitrator but takes no further action: blocks claim under refund guarantee (maybe). Owner appoints arbitrator and serves claim submissions to accelerate recovery under refund guarantee. Shipyard tries to sell ship to limit damage and generate cash

Forms of shipbuilding contract and dispute resolution

For orders placed in shipyards in Japan, Korea and China various more or less standard forms of shipbuilding contracts have developed and it has been usual for owners to contract on these terms, but with modifications introduced as a result of individual negotiations. In Japan, the starting point for most contracts is likely to be the SAJ form which provides for the validity and interpretation of the contract to be governed by the laws of the country where the vessel is built and disputes to be subject to the rules of The Japan Shipping Exchange2. In Korea and China various basic forms have been used, often subject to a good deal of modification through negotiation. Many foreign purchasers from Korean, Chinese or Japanese shipyards will wish to require the contract to be governed by the law of a neutral jurisdiction and for disputes to be resolved in a neutral forum. Many, indeed probably a substantial majority of, international shipbuilding contracts contain clauses including English law as the express law of the contract references to English arbitration, whether or not explicitly to the LMAA Terms. The advantages of arbitration are of course well known, in particular confidentiality, certainty (particularly where appeals to the courts are restricted or excluded) and the ability to enforce an award in any of the 150+ countries which are parties to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

Defects in arbitration clauses

In dealing with shipbuilding disputes referred to arbitration, it is remarkable to discover how many arbitration clauses are in some way defective. Whilst the law and jurisdiction clauses may be the last item of a shipbuilding contract to be focussed on by the parties and their lawyers, the proper

drafting of these clauses can often avoid unnecessary preliminary disputes as to the proper seat of the arbitration and the way in which the arbitration tribunal is to be constituted and/or to conduct its proceedings. It is quite rare to find an explicit reference to the seat of the arbitration notwithstanding the fact that this will determine which courts will have the power to supervise the proceedings. It is quite common to find references to arbitral bodies which dont exist or at least to find their names misstated. The procedures for the appointment of arbitrators may be unworkable and frequently there are references to umpires rather than arbitrators where it is clear that those drafting the provision do not really understand the difference.

The point is that it is worth the parties and their lawyers making sure that their arbitration agreement is really workable, that the seat has been identified and that a suitable set of arbitral rules has been properly referred to - whether it be the Terms of the LMAA or other body which is correctly identified. The parties should also give consideration whether they want to retain or exclude rights of appeal to the courts and what express language they need to include to achieve the desired result.

Cancellation for Delay

All shipbuilding contracts will include an express right of cancellation (often expressed as termination or rescission usually meaning the same thing) which the buyer can exercise if the ship is not tendered for delivery within a designated period after the scheduled contractual delivery date, as extended by permissible delays. For this purpose, in an English law

contract, permissible delays and the circumstances in which the shipyard can rely on them, need to be spelled out in detail as there is no general concept of force majeure under English law (unlike the laws of most

continental European countries and others whose civil law is based on such systems). The SAJ form of contract is quite explicit in describing permissible delays and sets a period of 210 days, excluding permissible delays, as the limit after which the buyer can rescind the contract if the ship has not been tendered for delivery. The most significant delays are likely to be the result of strikes, fires, crane damage, design defects or catastrophes such as earthquakes. They may however also be the result of poor planning or a shipyard taking on more orders than it is really able to fulfil or be the result of defects in components supplied by subcontractors or delays in delivery of subcontracted components which lie on the critical path for construction. Where the cancellation clause does allow the shipyard to take permissible delay into account, a dispute over the buyers right to cancel is likely to involve one or both of the following questions: Is the delay is really within the strict terms of the permissible delay definition and has any relevant prescribed notification has been given by the shipyard? Has the delay alleged actually been caused by the permissible delay or by something else. Many, indeed in my recent experience most, international shipbuilding contracts now include a further provision for an ultimate drop dead date3. This means that if the ship is delayed beyond a certain point (say, 365 days) after the scheduled contractual delivery date, the buyer may cancel the contract even if the delay is wholly or partly caused by permissible delay. A third type of clause dealing with delay is found in many contracts This seeks to give the buyer greater control over the construction process in the form of a right of cancellation if the keel has not been laid or another major milestone reached by a given date or, more generally, if progress on the construction of the ship is halted for a given period. Failure to meet such interim dates may give the buyer a warning that the ship will not finally be

