EditorialWelcome to the June 2019edition of the MooreStephens Shipping andMaritime Newsletter. For over75 years, Moore Stephenshas been synonymous withthe shipping industry. Ourstrongholds in key locationssuch as Hong Kong,Singapore, London, Piraeus,Monaco and Australasiaenable us to use sharedglobal knowledge andexpertise to better serve ourclients.

In this edition, we take a lookback at a successfulSingapore Shipping Forumand the key points that wereaddressed as part of our co-sponsored event throughMoore Stephens SingaporeLLP. There are key issuesaround Green Finance, CyberSecurity and IM2020compliance but we also havetechnical updates

from Panos Drakoulakos (theimpact on Shipping of thediscontinuation of Libor as areference rate) and WongKoon Min (regarding newaccounting rules centred onleases). Also, there is aprofile of CostasConstantinou, the GlobalLeader for Moore StephensShipping, and an example ofcollaboration in action.

If you have any feedbackregarding the content, or wishto make future contributionsplease get in touch withCostas(costas.constantinou@moorestephens.gr) or MSILDirector of Global Growth andCollaboration, John Stanford(john.stanford@moorestephens.com ).

Inside

Moore StephensGlobal Shipping NewsletterJune 2019 Edition

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Singapore Shipping Leaders debate key topicsPage 6

The impact of Libor discontinuation on shippingPage 9

New accounting paradigm for leasesPage 13

Upcoming shipping eventsPage 16

Newsletter contributors

The Shipping industry is amidst an unprecedented wave of changes presentingmanagement with challenges in many key areas including, environmental, IT, financing,sanctions and crew. To these traditional issues we can also add, ‘green’ shipping,autonomous vessels, block chain /crypto currencies, generational change and the currentgeopolitical uncertainty.

To adapt to this constantly changing environment, management requires practical andindustry specific advice to determine priorities and implement a strategy to successfullynavigate the changes.

Moore Stephens has been associated with the shipping industry for over 75 years and hashelped generations of shipowners through similar challenging times. The Moore StephensShipping Sector is comprised of similar minded member firms who collaborate closely toprovide practical advice and services to help clients thrive in a changing environment.

Andrew GallagherMoore Stephens Monacoandrew.gallagher@moorestephens-mc.com

Chris JohnsonMoore Stephens Singaporechrisjohnson@moorestephens.com.sg

Global Shipping LeaderCostas ConstantinouMoore Stephens Greececostas.constantinou@moorestephens.gr

Panos DrakoulakosMoore Stephens MonacoPanos.Drakoulakos@moorestephens-mc.com

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Wong Koon MinMoore Stephens Singaporewongkoonmin@moorestephens.com.sg

Moore Stephens Greece and Monaco recently collaborated on a proposal for a listedNorwegian shipping company, based in Athens, to provide assurance on its system of internalcontrols. This was a competitive tender against two major firms within an extremely tightdeadline.

When awarding the assignment the Company said that Moore Stephens was selected as theywere confident the team would bring significant added value to the engagement due to theirextensive knowledge of the industry.

Costas Constantinou, the Managing Partner of Moore Stephens Greece and Global ShippingLeader commented, “this is an excellent example of how success can be achieved throughthe close collaboration of offices in the key shipping locations. It was clear from the tenderthat the combination of our credentials and strong local presence were a perfect fit for theclient’s requirements, the close personal contact allowed us to meet the strict deadline. This isan example of how collaboration can drive International success in shipping and other keysectors”.

Shipping Collaboration Success

Global Shipping Leader, Costas Constantinou, discusseshow he found himself at Moore Stephens and how thenetwork forged his love for Shipping.My relationship with Moore Stephens was perhaps a foregone conclusion given thefamily connection. My father, Damianos, was the first one to establish an internationalfirm of public accountants in Greece and given that Moore Stephens was always theleading firm in Greek shipping, this sector became my natural environment.

I grew up hearing inspiring stories about clients, their successes and how our firm helpedthem solve their problems, so I wanted to get involved as well. I am passionate about theindustry and now, in my new role as Global Leader, I am excited that I have theopportunity to take Moore Stephens Shipping to the next stage of its development.

