 Fifth Third Bank | All Rights Reserved Vessel Financing Choices for Ferry Operators

2  Fifth Third Bank | All Rights Reserved Sample of vessel financing products available in the market today: For passenger vessel businesses:  Debt Products Conventional vessel financing provided by a term or revolver loan;  Lease Products (bareboat charters) Operating Leases – vessel owner (Lessor) retains tax ownership and benefits Passenger vessels owned by government agencies:  Tax Exempt Municipal Leases Lease purchase financing using annual tax revenue streams to acquire essential use equipment at lower interest rates (tax exempt to the Lessor)

3  Fifth Third Bank | All Rights Reserved Characteristics of Debt Financing Owner/Operator guarantees entire debt  An equity investment may be required to provide collateral coverage to a lender; however, amount of equity depends on financial strength and credit quality of the borrower.  Loan amortization and term will vary depending on the age of the asset and financial strength of the borrower.  Interest rate is either fixed or floating, or a combination, tied to a specific market index as such as interest rate SWAPS based on the length of the loan term and amortization.  Most banks are cash flow lenders and usually require some type of loan covenants while commercial finance companies may not, focusing more on the collateral.

4  Fifth Third Bank | All Rights Reserved Basic components of an operating lease:  Vessel Owner (financial institution) buys the asset at its FMV and takes a residual position in the vessel, expecting to recoup the residual when the asset is sold.  Charterer (operator) has no equity interest in the vessel.  Charterer leases the asset from the owner. The rent payments cover only a percentage of the owner’s investment.  Use and return conditions are required (operator has responsibility for all maintenance and repairs).  Owner (Lessor) must fund any additional capital improvements.  Basic components of Lease include: a fixed lease term, predetermined number of lease payments, and purchase options during and at end of lease.

5  Fifth Third Bank | All Rights Reserved Tax Exempt Leasing for Government Agencies  A lease purchase agreement using a sales installment contract with an end of term $1 purchase option.  Lessee (buyer) takes title to the vessel and grants the financial institution a security interest in the asset.  Each lease payment has a principal and interest component, however, the interest paid is exempt from Federal Income Taxes.  The vessel must qualify as “essential use” equipment.  Lease obligations generally are not classified as debt.  Lease may be terminated and equipment is returned in event funding is not available in subsequent fiscal years.  Lessor bears the risk of the lease being terminated and taking vessel back.  Other passenger vessel financing instruments include general obligation bonds, revenue lease bonds and abatement leases. Lease purchase financing (municipal leases with nonappropriation clauses)

6  Fifth Third Bank | All Rights Reserved Basic Vessel Financing Prerequisites  Need to understand your business and your niche in the market  Predictability of the business to generate revenues and service the proposed debt; use historical information and projections supported by solid data  Capitalization- how will the operator be able to manage through a downturn in business?  Credit history with comparable debt (most municipalities have publicly rated debt by a rating agency)  Operating history, safety record, summary of insurance coverages carried  What is the collateral coverage in the transaction? How financing requests are typically analyzed:

7  Fifth Third Bank | All Rights Reserved A Lender/Lessor’s perspective on collateral coverage and residual values  Collateral coverage is determined using an estimated orderly liquidated value (OLV), i.e., what the vessel will sell for using a months time frame.  Collateral coverage is also impacted by estimated repossession, custodial and selling costs.  The asset’s remaining useful life at lease end- determined by fresh or salt water usage, engine life and type of repairs required to renew Coast Guard certificates at end of the lease.  Future value is based on a variety of factors: market conditions, depreciation, replacement cost, regulatory matters, and obsolescence brought on by new designs and technology. Debt Financing Transactions : Bareboat Charters and key considerations in determining residual values

8  Fifth Third Bank | All Rights Reserved Comparing the relative advantages of one form of financing over another depends on the operator’s needs.  Obtaining the lowest financing cost  100% financing for the full cost of the project  Structuring a transaction to match debt service with the vessel’s income stream  Refinance to manage the balance sheet  Reduce depreciation and exposure to AMT  One stop financing source to handle construction and take out financing What are the priorities?

 Fifth Third Bank | All Rights Reserved Steve Isaacson Vice President Equipment Finance Group Fifth Third Bank