G L O B A L S H I P P I N G

Risk Management

Dean Domazet (BOHN, DOMAZET & ASSOCIATES GMBH)

Rio de Janeiro, October, 2008

AGENDA

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UniCredit Group at a glance HypoVereinsbank Global Shipping Expertise HypoVereinsbank Shipyard Consulting Development of the Maritime Sector Process of Shipbuilding Risk Management Reactive Risk Management - Preventive Risk Management Method Risk Management Results Risk Management - Examples

UniCredit Group at a glance

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over 40 million customers in 23 countries 1) over 10,000 branches over 180,000 employees a leader in the euro zone

1)

As per: August 2008

HVB Global Shipping Expertise

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Know-how

International Exposure

HVB has over 30 years experience and in-depth knowledge of the maritme industry. One of the leading TOP 15 international shipping banks. Providing tailor-made finance solutions to meet specific client requirements together with a full range of banking services. International expertise and local presence in the core shipping markets (Hamburg, Oslo, Piraeus, Singapore, Dubai). Long relationship to leading international shipowners. Dedicated team of over 80 professionals globally. Advisor to Governments, Shipping companies and Investors. Diversified loan portfolio of approx. EUR 8bn (9,5bn incl. Italy) in 2007
Shipping

Oslo Hamburg Pirus Dubai Singapur

Offshore

Maritime Logistics

Shipyard Consulting Research Syndication

HVB Global Shipping Expertise

HVB Global Shipping (HVB) provides a full range of shipping finance services and offers a comprehensive range of advisory services within the shipping and shipbuilding industry Products Structuring/arranging project finance for: Vessel construction financing Senior/junior/mezzanine loans Equity Port facilities/Infrastructure/Offshore Acquisition and Leverage Finance Lease Structuring Container-Box-Financing Shipyard Consulting

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Selected recent transactions

Odfjell Invest I Ltd. Odfjell Invest II Ltd. Dockwise Shipping BV CMA CGM ZIM Integrated Shipping Services Ltd. Croatian Government Golden Energy Marine Corp.

USD 850,000,000 Senior Secured Credit Facility Mandated Lead Arranger

USD 745,000,000 Senior and Subordinated Loans Mandated Lead Arranger & Bookrunner

USD 480,000,000 Loan Facility Co-Arranger

USD 80,000,000 Senior Term Loan Facility Mandated Lead Arranger

USD 188,800,000 Term Loan Facility Arranager, Agent & Swap Provider

Restructuring of the Croatian Shipbuilding Industry Mandated Advisor

Shipyard Consulting History/ Approach

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HVB Global Shipping is for many years involved in consulting their own customers in respect of shipyards. Main target is how to obtain best results in the shipbuilding process starting from actual market needs, initial design requirements to assessment of the the chosen shipyard where to be built and last but not least monitoring of the newbuilding phase to assure quality, timely delivery and no cost overruns. HVB has grown over time as a strong problem solver or even further as preventive monitoring tool by following the new building projects from early building stages. In 2000, HVB Global Shipping has decided to form their own team and to form a cooperation with Bohn Domazet & Associates - a maritime consulting firm with a proven track record in the industry. This combination of skills (banking, technical, commercial, as well as managerial) is giving HVB Global Shipping unique standing in the shipping market all over the world. HVB is the only bank which offers such kind of services.

Shipyard Consulting History/ Approach

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HVB clients range from ship owners to shipyards, as well as to other banks and to governments. These governments are EU member States as well as Central European Countries negotiating their EU membership by restructuring its State Shipbuilding Industry after and in conformity with EU rules. HVB Global Shipping long lasting cooperation with Bohn, Domazet & Associates GmbH has proven to be of utmost flexibility and of competitive advantage. No other Bank has such Shipbuilding Industry Know-How integrated in its structure able to support large spectrum of clients.