I believe the shipping industry will need to adapt to the fact that it is a part of a largesupply chain and all parts of that chain are impacted when one of the links are subject tochange. Sustainability, decarbonization, digitalization are some of the issues that affectthis chain that includes mines, manufacturers, cargo owners, ports, wholesalers, retailersand, ultimately, the consumer. Therefore, it is inconceivable that transportation willremain unaffected.

Given that Shipping is a counterparty to other key services and industries, such as banks,insurance companies, shipyards, fuel suppliers and others, change is also driven byregulatory pressures on all parties and is not just a matter for Shipping alone.

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LNG is not only one of the greenestsolutions currently available to IMO2020 andbeyond, it is also competitive and ready,according to speakers at the MooreStephens – BNP Singapore Shipping Forum2019.

According to Mr. Thomas Hansen,Commercial Director of Eastern PacificShipping (EPS), which recently acquired aseries of 15,000 TEU LNG Dual-Fuelcontainerships, LNG as a marine fuel is thecleanest in the market, with statisticsdemonstrating that, when compared to first-generation 13,000 TEU vessels, LNG vesselscan achieve reductions of more than 50% incarbon emissions, 95% of sulphuremissions, 80% of nitrogen emissions, and100% of particulate emissions.

Mr. Nicolas Parrot, Head of TransportationSector at BNP Paribas Singapore noted thatLNG-fuelled ships and LNG bunkeringvessels are capital assets that qualify forGreen Shipping Bonds and Green ShippingLoans. However, BNP Paribas cautionedthat methane slippages from LNG vesselsshould be considered in overallsustainability assessments.

LNG shipping is competitive in fuelconsumption. Seminar statistics comparingLNG-fuelled ships with older-generationcontainerships indicated that LNG vesselsconsistently outperform, with fuel savingsreaching in excess of 40% in some cases.

Green shipping in general including LNG-fuelled vessels, will be increasinglyattractive

Mr. Mick Aw, Senior Partner of Moore Stephens LLP, observed that part of the uncertainty in dealing with environment regulations is how potential solutions to existing regulation interact with future environment regulations.

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Global Shipping leaders debate key sector topics

as more companies, including the Fortune500, publicly commit to reducing emissions,in some cases with specific goals to reducelogistics-related carbon footprints.Examples highlighted during the seminarinclude Nike and Adidas, who aim to reducetheir logistics-related carbon footprint by10% and 4% respectively, and Amazon,which signed the Sustainable Fuel Buyers’Principles committing to low-carboncommercial transportation solutions.Further competitive advantages include thefreight premium that may come with greenshipping in general, as well as portdiscounts and rebates for the same whichare increasingly available.

Although LNG infrastructure is a frequently-cited concern, Mr. Hansen opined otherwise,noting the ready availability of LNG supplierswho are equipped with bunkering vessels forthis purpose, as well as LNG bunkeringinfrastructure and capabilities in diverseareas including US West Coast, Caribbean,the Baltic, North Continent, Mediterranean,China, Korea, Japan, and others. As LNGbecomes more widely-adopted, LNGinfrastructure will become even moreavailable. The anticipation for greater LNG

demand is corroborated with statisticsdisplayed by Mr. John D’Ancona, SeniorAnalyst at Clarksons Platou Asia, whichshowed the orderbook for LNG carriers to be25% of the existing fleet as at April 2019, thehighest of all asset classes.

Mr. Mick Aw, Senior Partner of MooreStephens LLP, observed that part of theuncertainty in dealing with environmentregulations is how potential solutionsto existing regulation interact with futureenvironment regulations. On that basis, Mr.Hansen noted that LNG is most future-proofas LNG’s significant reductions in not justsulphur and carbon emissions, but alsonitrogen and particulate emissions,positions it well among existing technologyto deal with potential future environmentregulations. Mr. Guy Platten, Secretary-General of the International Chamber ofCommerce, agreed that the industry canexpect more sustainability regulatorypressure going forward, with IMO 2020being regarded as a regulatory gamechanger for the industry.

