1. MARINE CAPITAL LIMITED/ECLIPSE SHIPPING LIMITED
SHIPPING. A HIGHLY SUITABLE ASSET CLASS FOR PENSION FUNDS & INSURANCE PORTFOLIOS

2. DISCLAIMER
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(Continued)

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5. EXECUTIVE SUMMARY
Shipping is an attractive asset class with returns that are largely uncorrelated to Government bonds and equities; consistently over-perform inflation; and enhance diversification and risk reduction on the overall portfolio. Shipping is a very suitable addition to any portfolio from an ALM and efficient frontier standpoint.
The properties of shipping returns perfectly suit the hedging needs of defined-benefits liabilities and in insurance portfolios with GRR and GAO mismatches. Additionally, Shipping returns are also very effective for managers seeking to eliminate or reduce solvency ratio problems and tackle the mismatch between assets and liabilities.
Returns on ships are short tenor, low duration, high coupon bonds, and are one of the most suitable asset classes from an adjusted risk/return standpoint with which to address portfolio shortcomings. Longer duration solutions and cash- flow matching are also available through both direct ship equity investment and debt- related deals.
Marine Capital proprietary expertise and rigorous focus on the 5y horizon and high quality ships allows to reduce volatility, stabilize returns and optimize Sortino ratios. Additionally, numerous quantitative analysis confirm that the returns of this business model outperform when interest rates are so low. This would not be the case for many other alternative investments such as Private Equity Funds, etc.
Marine Capital offers [NAME OF CLIENT] the possibility to embark, alongside with its strong and well reputed& experienced team, in a project in which we will
assist non- industry investors to overcome the existing barriers of entry
deliver a professional physical management of the assets which is crucial to success
Offer flexible investment strategies ranging from the direct investment in ships or debt-related instruments to any bespoke alternative which could address the specific challenges in your portfolios

6. INTRODUCTION TO SHIPPING BUSINESS MODEL
BACKGROUND:
A large number of pension funds’ and life insurers’ liability portfolios have forms of minimum guaranteed rate of return, GRRs (Guarantee rate of return) and/or GAOs (Guarantee Annuity Option), partially or imperfectly matched.
Furthermore, lower rates combined with appalling performance of equity portfolios & other asset classes have put the investment and liability portfolios in a difficult position. The recently released announcement of the estimate in £250 billion the total deficit in the pension funds of UK listed companies alone
Solvency ratios are being challenged and deficits increase as difficulties arise to preserve capital and the current lower rates increase the present value requirements for future obligations.
An atmosphere of declining returns coped with a widespread concern with inflation, make managers reluctant to lock-in long-term returns on long-dated government bonds at current low levels, and face potentially significant mark to market loss once rates return to more sustainable levels.
There is at the same time a growing reluctance to invest in hedge funds and private equity funds, whose claims for non-correlation and consistently high returns, not to mention liquidity, have been seriously brought into question.
In a moment when the investor community is striving for efficiency, consistency and transparency of the returns we believe that the shipping business model created by Marine Capital is a unique asset class which offers an outstanding risk-return investment opportunity with significant risk reducing and diversification features.

7. SHIPPING BUSINESS MODEL
Shipping as an asset class is worth circa USD 1.5 trillion, and the generic/commoditized part of the fleet where Marine Capital focuses is approximately $750 billion in value: not small by comparison with any genuine alternative.
For clarity we define shipping, for our investment purposes as a generic, commoditized, transparent asset class. The type of ships that conform to this class are those ships of which
there are many of the same type
which are regularly bought and sold, and which are regularly chartered in active markets, for employment of varying terms (up to several years) where such charter rates are consistently reported, and
which regularly carry the same types of cargoes in established trades.
In other words, Marine Capital focuses on the ships which are truly commoditized. Within this class are oil tankers, dry bulk carriers and containers below a certain capacity (SUBPANAMAX or less than 4,000 TEU).
A note on transparency: Generic shipping assets (as opposed to other alternative investments ) can be fairly and accurately valued on a weekly or monthly basis in any normal market conditions, and thus investors can avoid problems related to fair valuation of the portfolio and distribution to the retiring pension holders over the period in which the investment in shipping is carried out.