Shipyard Consulting - a unique service

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Evaluation of technological, organisational and economical standard => risk/project evaluation Monitoring of shipbuilding process => timely delivery, minimise risk Coordination of entire project management => make investments work the Government of Croatia has mandated HVB Global Shipping for the "Restructuring of the Croatian Shipbuilding Inidustry"

Developments
What can we expect?
If we are planning to participate in the favorable development of the maritime transport sector, we have to avoid all risks that may challenge this development. Demand regarding maritime transport capacities is further increasing Shipbuilding industry is working to full capacity New shipyards are entering the market and offer good prices The chances to receive vessels of good quality at the negotiated prices and according to agreed terms are decreasing

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Common Process of Shipbuilding Projects

Owner has charter Risks arising from the production process are commonly detected only when shipyard asks for a mark-up, the delivery date is postponed and the operability of the new construction is not guaranteed. Owner needs vessel Shipyard makes offer Letter of credit is available Financing is approved Contract with shipyard is signed The vessel is completed too late, is of poor quality and the costs are higher then agreed upon The order is cancelled with loss accruing, owner has no vessel

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Cycle (Reactive risk management)

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Defaults are detected only at the end of production process The defects call for complicated checking and review processes, which cost a lot of money and defects may not be corrected

New shipyard

Calculation error

Capacity Bottleneck

Liquidity bottleneck

Error level

Selection of shipyard

Offer

Construction process

Operation of vessel

Process level

Quality is OK?

Costs exceeded?

Suppliers reimbursed?

Touching up

Date is unrealistic

Effect level

Price increase

Date is postponed

Cancellation Reaction level

Risk Management
Reactive Risk Management
Reactive risik management always results in high losses for owner and investor. Delivery date not met Risk was acknowledged too late Looking for causes and responsible persons Remedy measures are no longer possible Owner suffers significant losses with charter Cancellation of building contract is considered Damages cannot be avoided

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Simplified Cycles (Preventive Risk Management)

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Preventive Risk management allows simplified cycles and reduces the probability of risks Second step is initiated only if risk probability is low prior to starting first process step.

Selection of Shipyard

Offer

Construction process

Operation of vessel

Shipyard capacity?

Offer realistic?

Processes, Costs, dates?

Outlook Charter?

RPIA shipyard

RPIA offer

RPIA construction

RPIA Charter

BOHN, DOMAZET & ASSOCIATES GMBH

Risk Management
Preventive Risk Management
Need for new vessel construction, offers, shipyard selection, credit, contract, construction, delivery & operation

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Preventive risk management requires less efforts and damages for owner and investor can be avoided

Systematic search for possible risks before each process step Determine and implement measures to avoid risks Risks will not occur Contract is fulfilled

A few steps hit the target

Preventive Risk Management

Elements
Preventive risk management regarding financing of vessels and vessel construction consists of four elements The core of risk management is the Risk Probability and Impact Analysis (RPIA)

BDA- Risk Mangement System

Quality Leader Client Image

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Shipbuilding capacity Preventive measures Experience

Risk free shipyard

RPIA Shipyard
Management evaluation Equipment evaluation Productivity assessment Quality assessment

Security for Bank Delivery statement for shipowner Work load for shipyard

Risk Management

Risk free project planning

Risk free Refinancing Risk free construction process

RPIA Offer
Calculation assessment Supplier assessment Production flow Capacity assessment Scheduling assessment

RPIA Charter
Freight rate development Charter outlook Charter contracts Shipowner credit

RPIA Construction
Monitoring of dates Budget control Resource allocation Delivery control

Risk Management
Risk Scenarios (Phase 1: Shipyard Assessment)
Selection of shipyard

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Risk Indications Shipyards equity rate too low in comparison with turnover

Impact Small cash reserve

Control Focus on letter of credit examination

Shipyard Capacity?

RPIA Shipyard
Production plant not yet in operation Productions starts too late Determination of delivery date range

Staff with low level of training cannot fulfill quality standards

Reclamations and reworks, potential limited operability of vessel

Enhancing capacity of site office

Order book is overwhelming production capacity

Scheduled delivery dates cannot be met

Setting new priorities together with shipyard

Risk Management
Risk Scenarios (Phase 3: Construction Process)
Construction process

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Risk Indications Information about technical parts is not in the computer system

Impact Day to day purchasing, deliveries are arriving late.

Control Important purchasing positions are taken over by owner

Processes, costs, dates?