The Moore Stephens-BNP ParibasSingapore Shipping Forum 2019, held at TheWestin on 11 April 2019, is an event hostedannually by Moore Stephens, together withco-sponsor BNP Paribas, in conjunction withthe Singapore Maritime Week 2019, an eventsupported by both the Singapore ShippingAssociation (SSA) and the Maritime andPort Authority of Singapore. The sessionwas well-attended by more than 200delegates.

Mr Chris Johnson, Partner and Head of Shipping, Moore Stephens LLP Singapore providing an introduction to the panel discussion

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After the 2012 Liborscandal in which majorinternational lending bankswere fined by the relevantauthorities and besides themeasures adopted toreform the Libor market,Andrew Bailey, ChiefExecutive of the UKFinancial Conduct Authority(FCA), has signalled withhis speech on 12 July 2018the discontinuation of Liboras a reference rate after2021. The main argumentfor the discontinuation isthe lack of actualtransactions in theunsecured wholesale

borrowing and relatedmarkets. Panel banks havebeen using “expertjudgement”1 , their ownestimates of what it couldcost them to borrow funds.

Libor is widely used as abenchmark rate in theshipping finance industry.The discontinuation willaffect ship financing loanagreements, floating ratenotes (“FRNs”), leasingarrangements andderivatives among others.

With the encouragement ofthe Loan MarketAssociation, banks over the

last few years haveintroduced clauses, betterknown as fallbacks, toaccount for the case that areference rate isunavailable due to marketdisruptions or other events,in any type of financialagreement.

Management and financepeople should closelymonitor and evaluate alltheir contracts where Liboris used as a reference rateand loan agreements aredue to mature after 2021.They should identify thefallbacks that are includedin the agreements, analyse

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alternative reference rateoptions discussed in orderto replace the Libor and therelevant lender consentlevels. A similar processshould be performed forany derivative contractswhere the US$ Libor is alsoused as the benchmarkrate. Discussions shouldbe held well in advance ofDecember 2021 to allowyour company and yourcounterparties an adequateperiod of time to negotiatean appropriate alternativerate. An important elementin this discussion is toagree who will bear thecosts of any amendmentdue to the change of thereference rate. Once youhave agreed the alternativerate you should considerthe potential implicationsof IFRS 9 paragraph 3.3 –Derecognition of financialliabilities. The situationperplexes a bit more for thederivative contracts suchas interest rate swaps andoptions. For this reason,the International Swapsand Derivatives Association(ISDA) has issued detailedguidelines which, if thedisruption is activated,provides a series offallbacks which may differfrom what is specified inthe relevant loan

agreement. The mismatchmay affect the hedgeeffectiveness and hedgeratio, which should be re-assessed after themodification of the loanarrangement. Theimperfect correlationbetween the modified loanand the derivative may lead

to excess gains and lossesand completely derail theoriginal hedging strategy.The InternationalAccounting StandardsBoard (“IASB”) hasrecognised the significantimpact the discontinuationof Libor will have onexisting and future hedgeaccounting treatment ofLibor related hedges. As aresult IASB has proposed a

number of changes in theaccounting standards tomitigate its impact andallow companies tocontinue accounting forLIBOR related hedgesdisregarding thediscontinuation.2Stakeholders shouldprovide their comments bythe 17th June 2019. Thealternatives specified in thecontract are only atemporary solution and, inmost cases, could not beused over the long run.Some of the alternativesmentioned are interpolatedrates, historical rates,reference rates and cost offunds.3 The cost of funds isa last resort rate and banksand their agents may notbe willing to reveal thissensitive information totheir customers for anextended period of time.Various alternatives arebeing developed byworking groups in themajor Libor currencies (USDollar, Euro, Sterling, SwissFranc and Japanese Yen).