8. SHIPPING BUSINESS MODEL: Best way to explain…numbers!
GENERIC SHIPS AS ASSETS – PROOF OF SECTOR PERFORMANCE 10 YEARS FROM JANUARY 1999 TO JANUARY 2009
Source: MCL calculations based on data from Clarksons, Drewry and MSCI Barrat.
Source: MCL calculations based on data from Suisse Tremont

9. SHIPPING BUSINESS MODEL: Best way to explain…numbers!
GENERIC SHIPS AS ASSETS – PROOF OF SECTOR PERFORMANCE 10 YEARS FROM JANUARY 1999 TO JANUARY 2009 9 9

10. INTRODUCTION cont.
"It‘s the returns, stupid ''. Ship returns are what probably best explain this asset class. Ships are trading assets, returns are cyclical, ship values are volatile, and yet its performance attribution is superb (as the above charts clearly demonstrate.)
For clarity we define shipping, for our investment purposes as a generic, commoditized, transparent asset class and the type of ships that conform to this class are those ships of which there are many of the same type, which are regularly bought and sold, and which are regularly chartered in active markets, for employment of varying terms (up to several years) where such charter rates are consistently reported, and which regularly carry the same types of cargoes in established trades. In other words, they are truly commoditized. Within this class are oil tankers, dry bulk carriers and containers below a certain capacity (SUBPANAMAX or less than 4,000 TEU).
Cruise liners, Gas carriers <LNGs> Car carriers like RO/ROs and ROPAX and Off shore services (platforms, support boats) are outside our focus for this purpose (these can be fairly described as industrial or niche shipping). We will review debt related opportunities more thoroughly in a different section.
When we see the returns from direct investment in ships, (the physical assets as opposed to investment in equities or freight derivatives) over the last five or ten years, we observe that there are not only more positive than negative periods, but also, the positive returns are much higher than the negative readings. Shipping returns are obtained by a combination of current earnings (charter related income) and future sales proceeds. We also calculate the returns on an unleveraged basis, using IRRs.
Understanding the nature of these returns is the key, as in any other asset class. For consistency, we take as a benchmark investments in modern, five year old ships. Ships have an accounting life of 25 years, which is normally taken as average life expectancy for calculation purposes, although they can live longer (incidentally, Marine Capital only focuses on modern ships, either relatively new second hand ships not older than 10 years, or new builds, either contracted at inception or bought as re- sales of the original new building contract).

11. INTRODUCTION cont.
The value of a ship can be calculated as the PV of all future cash-flows, just like the value of a share or bond. Under normal market circumstances, there is a fairly high correlation between the market value and the one and two year term charter rate applicable for a generic ship. There is a constant market for terms of this duration, and (like a share) the further out one goes, the more earnings may be expected to vary. This correlation will only break down at the extremes- for example, if the earnings have fallen to such a level that they are hovering around actual daily running expenses, owners will be considering idling their ships ( lay-up), i.e. removing capacity from the market, until higher rates return. At the same time, scrapping of older ships will accelerate, as the economics do not justify continued operation in weak markets (see Ship invest ). The value of the ship is then estimated more by an expectation of the future value rather than the current/intermediate earnings. Clearly, therefore, both ship prices, (hence timing for entry: we will review market outlook and opportunity in the last section of this note) and charter rates are relevant to determine the attractiveness of any given investment in order to optimize the IRR obtained and minimize the residual value risk. A disciplined approach and rigorous financial analysis is carried out alongside the technical due diligence on the vessel, and continuous attention to the detail of changes to the fleet profile (additions and removals) and wider economic data relevant to underlying cargo demand. We at Marine Capital run our own IRR-oriented models to assist us in taking the appropriate decisions. Not all ship owners share this IRR- driven discipline, nor do they all choose to invest in modern ships.
Shipping can fairly be described as a small capital market all on its own, with many, if not all, of the features of the global capital markets, albeit expressed in another manner. By the same token, it is simple to understand in concept, and the barriers tend to lie in specific market knowledge and execution. It has been for generations an industry run by and for insiders.  
In the returns calculated, we assume a strategy, where returns are calculated through a pre determined path of buying the ship on a given date, chartering for a year at the one year rate applicable on that day, and selling the ship after twelve months at the known market price one year later. Actually, ship owners charter ships for much shorter and longer periods and obviously do not follow this pre-ordained path. 

