Concerns and Challenges of Raising Capital

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WISTA 2008 Annual Conference
Concerns and Challenges of Raising Capital
October 17, 2008
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Seabury Group Overview

• Seabury Group is one of the largest independent
  investment banks dedicated to the transportation
  industry with offices in the US, Europe and the
  Far East
• Seaburys investment bankers have been involved
  in significant transportation transactions
• Served as advisor, in cooperation with OKeeffe
  Partners, Ltd. on formation of joint venture
  between Overseas Shipholding Group, Inc. and
  Clipper Group A/S for purchase of newbuilding
  VLCCs
• Orchestrated the merger and recapitalization of
  US Airways/America West
• Exclusive investment banker to 750 million
  equity raise for Northwest Airlines

• Seaburys Transportation Focus
• Maritime Companies
• Passenger Airlines
• Cargo Airlines
• MROs
• Forwarders
• Logistics Providers
• Trucking Companies

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Seabury Maritime Finance Group
Founded in 2004 and headed by Randee Day, the
group provides investment banking, corporate
restructuring and management consulting services

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Capital Markets
MA Advisory
Business Strategy
Restructuring
Creditor and Investor Advisory

• Private placement of debt and equity
• Asset finance and leasing
• Bank credit facilities

• Public / private company MA
• Subsidiary divestitures
• Exclusive sales
• Buy side advisory
• Leveraged buyouts
• Recapitali-zations

• Strategic planning
• Business plan development
• Pre- and post-merger integration

• Liquidity management
• Debt / lease renegotiations
• Payment obligations
• DIP financing
• Interim management

• Asset sales
• Business plan feasibility
• Liquidation analysis
• Strategic assessment
• Valuation analyses
• Due diligence

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Industry and Capital Crisis?
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Capital Sources
Increase in newbuild orderbook has been fueled by
abundant access to equity capital and inexpensive
bank debt
US Equity Market
Historical Senior Bank Debt Market

• Vast majority of debt financing is provided by
  international bank lending market
• Senior debt generally secured by lien on vessels
• For the past few years, the cost of debt has been
  relatively inexpensive, with cost of senior
  secured debt of LIBOR 70-90 bps
• Spreads are expected to expand in 2009

Equity markets were almost non-existent at YE 2007
Source Capital IQ.
4
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Funding
US 635b in funding is required over the next
four years to finance existing orderbook

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213
191
128
127
81
77
72
Source Clarksons. 1. Assumed financing based on
25 equity and 75 debt.
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Current Situation Cost of Capital Rising
The current credit crisis is having serious
effects on the shipping industry

• Equity markets are essentially frozen and there
  is a significant backlog of follow-on offerings.
• Illiquidity among global banks is affecting
  owners ability to fund progress payments due to
  shipyards and orders are starting to be
  cancelled.
• Available capital is only being allocated to
  long-standing clients with strong balance sheets.
  However, because the funding costs of all banks
  have increased, each Company will be paying more
  for their debt.
• Advance rates are lower while fees/spreads are
  higher.
• Certain shipowners are being offered the chance
  to redeem their loans at significant discounts as
  banks endeavor to improve their liquidity and
  financial ratios.
• Charter defaults are starting to develop and will
  put additional pressure on owners liquidity.
• As the recession spreads and trade volumes
  decline, freight rates and asset values will
  continue to be depressed.

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Global Shipping Loan Volumes
Domestic loans have decreased over 70 YoY

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30.0
22.4
19.3
14.0
8.8
Source Industry publications
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Tanker YTD Relative Value
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Note 1. Prices as of October 14, 2008.
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Dry Bulk YTD Relative Value
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Note 1. Prices as of October 14, 2008.
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The Private Equity Alternative
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Private Equity
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US based private equity has historically not
played an active role in funding the maritime
industry

• A majority of shipping Companies are still
  private, family owned and tightly controlled
  only willing to sell at a premium.
• Because deal flow has not been significant, it is
  hard to get accurate comparables.
• Private shipping Companies do less forecasting
  (generally one year out) and their revenue
  expectations can be unrealistic due to market
  volatility, therefore, it is difficult to assess
  future multiples.
• Private equity typically has return hurdles and
  requires an exit or time horizon on repayment of
  capital.
• However, the volatility of ship Company earnings
  have made this difficult to achieve as the bulk
  of an owners return is linked to the capital
  gain from the resale of the asset.
• Even in cases when the shipowner has secured
  future cash flows via charter coverage, the owner
  is always looking to the residual value of the
  vessel as part of the return and yet, many PE
  investors are hesitant to structure that risk in
  their return analysis.

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Private Equity
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Large source of Capital

• The US private equity market exceeded 300b in
  the US market for 1H 2007 the last time the
  markets had ample liquidity.
• In the transportation sector, particularly
  aviation, private equity has been a large
  participant through the funding of equity and the
  purchase of secured/unsecured debt. Since 2001,
  it has been a significant player in the
  restructuring and mergers of several legacy
  airlines.

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Notes 1. Included financial investor. 2.
Included public equity at emergence.
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Case Study US Airways II
US Airways equity raise was also a unique
challenge raising substantial equity capital to
acquire a publicly traded company
Publicly pursued standalone plan for 250-350mm
Private Equity, while privately secured
preliminary merger agreement and quietly sought
equity to fund merger
Feb-Mar 05
Merger with AWA used to build new business
plan upon which equity was raised Increased
view of capital needs because of Southwest
competition at PHL and dramatic spike in oil
prices (Hurricane Katrina hit just weeks before
closing), Overcame Katrina, oil price shock
and built investor demand
375mm Private Equity raised (merger announced
5/17/05)
May 05
565mm Private Equity, potential Rights Offering
considered and discarded
June 05
Stock Price of LCC 12 Months Pre- and 10 Months
Post Emergence 1
September 27, 2005 emergence from Ch. 11 and
acquisition of AWA
May 17, 2005 merger announcement
Final Structure 678mm Private Equity 188mm
Public Equity 144mm Public Convertible Bond
Sept 05
Note 1. LCC stock pre-emergence represents
equivalent AWA stock price.
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Private Equity
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Importance of Private Equity now

• Earlier this year, with the contraction of the
  public equity markets, tightening of both the
  cost and availability of debt, Seabury began a
  dialogue with several private equity funds to
  secure new sources of capital to fund growth and
  capital expenditures.
• Today, Seabury has access to approximately
  US300m of leverageable private equity which is
  targeted for the marine transportation sector in
  the following areas shipping, marine services,
  logistics, offshore drilling and offshore support
  services.
• Use of funds include growth capital,
  consolidation or balance sheet restructuring.
• Targeted equity investments are in the range of
  US100m to 250m per deal in companies with
  enterprise values ranging from 200m to 1.5b and
  with EBITDAs in excess of 25m.
• We prefer to invest in qualified Companies that
  have the following attributes
• A proven management team.
• High asset quality.
• Providing continuous service that is essential to
  the growth of world trade.
• Revenues that are relatively stable in a shifting
  geopolitical environment.
• Barrier to entry mandated (Jones Act) or a unique
  customer base.
• Operating in a sector that has consolidation
  opportunities.
• Nature of the business appeals to a broad sector
  of investors.

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Annex
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Other Sources