Shipping Finance

The specific questions and forms are in the pdf file, the file name is Questions, please use the knowledge in the pdf to answer these questions, word and excel files are the conditional information needed to answer the questions

PART A: INDUSTRY ANALYSIS (30 marks)
By using your historical market data you are required to perform a
market analysis of the Capesize vessels in order to evaluate the new
investment. Specifically, you are requested to address the following
questions:
1. In the specific market of the Capesize vessels, describe and explain
how the 4 shipping markets (freight, sales & purchase, newbuilding,
demolition) have historically evolved and how they interact among
themselves. Make sure you discuss both ups and downs and how one
provokes the other. Present the appropriate graphs with historical
information to support your discussion.
2. Comment on the specific timing in the shipping cycle that the
particular investment takes place (end of year 2019). Where in the
shipping cycle you think we are? Regarding the CAPE vessel that you
purchase, how do you expect its market value and its freight rates to
develop in the future? Justify your response.
3. 6 months after the investment (summer of 2020) there is a
geopolitical tension in the Middle East. Political analysts comment
that a war is about to break out which will result into the closure of
the Canal of Suez. Hostilities are expected to prolong for many
months. Vessels will have to circumvent the continent of Africa as the
Canal will be no more available for shipping. Demand for international
trade is expected to remain the same. How would you expect the
freight rates for the vessels of our investor to be affected if the war
really takes place? Explain why. How the four shipping markets might
develop in the long-run because of this event

PART B: CREDIT ANALYSIS (40 marks)
Note the following additional information:
• Cape (Vessel 2) acquisition and loan drawdown took place in
January 1st 2020.
• To simplify calculations, assume that first loan instalment payment
takes place on 31 March 2020.
• Assumed revenue days of 355 per vessel per year.
• Expenses growth rate (for operating expenses and administrative
expenses) 2.0% per year.
• Administrative expenses: 500,000 in 2020, thereafter increased by
expense growth rate.
• Assumed LIBOR of 1.50%, same throughout the projected period.
• The commitment fee is zero since the drawdown of the full loan
amount took place immediately.
• Special surveys are expensed in the same year that they occur
(they are not capitalized).
• Dividend policy of the company is to distribute 300,000 per year to
the shareholders.
• Assuming that you are working from the Bank’s perspective, your
approach on future market developments is conservative.
Accordingly, your assumption on the freight rates for the open days
should be the lower 25% bracket of your historical data at the time you
do the calculation for 1yr time charter rates. This means that in the
historical freight distribution (ranking historical freights from lower to
higher) you select that historical freight rate having 25% of observations
lower and 75% higher. Remember that we are standing at Dec 2019.
Mkt value 31/12/2021
Vessel 1 (PMX) 13,000,000
Vessel 2 (CAPE) 30,000,000

How would you expect that the balloon (last payment) of the loan of
SIGMA bank, funding the new acquisition of the Cape vessel, will be
paid out? Do you see any risk for a payment default at that time?
2. Identify in the loan term sheet all those terms that protect the bank
from a potential adverse behavior of the Borrower. Explain how each
of these terms provide this protection.
3. Do a stress scenario by using the absolute worse historical freights of
your historical data for the open days of your model. Discuss the result
in terms of your cash flow generation. What are the implications for
the need to refinance the maturity of the loan of the Cape Vessel
(Vessel 2) after 5 years with a new loan?
4. Discuss how you may use the ability to trade in the FFA market (see
below FFA prices) in order to minimize the above risk.
FFA curve
2020 2021 2022 2023 2024
PMX 11,220 10,392 10,311 10,095 10,050
CAPE 13,885 12,213 12,841 13,009 12,900
5. Based on your stress analysis, suggest possible modifications to the
loan to enhance its credit standing in the absence of any additional
guarantee

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