Ghostwriter 7SSMM712 – Topics in Applied Finance 2023/24Debug Programming

Examination 2023/24

Module Code and Title: 7SSMM712 – Topics in Applied Finance

Coursework: Shipping, Period 2, March 2024.

SECTION A – ANSWER ALL QUESTIONS

Assuming we are standing at December 2019. A shipping company which already owns one Panamax (PMX) dry-bulk vessel is about to complete the acquisition of one Capesize (CAPE) dry-bulk vessel. The acquisition of the vessel will be funded partly by a bank loan and partly by cash held within the company. SIGMA BANK has just provided a Commitment Letter with the main terms for the bank loan. Completion of the transaction (loan drawdown and vessel acquisition) is expected in the first week of January 2020. The vessel to be acquired is described below:

The following files provide additional information:

1. Bank Commitment Letter; includes the terms of the debt financing for the acquisition of Vessel 2.

2. Company information: includes information on the company’s fleet, its Balance Sheet as of 31/12/2019 (note that Vessel 2 has not yet been acquired), and additional accounting information on the company’s fixed assets.

3. Market Data; includes historical market data on the vessel values, freight rates and fleet development on both vessels.

Coursework questions are divided into 2 questions.

Question 1: INDUSTRY ANALYSIS

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:

a) 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.

b) Comment on the specific timing in the shipping cycle that the particular investment takes place (end of year 2019). (Position in the shipping cycle). Discuss your expectations on the future course of the market value and freight rates of the CAPE vessel that you plan to purchase. Would you recommend proceeding with the investment? Justify your response.

c) 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 last 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 stable. Explain how would you expect the freight rates for the vessels of our investor to be affected if the war really takes place? Discuss your expectations of this event on the impact on the four shipping markets in the long run.

[40 marks]

Question 2: CREDIT ANALYSIS

By using the following additional information:

· Cape (Vessel 2) acquisition and loan drawdown took place on January 1^st, 2020.

· To simplify calculations, assume that first loan instalment payment to the Bank 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.

· 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.

You are asked to provide the following in your Report:

a) Do the following:  

i. Identify the Security Parties and list the Security Documents for the specific loan financing.

ii. Describe the role of each Security Document.

b) On what basis does the Corporate Guarantee have value? Calculate this value as of 31/12/2019 that the Bank provided its Commitment Letter. Remember to adjust the book value of the vessel based on the actual market value as provided in your market data time series. Outline the scenarios that may result in a change in the value of the guarantee in the future.

c) Prepare projected annual Cash Flows for the Guarantor (including both the existing and the new vessels) until the maturity of the loan (2020 – 2024). Make sure you include all cash inflows and outflows. In addition, present how cash balance changes. Make sure to also monitor how loan outstanding de-escalates over time. Include your supporting calculations in an Appendix.

d) Calculate percentage of secured employment for each year of your projected period. Discuss its importance for the bank advancing the loan. Calculate breakeven rates for each year of your projected period. Breakdown breakeven rates into their cost components. Discuss how such components develop through time. What risks do you identify as Banker through your review of the development in the breakeven rates?

e) Assuming we are standing at Year End 2021, based on your annual cash flows of the Guarantor that you prepared at (c), you are asked to prepare and submit the Compliance Certificate for the year 2021 to the Bank, as per the bank’s Terms Sheet description. Present your calculations in detail. For the market values of the two vessels, you assume the following numbers:

f) How certain do you feel 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? List the alternative ways that the Borrower might use to repay the balloon.

[60 marks]