Private Equity and ShippingFrom Common and Preferred Equity to Secondary Loan Purchases

September 2019

P | Sep 20192

About

Transactional Services(1)

Ø Capital Raising

Ø Mergers & acquisitions

Ø Asset divestitures

Ø Structured transactions

Ø Debt and equity private placements

Ø Fairness opinions

Maritime Asset Management Services

Ø Vessel oversight and management services

Ø Reporting and monitoring

Ø Performance tracking / benchmarking

Ø Transaction structuring and execution

Ø Investment financial structuring

Financial Advisory Services

Ø Financial restructuring and debt reorganization

Ø Management and stabilization of distressed situations

Ø Strategic alternatives review and implementation

Ø Business valuation

Ø Interim management

(1) Goldin Associates LLC and Goldin Maritime LLC do not conduct activities that are, under applicable laws and regulations, exclusive to broker-dealers. Upon written agreement, such activities may be undertaken by Goldin Capital Advisors LLC, an SEC-registered broker-dealer and a FINRA and SIPC member.

u Randee DayØ CEO of Goldin Maritime, LLC

Ø Former Interim President of Eagle Bulk Shipping Ø Former Interim CEO of Double Hull Tankers

Ø Former Global Head of JP Morgan Shipping

Ø Independent Director of Tidewater, Inc (NYSE: TDW)

Ø Independent Director of Eagle Bulk Shipping (NASDAQ: EGLE)

Ø Independent Director of International Seaways Inc (NYSE: INSW)

P | Sep 20193

Private Equity in Shipping

u How much has been invested? Ø ~$38bn since 2007Ø Peaked in 2013 with substantial purchases of NPLs

and debt to equity conversions of public shipping companies

*Source: Marine Money Inc

P | Sep 20194

Private Equity in Shipping

u Which Sector benefited the most?Ø Traditional trades (dry bulk, container, tankers)

benefited the most

Ø Little investment in today’s high growth sectors –cruise and gas – most PE missed the trend

*Source: Marine Money Inc

P | Sep 20195

Private Equity in Shipping

u Why does Private Equity invest? Ø Investment thesis of sector based cyclical dislocationØ Distressed public vehicles

Ø Appetite for European non-performing loans u How has it turned out?

Ø Poorly for most u Why?

Ø Not conducting a fundamental supply side analysis (incentives of Chinese and Korean yards) and Owners to order new ships – e.g., Product Tankers (Scorpio) and Dry Bulk 2013 (Oaktree newbuild orders!)

Ø Not anticipating that public vehicle take-overs (debt to equity) would leave listed entities illiquid (no trading volume) – some stocks are still 70% controlled by PE funds who came in during Chapter 11 to this day

Ø European NPL process takes many years – missing cycles due to timing constraints from closing portfolio transactions with complex regulator approval

v Many ships enforced upon (or quasi-enforced / zombie KG ships) by German banks are in terrible shape, trade poorly, have lost vettings from charterers and have accrued maintenance CapEx that sometimes approaches 50% of vessel value

v No more China ‘super cycle’ like from 2004-2007

P | Sep 20196

How does Shipping Really Work?

u The business looks like it has been commoditized Ø Ample data, supply visibility (2-year order book) and indexes (BDI, etc…) give

perception of rationality and perfect price discovery

v E.g., Clarksons, MSI, Vessel Values, ‘forecasting on a page’ – if it were that simple, we’d all make a lot of money, yet returns have been negative for a decade

u It isn’t so simpleØ Shipping is hard

v The only parties with ‘perfect price discovery’ are the vessel Charterersv All Owners are ‘price takers’ it just depends on the degree

v Just making the ‘index’ is difficult and most Owners do not make their indexv Making the index requires scaled fleets, being first in line with charterers, and

triangulation for access to cargoes v Top Owners who keep vessels on the water and are diversified with strong balance

sheets have relationships with the major Charterers (Oil Majors, Cargill, Vitol, Trafi, Glencore, etc…) that most ship Owners and even some public companies do not

v It takes scale just to be competitive on cost v Third party professional ship management is good, but it isn’t a panacea. v Ships of same type (even sisters) not always same quality – Masters, etc… can

cause variance

P | Sep 20197

Private Equity in Shipping

u The Best Ways to Lose Money in ShippingØ Buy a portfolio of European NPLs

v Negotiate for 2 years, totally miss the cycle

v Spend 10% of transaction cost on closing fees (legal, audit, etc…) v Buy ships that were starved of cash and often haven’t traded, have poor vettings,

have been poorly maintained – your ships are last in line for businessØ Non controlling JV with a second-tier ship Owner

v You’ve incentivized them to make money through ‘leakage’ on the cost side (mark ups, fuel quality, commissions, padding the Dry Dock costs / yard kick backs etc..)

v They have no incentive to help you exit your trade, and every incentive to stop your exit to ensure that they earn their mgmt. fee

Ø Bought the debt and convertedv Expensive Chapter 11 process (some Companies spent 2 quarters of earnings on

advisor fees!) v The reward is that the new public vehicle that was once over levered, now is an

illiquid public vehicle with little trading volume v Stranded equity….forever? Every time you sell you drive down your own stock price

P | Sep 20198

Private Equity in Shipping

u How to Recover your bad investmentØ You’ve bought a pile of bad European shipping loans, now what?

v Scrap!

v Invest (less than 10 years old, get her into dry dock)v Pool / Partner and Consolidate

q Don’t be the fund that has 200 ships all competing with different commercial operators, pool your commercial side, gain advantage by merging your technical and gaining scale!