tendered by the scheduled delivery date and an opportunity to take action without having to wait until the scheduled delivery date before giving notice of cancellation. The last provision I would draw attention to in connection with delays is the right contained in some contracts for the shipyard to put the buyer to an election as to the exercise of its right of cancellation. That is, if the buyer is entitled to exercise a right of cancellation but simply does not do so, leaving the shipyard in the dark as to the buyers intention, the shipyard can give notice to the buyer nominating an alternative delivery date and forcing the buyer either to accept the later date as a substitute contractual date, or to exercise its right of cancellation.4 In principle, this provision could provide the shipyard in delay with an opportunity to avoid an uncertain situation, but it effectively requires the shipyard to admit that the buyer has an accrued right of cancellation, something which shipyards in this situation have been understandably reluctant to do. Where a buyer has been equivocal in its dealings with a shipyard in a case where a right of cancellation may have arisen, the shipyard may allege that the buyers conduct amounts to a promissory estoppel, namely that the buyer has made an express or implied representation to the effect that it will not exercise the right and that the shipyard has acted on such representation to its detriment. The decision on such arguments will of course depend on the arbitrators evaluation of the facts in each case.

Failure to meet the contractual specification

In English law, shipbuilding contracts are contracts for the sale of goods by description within section 13 of the Sale of Goods Act 1979. This imports a condition that the goods tendered will correspond with the description. The description is partly contained in the shipbuilding contract (particularly details as to main dimensions, speed, deadweight, draught, fuel

consumption etc) but most of the description will be in the specification and plans. The buyer will monitor the progress of construction through its site supervisors but does not normally take contractual responsibility for the compliance of the finished product with the contractual description. The contract will invariably contain provisions for liquidated damages to be paid (often by way of a reduction of the price on delivery) for deficiencies in designated aspects of the description - notably speed, deadweight and fuel consumption and provision for the buyer to have the right to cancel if the specified parameters are not met by more than a particular margin. So much is relatively clear. The question however often arises whether the

buyer may cancel the contract for a failure to comply with section 13 of the Sale of Goods Act or otherwise if the ship on delivery does not meet other aspects of the contract description, for example if the ship is subject to vibration above the specified level.

Historically the English courts adopted a very strict approach to the condition as to compliance with description, such that even minor noncompliances could be invoked as a justification for termination of the contract. In the last 30 years however, the courts have inclined to take a less strict approach, holding that the contractual description for these purposes should be confined to terms which, viewed objectively, are of commercial significance to the purchaser5. As compliance with

description is frequently in dispute in shipbuilding cases, arbitrators may quite often have to decide the question whether a particular discrepancy is of commercial significance to the purchaser and, in cases where the arbitrators are commercial men (or women), arbitrators assessment.

It should be mentioned that it is not unusual for the statutory implied conditions to be expressly excluded in shipbuilding contracts governed by English law. In cases where the buyer has purported to cancel the contract,

the decision for the arbitrators would be not whether the condition as to compliance with description had been breached but whether the failure to comply with the obligation to build and deliver the ship in accordance with the specification amounted to a repudiatory breach of contract by the shipyard. Again this will depend on the arbitrators evaluation of the significance of the breach. The comments made above in relation to the qualification of arbitrators to make such a judgement also apply.

Can a buyer claim both a refund of instalments paid and damages at large?

This question came for decision recently in the widely reported case of Stocznia Gdynia SA v Gearbulk Holdings Ltd (an appeal which, incidentally, fully upheld the decision of the sole arbitrator). The case involved identical shipbuilding contracts for three ships. The contracts included provisions entitling the buyer to terminate the contracts if the delay in delivery of a particular ship extended beyond a given cancelling date. In the event of termination, the buyer had the right to receive repayment of the instalments of the contract price already paid plus interest, which was guaranteed by a third party refund guarantee. The contracts also included a provision that the shipyard should not be liable for any other compensation for damages sustained by reason of delay. The buyer terminated each of the contracts for delay and claimed payment under the refund guarantees. The buyer however also claimed damages against the shipyard for repudiatory breach of contract by reason of the delay. The arbitrator held that the yard had repudiated the contracts, that the terms of the contracts did not preclude the buyer from treating the contracts as discharged for repudiatory breach nor from recovering damages for loss of bargain and that the termination letters did not have the effect of affirming the contracts and therefore abandoning common