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Currency Proposed Risk-Free Rate Secured/ Unsecured Working Group

US Dollar ($) SOFR (Secured Overnight Funding Rate) Secured

Alternative Reference Rates Committee

Euro (€) ESTER (Euro Short-Term Rate) Unsecured European Central Bank

Sterling (£) SONIA (Sterling Overnight Index Average) Unsecured Bank of England

Swiss Franc (CHF) SARON (Swiss Average Rate Overnight) Secured Swiss National

Working Group

Japanese Yen (¥) TONA (Tokyo Overnight Average Rate) Unsecured Study Group on

Risk- Free Rates

The above rates areovernight rates and are riskfree. The main differenceswith the Libor are:

1) The above rates arebackward lookingwhereas Libor isforward looking andthere are quotes fordifferent tenors.

2) Libor is not risk-freeand contains anelement of credit risk.

3) Libor also contains aliquidity premium onlonger term tenors.

The differences betweenUS$ Libor and the risk freerates (RFRs) pose asignificant challenge for thebanking industry, in general,as it raises a number ofissues. More specifically,given that the RFRs arelower compared to LIBORs,the transition to RFRspotentially creates a pricing

gap, which should be takeninto consideration whennegotiating your newreference rate. US$ Libor isset today but is applicable inthe future. This allows theborrower to know theirfunding costs in advance andmanage their cash flowaccordingly. This may not bepossible with a new backwardlooking reference rate. So far,slow steps have been madeto move away from the use ofLibor as a reference rate and,since July 2018, Fannie Mae,the World Bank and CreditSuisse have issued debt tiedto SOFR. Similarly, LloydsBanking Group has issueddebt linked to SONIA. There isa long way before the newreference rate is establishedbut the consensus amongfinancial analysts is thatsooner or later the use of US$Libor will eventually fadeaway.

How can we help?

Moore Stephens is one ofthe world’s leadingshipping consultancynetworks due to ourspecialist knowledge andwide-ranging advice andassistance. The analysisabove does not cover allthe implications of a debtrestructuring. We areavailable to provideguidance on debtrestructurings and how thiswill affect your business.

For more information or todiscuss how we could helpyou with transitioning fromUS$ Libor to a newreference rate, pleasecontact us.

[1] 10 LMA News H1 2018

[2] IAS Exposure Draft 2019/1

[3] LMA News H1 2018

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From 2019, companies across the globe willbe applying new accounting rules that willcapitalise most leases, thereby expandingboth assets and liabilities on the balancesheet. The new rules will significantly impactthe growing volume of leases globally,exceeding US$1 trillion according to theGlobal Leasing Report 2018 (White ClarkeGroup, 2018).

The new accounting paradigm, captured inInternational Financial Reporting Standards(IFRS) as IFRS 16, is conceptuallystraightforward and promises to streamlinethe accounting for most leases. Currently,some leases are capitalised while others arenot. However, the challenge posed by thenew rules, is in dealing with the potentiallyonerous economic impact. According to a

study in 2018 on 646 European quotedcompanies, the highest increase in liabilitiesresulting from the new accounting rules, ofbetween 50-60%, will be registered in thetransportation, hotel, and consumer retailindustries, as compared to average assetincreases of only 25-30% (Morales-Diaz,2018).

Economic impact on businesses

Leverage ratios can deteriorate, which maycause companies to trip over bankcovenants that hinge on such ratios inborderline (and, perhaps, not-so-borderline)cases. This will in turn require creditors’approval to adjust or relax covenants,possibly at an additional cost from penaltiesor higher rates.

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The detriment to gearing arises due tovarious technicalities, as follows:

• Arithmetically, equal inflation of assets andliabilities adversely affects healthy gearingratios.

• Lease assets depreciated on a straight-linebasis will decline faster than thecorresponding liabilities under the new rules,resulting in further detriment to both gearingand profit.

• New rules on determining “lease term” mayresult in more years of lease paymentsbeing capitalised than under current rules,amplifying the effect of asset and liabilityinflation.

Lessee companies may also experiencedeclining profitability, as the new rules front-load the expense in the earlier years of thelease, as compared to the previousoperating lease accounting model.Industries that rely heavily on leases, suchas retail, transportation, andtelecommunications, are most likely toexperience these issues.