Fluctuating prices for materials and components

Costs are higher then calculated in initial offer and exceed liquidity ceiling

Acknowledgment by agreeing on new price or cancellation

RPIA construction

Productivity is lower as rated in calculation

Postponement of delivery dates later then cancellation date

Cancellation of vessel

Quality level lower then assumed

Operability of vessel is jeopardized

Price reduction or cancellation

Risk Management Method

Determining Risk Factors Listing of all possible risks jeopardizing the fulfillment of a product function or a project criterion
Creating an element structure Which element could fail in what way? Which risks can occur regarding organization, manufacturing, transportation & assembly?

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BD&A has developed project specific templates for creating a structure of elements

Estimating all possible impacts in the event that a risk will occur
What impact will this defect have? What is the customers opinion about this defect?

Finding the reasons that lead to a possible risk

Example: Capacity bottle neck situation Material defect/material handling error Calculation error

Risk Management Method

Determining Probability of Risk
Assessment criteria for occurrence probability A Possible error rate Assess-ment

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High It is very likely that a high amount of errors will be made in either construction or assembly

1... 1/10

Medium The methods applied in construction or assembly have caused difficulties in the past

<1/10.... 1/100

Low The methods applied in construction or assembly have caused some but not many difficulties in the past

<1/100.... 1/2.000

Very low The methods applied in construction or assembly did cause relatively low amount of errors

<1/2000... 1/100.000

Unlikely It is unlikely that an error will be made

<1/100.000

Risk Management Method

Assessment criteria for extent of consequences of error B Assessment

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Errors with extreme consequences have a low level of probability of occurrence and therefore the risk assessment is low. The error with extreme consequences is assessed as value 10.

Error with extreme consequences: leads to jeopardizing the safety of humans and/or a long term product failure and/or non-compliance of legal regulations

10

Significant error: leads to a mid term product failure, causes considerable efforts for customer and irritation of customer

Medium significant error: leads to a short term product failure, may be remedied easily, but will make customer unhappy in the long run

Insignificant error: there is no product failure and remedy is possible after conducting a routine check

Hardly noticeable error: it is very unlikely that error will have noticeable consequences on function and safety of product. Customer will most likely not detect error.

Risk Management Method

Assessment criteria of probability of risk detection E (prior to
product operation by customer )

Detection probability

Assessment

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The harder it is to detect a risk, the more dangerous the risk is for the project and therefore, it is assessed with the highest risk value

Unlikely Error detection involves significant checks and destruction of product, respectively

<90%

Very low Error detection requires special checking efforts made by manufacturer

90%.... 98%

Low Error detection possible by conducting routine and structured checks

98%.... 99,5%

High Error detection easy during normal processing of product (e.g. shrinkage hole)

99,5%.... 99,9

Very high It is unlikely that error is not detected prior to handing product over to customer

>99,9%

Risk Management Method

Owner/ Shipyard
Nr. Element

Analysis Sheet (RPIA type, object, date, revision status)

Function Risks Effect Cause
Avoidance

Detection

PO

PD

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RPV

Measure

Minimum content of RPIA Form I = Importance of error (1....10) PO = Probability of occurrence (1....10) PD = Probability of detection (1....10) RPV = Risk priority value (B*A*E) (1...1000)

Risk Management (Result)

Until August 2008, BD&A has conducted risk probability impact analyses regarding shipbuilding projects with owners in shipyards worldwide

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Preventive risk management has stood the test multiple times with financing of vessels

The analyses result in the following forecasts: 62 % of the vessels are delivered in good quality and on time 27 % of the vessels are completed up to one year after delivery date 11% of the vessels should be cancelled, since their operability is unlikely BD&As forecasts had an accuracy of 87 %

Risk Management (Examples)

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These perfectly rust proofed and equipped blocks with high fitting accuracy are proof that the shipyard is capable. It is OK to place an order with this shipyard.

Risk Management (Examples)

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This pre-assembly site is chaotic and leads to the conclusion that the management is not effective. In this case we can assume that a time sensitive scheduling is very unlikely.

Risk Management (Example)

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If the engine room of a vessel looks like this after a test run, we can assume a high probability of risks with this shipyard. The operability of this new construction is definitely jeopardized.

Risk Management (Example)

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One has confidence in this shipyard at first sight.