law rights. The shipyard appealed. The judge at first instance found that there was a repudiatory breach of contract but that the buyer was precluded from claiming damages at common law by virtue of it having effectively affirmed the contract and recovered monies together with interest from the refund guarantor in accordance with the provisions of the contracts. The Court of Appeal restored the decision of the arbitrator. Moore-Bick LJ said as follows:
Whenever one party to a contact is given the right to terminate it in the event of a breach by the other, it is necessary to examine carefully what the parties were intending to achieve and in particular what importance they intended to attach to the underlying obligation and the nature of the breach. The answer will turn on the language of the clause in question understood in the context of the contract as a whole and its commercial background The primary purpose of [Article 10] in the present case is to provide an agreed measure of compensation for breaches of contract by way of delay in delivery and deficiencies in capacity and performance which, although important, do not go to the root of the contract. For these the parties have agreed the payment of liquidated damages which are to be deducted from the final instalment of the price and to that extent their agreement displaces the general law, at least as regards the measure of damages recoverable for a breach of that kind. However they have also agreed that there comes a point at which the delay or deficiency is so serious that it should entitle [the buyer] to terminate the contract. In my view they must be taken to have agreed that at that point the breach is to be treated as going to the root of the contract. In those circumstances the right to terminate the contract cannot sensibly be understood as anything other than embodying the parties agreement that [the buyer] has the right to treat the contract as repudiated withthe usual consequences.In my view it is wrong to treat the right to terminate in accordance with the terms of the contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law. In those cases where the contract gives a right of termination they are in effect one and the same.

The court effectively went to on to decide that as a matter of construction the exclusion clause did not mean that the buyer had given up its right to claim damages at large as well as claiming a refund of instalments and interest.

I suspect that many shipyards and their lawyers will be surprised by this decision. However, it should be borne in mind that the court did not rule out the possibility of excluding the right to claim damages at large in the case of a repudiatory breach of contract as a matter of principle. What it did decide was that very clear language would be needed to reach the conclusion that a buyer had given up this right. The result is that the wording of the relevant contract will need to be considered and construed by arbitrators or a court in reaching the appropriate decision as to whether an award of damages at large would be appropriate (as well as evaluating the circumstances in deciding whether there has been a repudiatory breach). A final point to note on this case is that the court found that the termination of the contract under the specific termination provision was capable of operating as an acceptance of the repudiatory breach, even though it was not expressed in those terms:
..where the contract provides a right to terminate which corresponds to a right under the general law no election is necessary. In such cases it is sufficient for the injured party simply to make it clear that he is treating the contract as dischargedIf he gives a bad reason for doing so, his action is nevertheless effective if the circumstances support it..6

Insolvency and the Cross Border Insolvency Regulations

It is accepted in most jurisdictions, as a consequence of Article II.1 and 3 of the New York Convention, that arbitration agreements will be given effect to, and that court proceedings in the same matter will be stayed in favour of the resolution of the dispute by arbitration. However, where one of the parties to an arbitration agreement is insolvent and obtains protection under local insolvency laws, it will be open to the foreign representative of the insolvent party to seek the stay of arbitration proceedings pending in England under the English Cross Border Insolvency Regulations 2006 (CBIR)7. Whilst these issues are not confined to shipbuilding disputes, CBIR

may have significant consequences in such cases, particularly where the insolvent party is the respondent in the proceedings.

In a recent English case8, Korean shipowner and operator Samsun Logix Corporation (Samsun), having run into serious financial difficulties, petitioned the Seoul Central District Court for protection against its creditors under the Korean rehabilitation legislation. The Korean Court granted a stay in respect of proceedings against Samsun. The Korean Court appointed a Receiver of Samsun and applied to the English High Court for an order to stay proceedings against Samsun under the CBIR. The English High Court granted the stay which took immediate effect and prevented any creditor from, for example, obtaining an arbitration award against Samsun, let alone enforcing such award.

The English Courts have long recognised and assisted foreign receivers or other duly appointed insolvency officials from other jurisdictions at Common Law as mentioned in Galbraith v. Grimshaw9; indeed S. 426 of the Insolvency Act 1986 gave specific recognition in that respect to a number of former Commonwealth countries. The CBIR however goes much further and enables the English High Court to assist foreign receivers and other insolvency officials from any jurisdiction.

Security for costs In English arbitration proceedings it will be open to the respondent to apply for security for its costs in defending the proceedings. This however may lead also to an application by the claimant for an order for security for the costs of any counterclaim which the respondent may have brought. Not infrequently, the possibility of an order for security for costs will result in a good deal of shadow boxing between the parties to establish which is the true claimant in the proceedings. This may not necessarily be the party

which has given notice of arbitration. It may also involve an examination of whether the respondents counterclaim raises different issues or whether it is really just the flip side of the claimants claim.

