1. China and Ship Finance: The Degree of Difficulty Increases
14th Annual Greek Ship Finance Forum, 17 October Kevin Oates, Marine Money Asia

2. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Opportunities in Ship Finance
▪ Not least due to their size, Chinese banks have the potential to fill part of the void left by withdrawing European banks
▪ China is already home to at least four of the world’s largest banks by market capitalization 2

3. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Opportunities in Ship Finance
▪ The profile of Chinese commercial banks in international ship finance has developed significantly over the past decade
▪ Chinese banks are no longer underrepresented in league tables. Bank of China, Industrial and Commercial Bank of China, Bank of Communications and China Construction Bank have become major ship lenders
Ship Owners
Run offs 3

4. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Opportunities in Ship Finance
▪ Over the past five years, many shipping companies - including prominent foreign shipowners such as Bernhard Schulte, Mitsui O.S.K Lines, Norden, Pacific International Lines and STX Pan Ocean have tapped financing from the Chinese commercial banks successfully
Select Chinese Banks’ Ship Finance Transactions ( )
Lender
Year
Borrower
Deal Size (USDm)
Remarks
2011
Bernhard Schulte GmbH & Vo. KG
203
German owner closed a financing package consisted of a Sinosure backed USD 61 million facility and a USD million commercial facility (Bank of China and China Exim) for three 9,000 TEU ships to be built at Shanghai Jiangnan Changxing Heavy Industry
Fairstar Heavy Transport 30
Fairstar secured a USD 30 million pre-delivery loan from Bank of China, for the financing of a 50,000 dwt semi-submersible heavy lift vessel at Guangzhou Shipyard International
2010
Vale
1,230
Brazilian miner secured a 13 year loan from China Exim and Bank of China to finance 80% of the construction cost of 12 VLOCs ordered at Jiangsu Rongsheng Heavy Industries. The vessels will be owned by Vale Shipping and flagged in Singapore
Pacific International Lines
517
Singapore’s box shipowner/operator secured a Sinosure backed USD 517 million 10 year buyer's credit from Bank of China. Proceeds are used to finance newbuildings at Dalian Shipbuilding Industry
STX Pan Ocean 92
Bank of China and ING provided the South Korean shipper a Sinosure backed buyer's credit for the construction of four 57,000 dwt bulkers at COSCO Zhoushan Shipyard
J. Lauritzen
267
Bank of China participated in a club ten year deal, comprising BNP Paribas, Société Générale and Sinosure, for the financing of five China built MR tankers and two LNG tankers
FH Bertling 40
Bank of China provided the German shipowner a Sinosure backed buyer’s credit of USD 40 million for the financing of two general cargo newbuilding orders at Zhong Chuan Heavy Industry in Zhejiang province
Source: Marine Money
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 4

5. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Opportunities in Ship Finance
▪ Over the past five years, many shipping companies - including prominent foreign shipowners such as Bernhard Schulte, Mitsui O.S.K Lines, Norden, Pacific International Lines and STX Pan Ocean have tapped financing from the Chinese commercial banks successfully
Select Chinese Banks’ Ship Finance Transactions ( )
Lender
Year
Borrower
Deal Size (USDm)
Remarks
2012
Grupo R
550
Bank of Communications participated in a syndicated loan for the Mexican conglomerate Grupo R. Proceeds will be used to finance the construction of a semi-submersible drilling rig, ordered at Korean shipbuilder DSME. Other syndication members included Export-Import Bank of Korea (“KEXIM”), Mizuho, WestLB AG, Korea Development Bank and K-Sure
2011
China Shipping Container Lines
543.9
Bank of Communications, Hong Kong branch arranged a USD 543 million 10 year post-delivery syndicated loan for CSCL. The facility, at 40% LTV, was priced at LIBOR+130bps and will be used to finance a series of eight 14,000 TEU containerships ordered in August The boxships will be built at Samsung Heavy Industries for USD 170 million a piece
COSCO Container Lines
100
DNB provided a three year term loan to COSCO Container Lines. The facility is guaranteed by Bank of Communications
Xing Long Shipping
72.1
Bank of Communications, Hong Kong branch provided a 10 year post-delivery loan to Xing Long Shipping, a SPV which is jointly owned by China Shipping Development and Shanghai Puyuan Shipping. The facility, at 80% LTV, was priced at LIBOR+130bps and will be used to finance the construction of a 23,000 dwt ore carrier
Zhida Shipping
Bank of Communications, Hong Kong branch provided a 10 year post-delivery loan to Zhida Shipping, a SPV jointly owned by China Shipping Development and steel mill Baogang. The facility, at 80% LTV, was priced at LIBOR+130bps and will be used to finance the construction of a 23,000 dwt ore carrier
Lida Shipping
Bank of Communications, Hong Kong branch provided a 10 year post-delivery loan to Lida Shipping, a SPV jointly owned by China Shipping Development and steel mill Baogang. The facility, at 80% LTV, was priced at LIBOR+130bps and will be used to finance the construction of a 23,000 dwt ore carrier
Source: Marine Money
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 5

6. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Opportunities in Ship Finance
▪ Over the past five years, many shipping companies have tapped financing from the Chinese commercial banks successfully
Select Chinese Banks’ Ship Finance Transactions ( )
Lender
Year
Borrower
Deal Size (USDm)
Remarks
2012
Pacific International Lines 97
CCB participated in a Sinosure backed 11.5 year loan together with ANZ and ING. The facility is said to be priced at LIBOR+285 bps
2011
Norden
200
Danish owner secured a Sinosure backed loan for the financing of 7 Chinese built ships. BNP Paribas, Bank of Construction and Deutsche Bank were the lenders
2010
CCB, together with BNP Paribas, provided a 10 year Sinosure backed credit facility for the financing of seven vessels from Chinese shipyards. The shipowner drew USD 87 million on this credit facility in 2011
Mitsui OSK and China Shipping (PNG LNG Project)
440
ICBC participated in the pre and post-delivery limited recourse financing for two 172,000 cbm LNG tankers to be built at Hudong Zhonghua Shipyard. Other syndicate members included China Exim, Mizuho and SMBC
Seaspan
150
Subsidiary of Seaspan secured USD 150 million facility from BTMU and ICBC for the financing of one 13,000 TEU vessel
Shandong Haiyang Shipping
27.2
Chinese owner inked loan from ICBC for the financing of one panama newbuilding
United Arab Shipping Company
302
ICBC participated in a 14 year club deal, comprising Daxia, BNP Paribas, ICBC and Ahli United Bank for the financing of three 13,000 TEU vessels at Samsung Heavy Industries
Hopeful Grain & Oil Group
51.2
State-owned grain and oil marketing enterprise secured loan from ICBC to finance two second-hand panama bulk carriers
Jiangsu Ocean Shipping 20
Shanghai Pudong Development Bank completed its first ever cross border ship finance transaction, with Jiangsu Ocean Shipping's subsidiary in Hong Kong
Source: Marine Money
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 6

7. cautious, bureaucratic and time-consuming
China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Challenges in Ship Finance
But to many, the progress made by Chinese commercial banks in global ship finance is simply not fast enough
▪ Common grouses suggest that loan appraisals tend to be overly
cautious, bureaucratic and time-consuming
▪ While Chinese banks may have financed a number of foreign
shipowners, their clients are still largely limited to some of the
biggest and best-known companies, who can still obtain keen
terms from the international banking market
▪ Lending activities to the shipping industry are also mostly
confined to bilateral corporate lending structures. Club or
syndication deals among Chinese commercial banks are
uncommon
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 7

8. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Challenges in Ship Finance
▪ Managing risks and volatility in ship financing remains a challenge to many Chinese lenders. They continue to rely on Western banks to structure transactions
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts
Source: Bloomberg, “China’s Shipyards Fail to Win Orders as Greek Owners Shun Loans”, June 8, 2012
Dr. John Coustas, President of New York listed Danaos Corporation, described the loan appraisal process of Chinese banks as “time consuming and painful”
Safe Bulkers is one company who has not sought Chinese financing because of the costs 8

9. China and Ship Finance: The Degree of Difficulty Increases
Chinese Commercial Banks: Challenges in Ship Finance
But to many, the progress made by Chinese commercial banks in global ship finance is simply not fast enough
▪ The series of interest rate hikes since 2010 have eroded some of the pricing advantages previously available to Chinese banks
▪ Another dampener to the Chinese banks’ appetite for shipping lies in their continual struggle with USD/RMB exchange rate and the opportunity cost of capital
▪ Dollars have become costlier from an internal treasury prospective as they must buy dollars with RMB reserves. This is made worse, given that Chinese banks have suffered a savings flight in recent months
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 9