Ø You invested with the wrong partner

v Take away their management. Give it to a third-party manager if you must. Get out. Ø You’ve bought the debt and converted

v Consolidate and then consolidate again, and again, until you have a market cap that retail investors – and a fleet size that charterers – will notice (i.e., Starbulk)

P | Sep 20199

Private Equity in Shipping

u You may be asking “This sounds terrible. How can I make money? Why am I here?”Ø Yes you can make money if you structure properly & buy good quality assets

u Understand the basis: Ø Shipping is a good cash business.

v 8-9% unlevered cash on cash returnsØ In an environment with 30% of credit securities returning zero yield, shipping is an

attractive place to put capital – but expect a high yield bond return, not more!v Framing your investment memo “Buying a ship is like buying a secured high yield

bond with a maturity of 5+ years”

v Expect cash flow to be PAYG and have adequate working capital from day 1 v Don’t over-gear (not more than 50% LTV) either in the SPV or with back leveragev Have cash to last (don’t force a down cycle exit) – e.g., if your JV partner

accepts your buy out proposal, you’re on the wrong side of the trade!v Remember the boom / bust cycles in shipping are largely determined by bank

working capital requirements – lenders typically make most Owners have 6 months of cash in retention, in a down cycle, when that’s gone, ships get stacked, or scrapped or enforced upon by the Banks. The down cycles rarely last longer than two quarters, if you can’t identify and transact that quickly, you’ve missed the cycle

P | Sep 201910

How to Invest – Option A. Buy Direct u Be Fast

Ø Buy the hard asset in a clean sale with no legacy liabilities through sale & purchaseØ If you want scale, buy a fleet outright

Ø Never expose yourself to unknown trade liabilities of SPVs or Holding Companies Ø Don’t pay for ‘goodwill’ in a platform – its only as good as their best people Ø Values rise with expectations of future earnings. When rates improve dramatically,

market the asset(s) for sale!u Buy Good

Ø Be counter-cyclical – if other PE is buying it, don’t

Ø Japanese, Korean – Up to 10 years old for good quality vesselsØ Have your team lined up – commercial, technical to inspect, agree and take over the

ship before you buy! There is no such thing as a ‘cheap ship’v Hire me and my team!

u Control Ø Review and benchmark Technical and Commercial Operators annually

Ø Structure pool / commercial agreements to get out in 60 days or less when you sellØ Buy your ship and sell your ship with the same ship broker – align their incentives Ø Self Control (most important!) “Trees never reach the sky”, therefore, stick to your

original investment strategy, don’t grow your exposure risk against your fund’s AUM

P | Sep 201911

How to Invest – Option B. JV with a Real Playeru Only Fly First Class

Ø Characteristics: Diversified (bulk / wet); scale; time charter approval from majors; multi-generational family; history of serious banking relationships’ & personal guarantees

u What are you paying a ‘premium’ forØ Better charters, being first in line and being last to be cut

v In a down market, when utilization falls below 80%, these players keep ships trading when others are idle – importance of this cannot be overstated. Can keep you free of having to capital call due to negative operating cash / cash burn!

u Get into the platform if you can Ø Try and roll in the management platform – this is a real business! It may not be

possible but can help you negotiate on the NAV if they won’t budge u Remember you are the short term / dumb money in this room

Ø They are the industrial player who is here to run ships for 20 yearsv You’re here for 5 years (if you’re lucky)v You’ll never know their business as well as they do

v Align incentives knowing the above and you’ll make money v Governance, governance, governance (even if you’re 49% minority, you can

structure negative controls!) v Board representation is key – put on an industry expert like me alongside you

P | Sep 201912

Take Away

u One of the greatest ship Owners and Hong Kong industrialists of all time said: Ø “Shipping is a highly competitive and risky industry; one small error can destroy an

entire enterprise. Without…a tightly controlled and well-established organization, a shipping business will not survive the vicissitudes of the industry” – CY Tung ‘From Shipping Through Bitter Experience’

u Putting it into action:Ø Clear Strategy (Know your thesis)Ø Speed (Transact fast)

Ø Commitment (Do it right or don’t do it at all)Ø Discipline (Don’t get distracted or stretch your mandate)Ø Aligning Incentives (Make everyone’s margin and upside clear and known from day 1)

THANK YOU

Goldin Associates LLC does not conduct activities that are, under applicable laws and regulations, exclusive to broker-dealers. Upon written agreement, such activities may be undertaken by its affiliate, Goldin Capital Advisors LLC, an

SEC-registered broker-dealer and a FINRA and SIPC member.

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