12. INTRODUCTION cont. We would like to highlight two particular issues:
First of all, these high returns could be achieved in relatively short periods of time, of between two and five years. This is due to the shipping market’s ability to self-correct, through the acceleration of fleet changes (i.e. more scrapping and less new ships being delivered) . We believe this ability to close or eliminate existing gaps between asset and liabilities in relatively short periods of time can provide enormous advantages. Conversely, private equity funds and real estate assets are generally not able to produce these returns in such a short period, and may find the absence of leverage even more challenging.
Furthermore shipping assets tend to have embedded optionality, not necessarily priced-in at the time that the investment is made, leaving upside potential to be unlocked in the future.
Not denying that shipping markets are cyclical and that values and earnings are volatile, timing of entry can clearly make an enormous difference. The value of a 5 year old capesize bulker , for example, ( the largest bulk carrier, trading only with coal and iron ore) dropped from $150m in August 2008 to below $50m in March 2009, The price was sky high, of course, because the earnings were sky high. The difference between the positive and negative return numbers, not only in absolute terms but also in number of periods ( please see graphs attached.) strongly suggest that a well-capitalised ship investment will produce the desired return over time, but such supportive data is not sufficient to allow a hands-off approach to investment. An experienced shipping asset manager is central to the case, and must take the decisions related to (sub-) sector choice, charter arrangements, counterparties, timing, hedging etc.
It is important to own modern ships and not to have excess leverage in order to be cushioned against downturns and positioned to take advantage of upturns. Historically, owners who have taken this approach have always done well and escaped unscathed from weak markets. Old ships are the  first to be scrapped, the last to be employed and the more expensive to run, and if the turn of the cycle doesn't take place soon enough to provide the recovery in prices and freight rates required, the owner of old ships will not recover his pos

13. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS
Hereunder we review data comparing the risk adjusted returns and features of shipping versus equities, bonds, inflation, commodities ( in particular oil), and hedge funds.
Does shipping provide the required diversification, better return profile, and move the portfolio into a more efficient frontier as suggested above? Is shipping a true alternative investment? Indeed it is. Any ALM and efficient frontier study will prove it.
The table below shows the correlations of the ship investment returns listed above.
CORRELATION OF ANNUAL RETURNS FOR EACH MONTH FROM JANUARY 1999 TO JANUARY 2009
Source: MCL calculations based on data from Clarksons, Drewry and MSCI Barrat.

14. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
We would argue that an investment in a dry bulk carrier such as a capesize transporting iron ore or coal, is a better proposition than investing in equities in China, or an investment in a factory in China, or a private equity investment venture pursuing Chinese corporate opportunities. China is responsible for import of some 45% of all iron ore carried by sea, but almost 90% of the growth in iron ore transportation. In other words, you have the proxy for Chinese industrial and urbanizing growth without the associated risks of ‘local’ investment, and an asset which in any case is more flexible, being able to serve other markets as and when appropriate.
Ship values have recently shown a strong correlation with iron ore (dry bulk carriers) and oil (oil tankers) prices, although we should be careful in making simplistic assumptions based on the evolution of these commodity prices. We should expect that a higher demand for oil, iron ore, or coal, will be accompanied by a higher price, and we could extend that expectation to ship prices and freight rates, but shipping dynamics are somewhat more complex,( to give one example, ton miles and physical location of supply and demand will play a very important role for a given quantity of any commodity , as the iron ore trade between Brazil and China has proven, or, say, the location of new oil refineries long distances away from end users.
Shipping investments have produced better risk adjusted returns than oil or iron ore, as shown above. (We have to take into account the earnings from ships as well as their prices). Both oil tanker and bulk carrier returns are higher than inflation, but more volatile too (measured by standard deviation: see graphs below). Managing this volatility is what differentiates the skilled shipping asset manager, and the excess returns above inflation more than justify the volatility. There is a range of strategies and trading decisions available to the asset manager of a shipping portfolio e.g. through sector switching, varying duration of term commitments, hedging asset risk by physical charter trading, known as operating, as well as freight derivatives

15. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
GRAPH 1: COMMODITY PRICE RETURNS ON IRON ORE AND SHIPPING INVESTMENT RETURNS (PANAMAX)
Source: MCL calculations based on data from Clarksons, Drewry and UNCTAD Commodity Database.
* One should note that the above is not a like-for-like comparison. The calculation based on ship prices and charter rates is actual data for real transactions, which could be practically executed. The iron ore data (provided by UNCTAD) shows the change in contract prices over time, and the attributed return therefore presumes the ability to purchase/hold/sell the commodity on the relevant dates. Only in recent days has an exchange contract for iron ore been announced.

16. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
Below we show returns on tankers versus trading oil (lower max return but significantly lower standard deviation and volatility).
GRAPH 2: COMMODITY PRICE RETURNS ON CRUDE OIL AND SHIPPING INVESTMENT RETURNS (AFRAMAX)
Source: MCL calculations based on data from Clarksons, Drewry and UNCTAD Commodity Database.

17. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
One could visualize, as a central case for the purpose of this discussion, a direct investment in ships as being a short bond with a high coupon and upside potential on the principal at maturity: an appropriate instrument with which to eliminate existing gaps between assets and liabilities in a short period of time.
Portfolio managers are concerned with a bounce back in inflationary pressures, and rightly so. We see very limited academic value in discussing whether the current low inflation will last months or years in this analysis, and whether the current gap between actual and potential production will disappear shortly or not. As a fund/asset manager our aim is twofold. Firstly to invest now in assets that will produce high absolute returns in a relatively short period, particularly when the alternative of investing in Government bonds or leaving the money in bank deposits is not very appealing. Secondly, when, rather than if, inflation is back, our assets should outperform inflation. Not only are we preserving capital, but also producing excess returns. We take the US CPI data as our benchmark for this analysis (See graph [ ] below).

18. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
GRAPH 3: US CONSUMER PRICE INFLATION VERSUS SHIP INVESTMENT RETURNS (AFRAMAX AND PANAMAX)
Source: MCL calculations based on data from Clarksons, Drewry and Inflationdata.

19. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
GRAPH 4: SHIP PRICE INDICES AGAINST US CONSUMER PRICE INDEX
Source: MCL calculations based on data from Clarksons, Drewry and Inflationdata.

20. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
The historical evolution of second hand prices over the longer term is probably the most obvious indicator that ship investments consistently outperform inflation, and the two are highly correlated, clearly a positive feature. Viewed logically, major items in the inflation basket clearly affect both ships’ prices and shipping market dynamics, although not necessarily in the way one might expect. The freight market is very flexible in that charter rates adjust very quickly to reflect the existing supply and demand of ships at any given point in time; it is, volume driven (as measured in ton-miles) rather than price driven. For example, as the ever-increasing (and very largely unanticipated) Chinese demand for iron ore in particular proved throughout the last five years, the cost of freight is always determined at the margin. This unanticipated increase in demand, coming largely from China, proved that freight rates even for essentially low value dry bulk commodities had high elasticity. For detailed analysis of the relationship between ship values and inflation & commodities, see our SHIPINVEST paper
In practical terms, in weak markets the ship employment focus is on shorter term, or spot employment, in order to benefit from higher prices and earnings later (why would we want to lock in long dated charters at these low levels, not very different to a fixed income investor buying 10 year bonds at these low yields). Over time, longer charters (or a balance of shorter and longer charters), hedging through freight derivatives, and active investment-divestment programmes (given that sub-sectors within shipping have different drivers and dynamics) can smooth the volatility.

21. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
As briefly discussed above, ship returns, and in particular charter rates, could generally be characterized as a three-five year bond with a high coupon, obviously, with certain caveats relating to, among other issues the entry point, which we cover in our brief market outlook, below). Longer tenors are also feasible, but for the purpose of this analysis we will focus in comparing the 30 year UST (expressed through the futures contract) versus ships with a three-five year horizon. A short tenor, high coupon instrument could be described as a low duration asset, and ships fit this description. Does this contradict our assertion that ship investments assist in hedging the duration of the portfolios? We believe not. Achieving high returns in a much shorter period of time with a low duration instrument offers an advantage, and should the investor like to extend the duration profile of the cash flows received, this excess present value received over the coming three-five years could be hedged by locking into a future stream of cash flows at a later stage without incurring excessive duration risk, particularly when existing yields are so low. At any given time, in any functioning market scenario, the alternative of fixing a charter for longer periods is available, but this may not be the right solution: probably a debt related transaction will be more suitable for cash- flow matching or hedging guarantees of different types. Long- dated charters may have shortcomings, for example in terms of increased counterparty/credit risk, which may mean that a great part of the potential benefits are lost. There is a trade- off between returns and tenors. Recent outperformance of the long- dated Government bonds should not delude us into thinking that they will provide all the answers.

22. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
GRAPH 5: BOND RETURNS AND VOLATILITY COMPARED TO SHIP INVESTMENT RETURNS AND VOLATILITY
Source: MCL calculations of ship investment returns and bond returns based on data from Clarksons, Drewry, MSCI Barrat and Bloomberg.

23. COMPARISON OF THE ASSET CLASS WITH OTHER MAINSTREAM INVESTMENT OPTIONS cont.
The low correlation with equities is also noteworthy. Again, this feature plus the much higher returns, together more than offset the higher volatility. We are fully aware that in general, and in most portfolios, asset duration is lower, or perhaps much lower than liability duration, and the current level of rates is affecting the mismatch enormously. But we feel that adding duration per se is not the solution. Conversely, assets that produce high returns and present values, able to offset the losses observed in other asset classes and reduce or eliminate the existing deficits are the solution. Uncorrelated investments in ships could address and supplement the shortfalls in cash flows required, which a government bond portfolio alone could not do.
Our Shipinvest paper, covered these issues.

24. BARRIERS OF ENTRY & MANAGING THE MANAGERS
Prospective investors either in direct investments (equity in ships as opposed to investment in listed shares) and debt, who do not have shipping expertise (which means more or less all the potential institutional investor base), may be somewhat reluctant to invest in this asset class because of the necessity of managing these ‘unusual’ physical assets either as ship owners in the first instance, or as creditors coming into possession. 
This is quite understandable. Indeed, there is a whole process starting before the purchase of the ship, the due diligence required is substantial, as is the ongoing requirement of high quality technical maintenance and operation. Operating risk on the asset lies with the owner, in other words, if the ship is not working, it is not earning. This attention to physical detail is therefore necessary to keep ships moving and to maintain residual value.  
If there is an area where institutional investors are or feel vulnerable, it is here. How can they feel comfortable that appropriate action and care is in place, let alone that they are paying the right price for services used? It is the role of MCL as asset manager to ensure that what looks good on paper is translated into a physical reality.  

25. BARRIERS OF ENTRY & MANAGING THE MANAGERS cont.
We strongly recommend you read the outstanding paper written by our colleagues Peter Paterson and Peter Rowat, our senior technical managers on the subject *. It explains how we manage the process at Marine Capital, describes the different risks and issues involved, and also very relevantly, how Marine Capital addresses the potential conflicts of interest between technical ship-managers and owners, and how we do it efficiently and transparently. As stated, the residual value is a very valuable piece of the return component, and achieving a higher or lower price at the margin is a reflection of the quality of maintenance. Please be aware that at the centre of every shipping investment, no matter how well structured financially, is a piece of marine hardware – the ship.
The success of the investment depends in large part on the condition and performance of that hardware. It provides the project’s cash flow, income, security and residual value. If not operated safely, it also presents the major risk to the venture.
Here Marine Capital has a meaningful edge as asset manager, in that all necessary skills required to own and operate a ship – including the process of technical ship management – are held in-house.
* Marine Capital. Managing the managers. January 2009