10. China and Ship Finance: The Degree of Difficulty Increases
Policy Banks Take the Lead: China Exim Bank
▪ With the mission to support the local shipbuilding industry, China’s two state-owned policy banks - China Exim and China Development Bank (“CDB”) have remained committed to extending financing to foreign shipping companies (either as participating as a lender or an issuer of standby letter of credit or guarantees)
China Exim’s Ship Finance Transactions
Borrower
Deal Size (USD million)
Remarks
2011
Mitsui OSK and China Shipping (PNG LNG Project)
869
China Exim participated in the pre and post-delivery limited recourse financing for four 172,000 cbm LNG tankers to be built at Hudong Zhonghua Shipyard. Other syndicate members included ICBC, BTMU, Mizuho and SMBC
Danaos Corporation
203
China Exim participated in a 12 year Sinosure backed USD million post-delivery facility together with ABN AMRO and Citi. Loan proceeds will be used for the financing of three 8,530 TEU container ships to be built at Jiangnan Shipyard. This is the first Sinosure backed buyer credit closed for a Greek name
Costamare
Greek owner entered into a 10 year credit facility with China Exim, DNB and China Everbright Bank for the financing of three 9,000 TEU newbuildings. The vessels were ordered at Shanghai Jiangnan Changxing Heavy Industry, at USD 95 million apiece
SK Shipping
137.2
China Exim co-financed 45% of a DVB arranged pre and post-delivery mortgage financing for the construction of two 320,000 dwt VLCCs at Dalian Shipbuilding Industry Corporation
Parakou Shipping 96
China Exim provided a USD 96 million loan to the Hong Kong owner at LIBOR+300bps for the financing of a 35,000 dwt bulk carrier, Pretty Keel
Daxin Holdings 50
China Exim provided a USD 50 million buyer’s credit to the dry bulk shipping subsidiary of China Dalian International Cooperation
Craig Group
Undisclosed
UK based Graig Group secured financial support from a major European bank and China Exim for the financing of its fuel efficient new generation container feeder ships. The vessels will be built at Jin Hai Shipyard
Source: Marine Money
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 10

11. China and Ship Finance: The Degree of Difficulty Increases
Policy Banks Take the Lead: China Exim Bank
▪ With the mission to support the local shipbuilding industry, China’s two state-owned policy banks - China Exim and China Development Bank (“CDB”) have remained committed to extending financing to foreign shipping companies (either as participating as a lender or an issuer of standby letter of credit or guarantees)
China Exim’s Ship Finance Transactions (Con’t)
Borrower
Deal Size (USD million)
Remarks
2010
Vale
1,230
Brazilian miner secured a 13 year loan from China Exim and Bank of China to finance 80% of the construction cost of 12 VLOCs ordered at Jiangsu Rongsheng Heavy Industries. The vessels will be owned by Vale Shipping and flagged in Singapore
National Iranian Tanker Company
1,112
Iranian shipper secured 90% financing from a consortium of Chinese banks including China Exim for the financing of 12 Chinese built VLCCs
Bourbon
400
French offshore oil and gas services provider secured a 12 year credit facility from China Exim for the construction of ships ordered at Sino-Paciifc Shipbuilding
Ethiopian Shipping Lines
235
African shipping company secured 80% financing from China Exim for the financing of seven multipurpose vessels and two product tankers, ordered at China's Taizhou Kouan Shipbuilding
TORM
170
Danish owner entered into an 8 year USD 170 million loan with China Exim for six 52,000 dwt tankers to be delivered between 2010 and This part of the letter of intent that TORM concluded with China Exim 2009 on a total financing facility of USD 500 million
Angelicoussis Group
111
Loan facility to finance the construction of two Chinese built dry bulkers
Bocimar International 90
Belgium based owner secured a loan facility from China Exim and Societe Generale for its purchase of two bulk carrier newbuildings under construction at Zhoushan Jinhaiwan Shipyard in China
Diana Shipping
82.6
China Exim provided 70% financing for Diana Shipping’s acquisition of two 206,000 dwt dry bulk carriers, under construction at China Shipbuilding Trading Company and Shanghai Jiangnan-Changxing Shipbuilding
InterOrient Navigation
64.7
Cyprus based owner secured the Sinosure backed buyer’s credit for the construction of two 115,000 dwt bulk carriers at Jiangsu New Century Shipbuilding
SUMEC Corporation 23
SUMEC’s subsidiary in Singapore will make use of the 8 year USD 23 million buyer credit facility from China Exim to finance its first vessel, a 35,000 dwt dry bulk carrier
Source: Marine Money
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 11