Business considerations

“Lease-versus-buy” decision

Depending on the extent of these effects, itmay be worthwhile for companies to re-examine business models. One corporatedecision that may be affected is the “lease-versus-buy” decision. Companies maychoose to purchase assets outright withdebt, instead of leasing, if it is less costly todo so and the financial impact is similar.

Service/ capacity contracts

Companies may also wish to considerfalling back on service/ capacity contracts

where their business model allows. Ingeneral, the new rules do not apply toservices and capacity contracts. Forexample, a long-term car rental should becapitalized but a contract for daily transportservices need not. Similarly, optic fibre cableleases should be capitalised but fibre opticcapacity contracts need not. Companiesadopting this approach must consider therules carefully to ensure that the service/capacity contracts are indeed exemptedfrom capitalisation.

This may require technical help to delve intothe more esoteric aspects and judgmentssuch as:

a) Whether the subject of the contract is“physically distinct”?

b) Whether the capacity rights that are thesubject of the contract comprisesubstantially all of the capacity of anunderlying, physically distinct, asset?

c) Whether the supplier has “substantive”rights to substitute for alternativeassets?

d) Whether lessee or lessor has greaterdecision powers on how the assets areused? This can be a potentially difficultquestion when different parties havedifferent decision powers, or when keydecisions are hardcoded into contractsupfront.

Secondary lease periods

Another area to consider pertains to optionsfor secondary lease periods, and actionsthat incentivize take-up of such options. Forexample, a favourable rental rate over thesecondary period suggests that the lessee

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will be incentivised to extend the lease, andthe secondary lease payments are thereforecapitalised. Similarly, heavy upfrontinvestment by the lessee into the leasedasset, as in the case of upfront renovationcosts on a leased retail flagship store,suggests that the lessee will want tomaximise the renovation benefits byextending the lease period. In assessingsecondary lease periods, a consideration ofall facts and circumstances is required, butmanagement intention, on its own, does notsuffice. These rules have broadened ascompared to corresponding previousrequirements, and is another areaassociated with technical caveats, whichmay require technical expertise.

Optional reporting exemptions

Businesses may benefit from optionalreporting exemptions that alleviate thefinancial impact. Leases shorter than 12months need not be capitalised. Neither doleases of low value items. Exemptions arealso available upon transition to the newrules.

One possibly useful exemption allowsleases (including multi-year contracts) toremain off-balance sheet if they end within12 months of the adoption date (i.e. before31 December 2019 for a December year-endentity).

While these exemptions can simplify theprocess of transiting to the new rules,thereby reducing accompanying costs, theirelection should be accompanied by aholistic consideration of all financialconsequences. To illustrate, consider anexemption that allows companies toassume that lease assets are equal to leaseliabilities (with minor adjustments) upon

transition, thereby avoiding a full historicalre-computation. While this exemptionreduces implementation effort, it alsocreates a larger lease asset as compared toa full historical re-computation, with higherconsequent future depreciation charges andlower future profitability.

Companies may wish to considerprofessional advice to ensure a holisticimplementation that considers multipleperspectives and consequences.

In conclusion, the new leasing rules, whileconceptually simple, bears potentiallysignificant economic consequences. Earlyand thorough analysis and preparation isneeded to help companies prepare,minimize surprises, and communicate earlywith stakeholders. This summary does notcover all the requirements and professionalguidance should be considered on thechanges that will affect your business.

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Key upcoming events

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Key Events

Date Event Location

09/09/2019 –13/10/2019 London International Shipping Week London

10/09/2019 12th Annual Capital Link Shipping & Marine Services Forum London

24/09/2019 Marine Money Week Asia Singapore

24/09/2019 Marine Money Week Monaco Monaco

02/10/2019 9th Annual Capital Link Operational Excellence in Shipping Forum Athens

06/10/2019 –09/10/2019 Maritime Cyprus 2019 Conference Limassol

15/10/2019 Marine Money Athens Athens

15/10/2019 11th Annual Capital Link New York Maritime Forum New York