26. DEBT RELATED OPPORTUNITIES
The shipping debt in issue is approximately USD 500 bn., which includes offshore platforms and associated support ships, LNGs, Ro/Ro & ROPAX and cruise ships among other ship classes. 
Up to 2008, the arrangement of shipping debt was a fairly predictable business, with average spreads ranging from 80 to 150 b.p. very largely USD denominated, with an extremely low default ratio, very stable LTVs, and standard lending guidelines and documentation. However, every deal is unique, there are both bilateral and syndicated deals, there are loans with or without material residual value exposure, both corporate and asset specific, and all these features could have an enormous impact upon the future outcome of existing loans. There is no homogeneity.
What has changed? Default rates remained extremely low up to the last quarter of (Historical default rates are very misleading). LTV guidelines were fortified to reflect the new credit & liquidity environment, but lending was still available. The banking crisis over the summer, the Lehman default, the collapse in trade finance and the collapse of dry cargo and container freight rates, changed it all. Effectively, new lending stopped altogether. Major lenders faced, and continue to face, a lot of issues unrelated to the sector, ship prices collapsed, affecting LTVs enormously, and some established players went into default. In addition to all these issues, there are unique problems in the container sector, revolving around the sustainability of the KG (asset managers of limited partnerships) houses in Germany (the principal source of equity funding in the container market), and the solvency of some well-established liner companies.

27. DEBT RELATED OPPORTUNITIES cont.
The market price of debt of course reflected conditions prevailing for the previous five years (steady valuations, absence of default, readily available finance) , which had changed suddenly in 2008.
Ship prices and charter have plummeted, covenant breaches have become very common, and defaults, widespread amongst charterers, have begun to take place between owners and banks. The distribution of expected losses had been, until the fourth quarter of 2008, well defined within a very tight range, and recovery values were high and predictable. The market was not prepared for potentially severe losses, fat tails and LTV volatility...
This has left the banks with '' mispriced '' loan portfolios, not for only for reasons intrinsic to shipping, but also because credit spreads and bank funding costs widened across the board.

28. DEBT RELATED OPPORTUNITIES cont.
WHERE DO WE GO FROM HERE?
There is hardly any new finance available, and roughly USD 300 bn. of the order book still needs financing, which means more defaults by ship owners and more problems for shipyards. Ship prices are likely to fall further and potential purchases will be have to be assessed on a cash- only basis, at least in the near future. Banks are trying to cherry- pick parts of the debt portfolios they might like to sell, and prospective investors are likewise trying to cherry-pick the parts they would like to buy. There is a clear disconnect between buyers and sellers of debt. Given that ship-lending banks are not obliged to mark -to-market their portfolios, they may be more willing, given problems elsewhere within the bank, to stretch the definition of a ‘performing borrower’ rather than take physical possession and crystallize losses. Existing ship-owners may have limited capacity to step in with new equity to take over all the '' struggling deals '', hence this type of solution, typical of past downturns, may not be so readily at hand.... Both fresh equity and new lending from newcomers is needed.

29. DEBT RELATED OPPORTUNITIES cont.
HOW CAN PENSION FUNDS AND INSURANCE COMPANIES TAKE ADVANTAGE OF THIS OPPORTUNITY?
As described above, with a freeze on new lending from existing players, and some even exiting the business, this is the time for newcomers to enter. But how can non- industry experts avoid investing in the wrong deals? How can new investors feel comfortable with this asset class?
First of all, we recommend avoiding non- performing deals or deals appearing likely to default at any time soon. These are deals for shipping experts and ship owners, able to work through special situations and manage distressed transactions.
Secondly, the focus should be on good borrowers and modern ships: understanding what constitutes a ‘good borrower’ in shipping may itself oblige the investor to seek expert advice. Subordinated high yield bonds, despite their alleged attractiveness and price discount are not necessarily the most attractive deals. Ship loan documentation gives a lot of power and control to the lender, and good covenant language makes a big difference.
Despite the mismatch between sellers’ and buyers’ expectations outlined above, we are nevertheless seeing live opportunities in which the banks are sellers of performing transactions .The typical scenario would be one in which the transaction releases capital, and creates new capacity, enabling the bank to re-price new business at more attractive levels. Some deals are too long in tenor anyway for banks (such as LNG deals for example). They could offer attractive spreads for cash investors, whereas they may not be considered high enough by leveraged players like private equity and credit funds compared to leveraged loans, although we would argue that these investors are not making a like-for-like comparison, given the likely much better credit risks on the shipping side.