Claims under refund guarantees A typical scenario in the current environment is for a shipyard which is in dispute with a buyer over the delivery of a ship to first give notice of arbitration. In many cases this will deny the buyer the opportunity to obtain immediate payment under a refund guarantee until an arbitration award has been issued. Having thus deflected the claim under the refund guarantee (and its obligation to reimburse the issuer), the shipyard may have little incentive to pursue the claim with any vigour. The buyer on the other hand, will be keen to recover its investment if it is confident that it can obtain an award in its favour confirming its entitlement to terminate the shipbuilding contract for delay, non-conformity with contract description or otherwise. There is frequently some disconnect between proceedings for recovery under refund guarantees and arbitration proceedings under the related shipbuilding contract. Even if governed by the same law as the related shipbuilding contract, refund guarantees are invariably subject to the jurisdiction of the courts, resulting in some cases in the expense of parallel proceedings in court and in arbitration, each of which turn on the same issues.

Enforcement Like a number of the other issues discussed above, enforcement problems are not confined to shipbuilding contract disputes but the fact that a high percentage of the worlds ships are built in one of Japan, Korea or China makes it important, from the buyers perspective, to focus on enforcement in those countries. Many buyers may take the view that as long as their

downpayments are protected by a refund guarantee, they do not need to worry further about possible enforcement issues in the jurisdiction where their partner shipyard is located. This may not be the case for four possible reasons: If an arbitration award is needed to trigger payment under the refund guarantee, the course of the arbitration proceedings may be affected by local insolvency protection proceedings in the jurisdiction of the shipyard which may lead to a stay of the arbitration proceedings in the jurisdiction of the seat (see above). The decision in Stocznia Gdynia SA v Gearbulk Holdings Ltd (above) highlights the possibility of the buyer bringing proceedings to recover damages at large for repudiatory breach of contract. Such a claim would not be guaranteed by a customary form of refund guarantee. An award of such damages would need to be enforced against the shipyards assets, most probably in the jurisdiction where the shipyard is located. The shipbuilding contract may include a right to take possession of the uncompleted ship and have it completed in another shipyard. Again an award in this respect would need to be enforced in the jurisdiction where the shipyard is located. In such cases local insolvency or creditor/debtor protection laws would almost inevitably also need to be taken into account. If the bank or other institution issuing the refund guarantee has assets primarily or exclusively in the same jurisdiction as the shipyard, enforcement proceedings may need to be taken against the issuer in that jurisdiction and issues such as exchange controls may need to be taken into account. Whilst this is not a question of the enforcement of an award as such, the award against the shipyard and its recognition will undoubtedly be an issue in obtaining payment under the refund guarantee.

The position of the shipyard seeking to enforce an award against a buyer will be different, depending of course on the location of assets of the buyer or a guarantor against which enforcement may be sought. The easiest course may be to arrest a ship owned or controlled by the buyer but, unless the buyer is itself the owner of the relevant ship, it will be necessary to consider the local laws regarding sistership arrests in the jurisdiction where enforcement is sought. Again too, creditor/debtor protection laws in the state where the central management of the shipowning group is located may have an impact on the ability of the shipyard to enforce the award in its favour.

1 2

[2009] Lloyds Rep 461 The Rules of Maritime Arbitration of the Japan Shipping Exchange Inc. These are set out in Curtis The Law of Shipbuilding Contracts 2nd ed. at Appendix E, p327 ff 3 This right is not included in the SAJ form: see Article VIII. 4 SAJ form Article VIII.4. 5 Reardon Smith Line Ltd v. Yngvar Hansen-Tangen, The Diana Prosperity [1976] 2 Lloydss Rep. 621 6 Moore-Bick LJ at para 44 7 SI 2006/1030 8 Samsun Logix Corporation v DEF [2009] EWCH 576 Ch
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PART B Ship Finance A changing environment Alun Hatfield

Ship Finance A Changing Environment

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Disclaimer
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A Changed Picture - Its not what it used to be

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Syndicated Shipping Loans 2007

Source : Dealogic
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Syndicated Shipping Loans 2008

Source : Dealogic
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Syndicated Shipping Loans 2009

Source : Dealogic
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Syndicated Shipping Loans Q1 2010

Source : Dealogic
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Global Shipping Loan Volumes


Global Shipping Volumes 35 30 25 $ billion 20 15 10 5 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 % change 80% 50% 20% -10% -40% -70% -100% % change (y-o-y)

Source : Dealogic
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Global Shipping Volumes vs. New Money Raised