12. China and Ship Finance: The Degree of Difficulty Increases
Policy Banks Take the Lead: China Development Bank
▪ Like the Chinese commercial banks, they are equally prudent and cautious in selecting their counterparties and in determining their commercial terms
China Development Bank’s Ship Finance Transactions
Borrower
Deal Size (USD million)
Remarks
2012
A.P. Moller Maersk
500
Danish shipping and oil company signed USD 500 million loan agreement with CCB to purchase containers
DryShips
123
George Economou-led Dryships sealed a USD million export buyer credit syndication facility from CDB. Proceeds will be used to finance three 206,000 dwt VLOCs that will be built by state-owned shipbuilding conglomerate CSSC. CDB will provide Dryships the bulk of the facility, but Bank of China – Ningxia branch and Zhejiang branch will also participate as a minor lender for an undisclosed sum. This transaction also marks the successful closing of the first syndicated loan facility between two Chinese banks, without the involvement of a Western bank
China Shipping Container Lines
100
CDB provided a three year loan to Hong Kong incorporated subsidiary of state-owned China Shipping Group
2011
Brightoil Petroleum
4,000
China’s third largest marine bunkering company signed a 5 year USD 4 billion strategic co-operation agreement with China Development Bank. Funds will be used to acquire tankers, letters of credit and bank guarantees and potential M&As
STX Pan Ocean
510.7
CDB participated in a 12 year syndication loan, made up of KEXIM, ABN AMRO, DNB, Deutsche Schiffsbank, BNP Paribas, ING, Standard Chartered, Credit Industrial et Commerciel, for the financing of 16 Open Hatch Bulk Carriers. The vessels will be chartered to Fibria upon delivery
Peter Döhle
1,000
CDB pledged to provide financial support, amounting to up to USD 1 billion, to German Shipowner Peter Döhle, over the next five years for the financing of vessels to be built at Singapore listed Yangzijiang Shipbuilding
2010
Cardiff Marine 75
George Economou led Cardiff Marine secured a USD 75 million Sinosure-backed financing of a VLCC newbuilding from CDB
Maritime Construction Services
104
CDB provided a RMB 690 million loan for the financing of one 300m long pipelay barge constructed at Shanghai Zhenhua Port Machinery
Source: Marine Money
The flight to safety is lifting off. The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts 12

13. with reputable international banks in extending financing to foreign
China and Ship Finance: The Degree of Difficulty Increases
Key Takeaways
▪ Broadly speaking, commercial Chinese banks have not participated in global
ship finance in a big way and their willingness and ability to finance foreign
buyers is still very much dependent on the availability of export credit cover
▪ Apart from export credit cover, Chinese commercial banks prefer to work
with reputable international banks in extending financing to foreign
shipping companies. Such collaborations allow Chinese banks to leverage on
the shipping expertise and relationships that their western counterparts
have with the borrowers
▪ But in reality, club/syndicated deals involving collaborations between
commercial Chinese and Western banks remain fairly limited
The first is tighter regulation and capital controls, part of a policy introduced last year to rein in runaway lending that was heating up the economy. in hope that banks will become less dependent on each other for funding and reduce market tensions.
Part of this new regime is reflected in the six increases in reserve ratios for China’s banks made by the government last year. This was followed by another rise last Friday, boosting the reserve ratio by 50 basis points, an action that sent shares in Chinese banks into decline.
The moves are part of the government’s intensified effort to fight inflation — four of the moves were concentrated into the last four months. China’s consumer price index soared to a 28-month high of 5.1% in November. Analysts estimate that inflation could jump 5%-6% in the first half and believe that further reserve ratio increases are due in February.
The raising of reserve ratios is not solely targeted at controlling inflation, but also an ongoing effort to control lending to real estate and other forms of development, including shipping. Until last year, China’s bank regulator, the People’s Bank of China, moved from issuing a blanket lending target for all of China’s banks to targets for individual banks. It also asked for stress tests on current portfolios at individual banks, along the lines of the stress tests that Europe’s bank regulators required of banks in the Eurozone.
Increases to reserve requirements has made the major ship financing bank lenders mindful of meeting the high capital levels required of them. The knock-on effect has been a move away from US dollar reserves and US dollar lending, in favour of offering loans in Chinese yuan.
“What we have experienced since the summer is a slowdown on US dollar-denominated facilities,” says a local banker, who serves as an intermediary between European shipowners and Chinese banks. “Loans were given and loans were committed, but they can take a long, long time to develop.”
He says a recent facility that he has worked on has taken nine months to close, a long time for a standard ship financing deal.
The reluctance to lend in dollars can also be linked to the battle between China and the US over allowing the yuan to appreciate.
For regulatory purposes, the banks have to report the value of their loan portfolios in yuan, thus they do not want to commit a large amount to dollar lending and see the loans repaid in dollars, only to have it converted to yuan at a lower value, says the banker. Converting at a lower value would mean that the banks’ earnings from the loan would be reduced and that provisions against these loans might have to be increased.
As a result, China’s banks are seeking to expand their yuan loan books to shipping companies. But for shipping companies looking for investment funding from Chinese banks, the prospect of yuan is less attractive than dollars.
“No one wants to borrow in yuan for the same reason that they are reluctant to borrow in yen,” says the banker. “That is asking for shipowners to take currency exchange risk on top of shipping risk. It’s a harder sell.”
Tighter reserve levels are slowing down foreign lending. But banks are likewise more reluctant to lend to local companies for newbuildings. However, this has not slowed down the number of newbuildings being financed in Chinese yards. These are being done under less-regulated leasing affiliates of the banks.
“The fear is that the expansion capacity that has vanished from traditional ship financing has been taken up by the leasing companies,” says the banker.
That would imply that government measures to apply the brakes on China’s bank lending for shipping have been counteracted by a less-controlled finance force. 13