30. DEBT RELATED OPPORTUNITIES cont.
LNGs, Offshore Services & Platforms and Oil tankers, typically involving major oil companies, are good places to start. Some deals will have residual risk (refinancing risk), others not (fully amortized at maturity); some deals could offer upside in the asset value, such that existing low prices could present a great opportunity to exercise these options (or sell them) in the future.
LNGs loans are typically years, with the counterparty risk normally being an end user, typically a major oil and gas company Most of these deals have been structured with margins ranging from USD Libor + 80 to We are seeing some opportunities in this space either as a straight loan sale at a discount, or structured in different formats such that the seller could release more capital and the new buyer could get an additional spread over Libor, a spread wide enough to hedge existing liabilities, with duration between 12 and 18 years.
 We at Marine Capital are fully aware that promotion of this asset class will be met with certain reluctance among institutional investors, not only because their knowledge and expertise is minimal or non- existent, but also because they will see with suspicion deals presented by banks directly (sales teams with hardly or no knowledge at all of the subject discussing deals with non industry investors). Current marketing efforts by the banks themselves, such as they are, could also explain why this dialogue is not as developed as it is in other asset classes.
Marine Capital will focus on specific deals on a principal basis but with a bias towards investing , or placing its managed funds, in transactions as ship owners, where it will take a material or direct exposure to the value of the ships purchased, and with investment criteria matching that of its investment vehicles.

31. DEBT RELATED OPPORTUNITIES cont.
This leaves a large pool of potential transactions that either due to tenor ( too long-more than five years) or expected return (below 20% IRR) fall naturally outside the role of Marine Capital as principal and may allow it to source deals and advise potential buyers in this process.
Transactions that could fit these criteria range from long- dated LNG deals to oil major loans with low residual risk and some upside, or first/second losses associated to portfolios chosen by the investor, with or without Marine Capital assistance. Private Equity funds and credit and hedge funds have limited/minimal knowledge in this field, and certainly do not have the expertise to manage the physical asset. Therefore, we should not expect much interest, or aggressive competition from this group.
Marine Capital has a very experienced team with an impressive track record managing distressed situations, both commercial and physical, but as described above, these are likely to be equity-oriented transactions, possibly suitable for our equity investors, but not for debt investors for whom there is plenty of scope in good, attractive, performing deals.

32. MARKET OUTLOOK AND OPPORTUNITY
Shipping markets are not immune to global meltdown- in such a scenario, everything melts, although the three main subsectors have not moved in tandem over the last 18 months, since their drivers are different.
The freight market for container- ships witnessed a steady decline during 2008 and a precipitate further collapse in This collapse and the medium-term negative outlook is exacerbated in their case by over-ordering by the liner companies of the biggest possible ships to carry the maximum number of boxes. The same argument was used (also unsuccessfully) many years ago when ULCCs (ultra large crude carriers) were built. There too, owners discovered that the trade was too limited and the economy of scale only applied if the ship could sail full. There is effectively no spot chartering activity in the container market, and the balance of power between the liner companies as charterers and the owner/tonnage provider arguably favours the liner companies. These factors, inter alia, make the sector challenging, although there may be some interesting opportunities in the current environment.
The dry cargo market collapsed towards the end of 2008 as Chinese import growth came to a sudden halt and trade finance affected the movement of cargoes on a global basis, Whilst there has been some recovery (following a 98% fall at one point in the dry cargo index) ship values have adjusted quickly from the highs of June-July 2008, roughly 65% down, but is reasonable to assume further downward movement and/or specific opportunities to profit from the upcoming distress. The tight, if not virtually impossible market for debt, coupled with weaker freight rates, obviously removes a significant percentage of buyers from the market and exposes all concerned to increasing default risks / distress. Such default could come at the shipyard (resulting in failure to build ships), by the purchaser from the shipyard, or the charterer of the ship. Estimates vary, but there is perhaps USD 300 billion worth of unfunded commitments to new ships, i.e. where buyers have paid their initial down- payments (typically 20-30%) and do not yet have debt finance to assist with the balance of purchase money. Of course, some of the ships may have employment already arranged or be part of fleet replacement plans of the some of the world´s biggest companies, but the inability of the majority of the traditional ship-lending banks to offer new debt funding undoubtedly means big trouble for many new ship projects and potentially huge opportunity for new investors with cash, particularly those without legacy issues.