Global Shipping Volumes 35 30 25 $ billion 20 15 10 5 0 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010
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New money Raised

Source : Dealogic

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Potential Problems Ahead


Value & Finance Gap

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Clarksea Index
60 50 $000/day 40 30 20 10 0
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
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Value Gap Volumes


no. of orders with VG 3,000 2,500 2,000 no of units Value Gap 40,000 35,000

$32,788 $29,695

30,000 $million 25,000 20,000

1,500 1,000

$21,414
500 0 bulk carrier container ship tanker 15,000 10,000

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Finance Gap Volumes


no. of orders with FG 3,500 3,000 2,500 no of ships Finance Gap 70,000 60,000

$53,968
2,000 1,500 1,000 500 0 bulk carrier container ship tanker

50,000 $million 40,000 30,000

$33,555 $29,983

20,000 10,000

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Total Orderbook Finance Gap & Values


Delivery year 2010 2011 2012 2013 2014 2015 Total Total no of contracts 2,704 1,636 625 110 17 1 5,093 Total contracted value 149,991 107,334 41,794 7,309 1,730 132 308,289 Current Market Value 112,544 77,761 30,092 5,854 1,120 72 227,443 Contracts with FG 2,699 1,636 625 110 17 1 5,088 Finance Gap 56,232 41,620 16,299 2,555 737 63 117,506

Note: value in $million


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Bulk Carrier Orderbook Value Gap & Values


Delivery year 2010 2011 2012 2013 2014 Total Total no of contracts 1,531 1,047 451 87 11 3,127 Total contracted value 76,211 53,912 25,308 5,578 1,098 162,106 Current Market Value 65,021 44,523 20,456 4,492 754 135,246 No of contracts with Value Gap 1,215 877 369 68 11 2,540 Value Gap 12,624 10,113 5,348 1,266 344 29,695 % of contracts with VG 79.4% 83.8% 81.8% 78.2% 100.0% 81.2%

Note: value in $million


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Containership Orderbook Value Gap & Values


Total no of contracts 468 217 113 2 2 1 803 Total contracted value 33,557 23,142 11,444 103 267 132 68,644 Current Market Value 17,916 11,869 5,801 57 143 72 35,856 No of contracts with Value Gap 467 216 113 2 2 1 801 % of contracts with VG 99.8% 99.5% 100% 100% 100% 100% 99.8%

Delivery year 2010 2011 2012 2013 2014 2015 Total

Value Gap 15,641 11,273 5,643 46 124 61 32,788

Note: value in $million


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Tanker Orderbook Value Gap & Values


Delivery year 2010 2011 2012 2013 2014 Total Total no of contracts 705 372 61 21 4 1,163 Total contracted value 40,223 30,280 5,042 1,629 364 77,538 Current Market Value 29,607 21,370 3,836 1,306 223 56,341 No of contracts with Value Gap 689 354 56 15 4 1,118 % of contracts with VG 97.7% 95.2% 91.8% 71.4% 100% 96.1%

Value Gap 10,650 9,023 1,237 362 142 21,414

Note: value in $million


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Export Credit Agencies

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Banks/Governments in Asia support shipping


Through this crisis there has been a shift eastwards in the centre of ship finance as the traditional European banks continue to struggle. The countries that dominate shipbuilding and/or equipment supply have ensured that strategic steps have been taken to support both shipbuilding and shipping. Recent Announcements Korea Exim and KEIC to provide US$ 7.6bln to shipbuilders Korean government provides an extra US$ 9.2bln for loans to domestic and foreign ship owners Korea Asset Management and KDB are planning distress funds up to US$ 4.8 bln for ship acquisitions China Exim Bank has provided US$ 5bln in newbuilding loans to support the Chinese shipbuilding industry Malaysian government has a US$ 750m budget for a shipping fund to assist shipping companies to acquire modern tonnage and upgrade shipyards The Export Credit Agencies involved China Exim/Sinosure, Korea Exim/KEIC, GIEK/Eksportfinans, ECGD, SACE, COFACE and Euler Hermes. Singapore currently establishing a Singapore Exim.