14. China and Ship Finance: The Degree of Difficulty Increases
Key Takeaways
▪ There is a mismatch in expectations between owners and bankers. Owners are optimistic that more liquidity will be available for shipping in the latter half of 2012, but anecdotal evidence suggests otherwise. Chinese banks may have better USD availability than western banks, but they remain very cautious of industry fundamentals
▪ Chinese banks’ rise in the share in ship finance is largely in line with the growth of the country’s shipping and shipbuilding industries. They have no plans to grow into major ship financers. Moving forward, their appetite for ship financing will be severely tested in the current shipping downturn
The first is tighter regulation and capital controls, part of a policy introduced last year to rein in runaway lending that was heating up the economy. in hope that banks will become less dependent on each other for funding and reduce market tensions.
Part of this new regime is reflected in the six increases in reserve ratios for China’s banks made by the government last year. This was followed by another rise last Friday, boosting the reserve ratio by 50 basis points, an action that sent shares in Chinese banks into decline.
The moves are part of the government’s intensified effort to fight inflation — four of the moves were concentrated into the last four months. China’s consumer price index soared to a 28-month high of 5.1% in November. Analysts estimate that inflation could jump 5%-6% in the first half and believe that further reserve ratio increases are due in February.
The raising of reserve ratios is not solely targeted at controlling inflation, but also an ongoing effort to control lending to real estate and other forms of development, including shipping. Until last year, China’s bank regulator, the People’s Bank of China, moved from issuing a blanket lending target for all of China’s banks to targets for individual banks. It also asked for stress tests on current portfolios at individual banks, along the lines of the stress tests that Europe’s bank regulators required of banks in the Eurozone.
Increases to reserve requirements has made the major ship financing bank lenders mindful of meeting the high capital levels required of them. The knock-on effect has been a move away from US dollar reserves and US dollar lending, in favour of offering loans in Chinese yuan.
“What we have experienced since the summer is a slowdown on US dollar-denominated facilities,” says a local banker, who serves as an intermediary between European shipowners and Chinese banks. “Loans were given and loans were committed, but they can take a long, long time to develop.”
He says a recent facility that he has worked on has taken nine months to close, a long time for a standard ship financing deal.
The reluctance to lend in dollars can also be linked to the battle between China and the US over allowing the yuan to appreciate.
For regulatory purposes, the banks have to report the value of their loan portfolios in yuan, thus they do not want to commit a large amount to dollar lending and see the loans repaid in dollars, only to have it converted to yuan at a lower value, says the banker. Converting at a lower value would mean that the banks’ earnings from the loan would be reduced and that provisions against these loans might have to be increased.
As a result, China’s banks are seeking to expand their yuan loan books to shipping companies. But for shipping companies looking for investment funding from Chinese banks, the prospect of yuan is less attractive than dollars.
“No one wants to borrow in yuan for the same reason that they are reluctant to borrow in yen,” says the banker. “That is asking for shipowners to take currency exchange risk on top of shipping risk. It’s a harder sell.”
Tighter reserve levels are slowing down foreign lending. But banks are likewise more reluctant to lend to local companies for newbuildings. However, this has not slowed down the number of newbuildings being financed in Chinese yards. These are being done under less-regulated leasing affiliates of the banks.
“The fear is that the expansion capacity that has vanished from traditional ship financing has been taken up by the leasing companies,” says the banker.
That would imply that government measures to apply the brakes on China’s bank lending for shipping have been counteracted by a less-controlled finance force. 14