33. MARKET OUTLOOK AND OPPORTUNITY
It seems impossible that dry cargo demand will pick up so quickly in 2009 as to justify the absorption of all the contracted, undelivered new ships at old, i.e. super high prices observed in Q2 and Q What we are evaluating is the percentage of new ship orders which will not arrive, the reductions in shipbuilding capacity resulting from the crisis, and the speed of ship demolition. Market participants carefully monitor iron imports and inventories in China, for instance, and, imports in March 2009 reached an all-time high despite sluggish global growth.
Interestingly, the crude oil tanker market was relatively firm throughout 2008 and the first two months of 2009 but both values and earnings are now under great downward pressure, with the clean tanker market worse still. Earnings for VLCCs are currently hovering around daily operating expenses, once again raising the spectre of lay-up for some of these ships.
In summary, we can be confident that the bulk shipping markets, as lead market/indicators, will show when the wider economy I likely to be recovering since the movement of primary commodities presage recovery and particularly since there is such global emphasis on infrastructure spending following the credit crisis. The shipping market has structural flexibility (i.e. fleets do not just grow; they also decline through removals/demolition). If you stand by the maxim that EM industrialization/urbanization/trade growth will continue to exceed Western growth for years to come, and that trade growth will exceed the respective figures for GDP growth, then, the returns from ships should continue to outperform other major asset classes in the medium term and 2010 will undoubtedly provide excellent buying opportunities for ships for those with cash.

34. MARKET OUTLOOK AND OPPORTUNITY
Direct investment in ships should not be confused with trading in freight derivatives. A freight derivatives market only exists for dry bulk and tankers (with the dry cargo derivative trading much more extensive). The participation of non- industry players, driving the growth of the derivatives market per se may well create arbitrage opportunities for owners of the underlying assets. Looking at it another way, those entering the market through the derivative space are likely to want genuine physical exposure sooner rather than later if they intend to be major players. In the meantime, the freight derivative market is too small and fragmented to provide a proxy for investment in ships themselves, and has insufficient volume or liquidity to provide consistent hedging opportunities for the owner of the physical assets.
Access to this market may improve over time. If dedicated ship fund managers with the appropriate financial as well as shipping/trading skills can open it to a wider group. The growth of the freight derivative markets has already attracted investment banks and some hedge funds to participate, although mostly as ´screen traders´ and without the necessarily having knowledge of the underlying physical market and / or obvious access to it. As they have enjoyed the taste, the desire (even need) to grapple with real ships and cargoes will be obvious. It is also clear that the shipping market thrives, with a multiplier effect, in an environment of above trend trade growth. The historical growth in the container industry, until this most recent collapse, was a consistent 2.5/3 x global GDP growth. China’s development over the last few years, as suggested above, offers the prime example of this for the dry cargo market. We could not rule out larger infrastructure investment programmes being put in place in the USA and Western European economies going forward. In addition shipping is the greenest ( relatively, on a ton transported basis) and most efficient of all the transport alternatives. All the ingredients are therefore in place for the assumption by the wider investment community of ships as an asset class.

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