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London Shipping Law Centre - Maritime Business Forum

Billions of Chinese Lending


CHINESE banks have quietly lent billions of dollars to blue chip western shipowners since the banking crisis broke in September 2008 and traditional home turf sources of funds dried up overnight, ship finance specialists in Hong Kong have confirmed Stringent banking secrecy makes the overall total impossible to quantify, although anecdotal evidence suggests that the number of deals is up by a factor of over 10, albeit from a low base. Bank of China, Industrial and Commercial Bank of China, China Construction Bank, the Export-Import Bank of China, Bank of Communications and China Development Bank are all active in the market. Meanwhile, two separate sources have told Lloyd's List that ICBC has poached a star local ship finance specialist of overseas Chinese extraction from a European bank, a direction of travel that would have been unthinkable only a few years ago. Neither was willing to name the individual ahead of a public announcement. Prominent industry figures in Hong Kong now predict that Chinese ship finance will emerge on the world stage in force within a matter of years, especially if London, New York and Hamburg in effect hand them the business on a plate. With Germany's KG system clearly in decline and the UK Financial Services Authority set to spring a regulatory onslaught across the City, a full-scale rout may even be on the cards. By contrast, Chinese banks have every incentive to keep domestic shipyards working. The only health warning is that the tap could suddenly be turned off should Chinese regulators decide to cool down an economy that some analysts believe is overheating on the back of a huge asset bubble. An expatriate Hong Kong ship finance lawyer said that the picture had transformed beyond recognition over the last 12 months: "Chinese banks have suddenly gone from being niche players, to put it kindly, to being a major force in providing funds for global shipping." It makes sense. It supports Chinese shipyards, which employ a lot of people and use steel from Chinese steel mills, which also employ a lot of people. They build ships which can be used to build more iron ore from Australia and coal from South Africa, and keep the Chinese economic machine moving." So far only a couple of eastwest deals - most notably last year's loan of $389m from China Eximbank to New York-listed OSG - have been reported in the trade media, and the assumption had been that Chinese banks were almost exclusively backing Chinese and overseas Chinese firms. But the lawyer revealed that his company's workload had exploded over the last year or so, moving from six or seven deals a year for Chinese banks to six or seven a month. A "significant number" involve European and North American interests. While unable to name western companies due to client confidentiality, he said: "They are big names. They are not small names." They include leading players in the container and dry bulk sectors. Tanker activity so far has been limited to Hong Kong owners. A local lawyer at a rival company confirmed the dramatic surge of lending over the last period, but insisted that Chinese banks remain selective: "I have heard of people with lower credit ratings approaching them, but they have been turned away.

Source: Lloyds List

Tuesday, May 18, 2010

28th April 2010 www.clarksons.com

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London Shipping Law Centre - Maritime Business Forum

Kexim boosts Ship Financing The Export-Import Bank of Korea is expanding ship financing for cash-strapped shipbuilders and shipowners. The Korea Eximbank on November 18th held Shipbuilder & Shipowner CEO Invitation Talk attended by chief executives from 10 yards and owners including Hyundai Heavy Industries. Kim Dong-su, the president of the bank, and the chief executives discussed the difficulties industry players now have and measures to help them secure liquidity. Mr Kim said, For shipyards and shipping firms to overcome current crisis, appropriate financial support is necessary as well as restructuring. We plan to provide as much ship financing as needed in the industry. The industry representatives asked the bank to mitigate interest cost in the long term and expand ship financing scale, envisaging a prolonged slump. An official from a shipbuilding company said, As shipbuilding industry faces severe downturn, commercial banks almost totally stopped providing new ship loans. Against this backdrop, we wish Korea Eximbank, as a government-run bank, will more aggresively provide ship financing. A shipping player said, As ship prices go down, banks are requesting for more security for newbuilding loans under loan to value (LTV) ratio condition, and our agony is deepening. By October end this year, the Korea Eximbank has provided manufacturing financing of KRW 2.21trn ($1.91bn) for yards and their collaborative companies and network loans of KRW 2.18trn.

Source: Lloyds List


28th April 2010 www.clarksons.com

London Shipping Law Centre - Maritime Business Forum

Conclusions
Bank finance scarcely available while demand remains substantial Banks and owners lack liquidity/capital, funding, reduced or negative cash flows, internally focused on risk Banks focus on Core Client, Core Region and Core Sectors Banks finance terms and conditions less favorable for ship owners definitely a bankers market Traditional shipping lenders are closing, merging and/or reducing balance sheets Debt restructuring a high priority New funds need to be sourced Shift from vessel financing East Export Credit Agencies involved and a big lender to the shipping sector Public equity and high yield bond markets open up again Bank lending is returning albeit very slowly Larger public and privately owned companies have become stronger and easier access to varying sources of credit and cash reserves The banking market remains fragile and personally believe that capital will remain tight for a number of years.

28th April 2010 www.clarksons.com

11

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