1

Ships, Banks and the Credit Crunch

Intertanko Intercargo25th June 2008

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Contents

1. DVB – A brief introduction

2. The Credit Crunch – a digression…

3. The Ship Finance Market

4. Vessel Values - Optimism and Experience

5. Terms and Conditions in a lender’s market

6. The strange business of LIBOR

7. Conclusions

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DVB Bank

1923

1988

1995

1997

1998

1999 / 2000

2002

Foundation of Deutsche Verkehrs-Kredit Bank (DVKB) in Berlin

DVKB shares (24.9%) introduced to official trading on the FSE and BSE; Deutsche Bundesbahn retains 75.1%DG BANK takes a majority share of 50.1% in Deutsche Verkehrs-Bank

Strategy of the bank focuses on the transportation industry

Internationalisation through the acquisition of the Global Aviation and Shipping Finance division of the Long-Term Credit Bank of Japan

Change of corporate name: DVB Bank AG

Acquisition and integration of Nedship Bank N.V., closing of all German branches and establishment of four Transport Finance divisions

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From regional to global coverage

BergenBergenHamburgHamburgLondonLondon

RotterdamRotterdamFrankfurtFrankfurtPiraeusPiraeus

New YorkNew York

CuraCuraççaoao

TokyoTokyoHongHong KongKongSingaporeSingapore

AmericaAmerica

EuropeEuropeAsia/PacificAsia/Pacific

DVB Bank DVB Bank -- GroupGroupsincesince 20032003

ErfurtMünchenStuttgartKarlsruheBasel (Rep. office)

FrankfurtHamburg HannoverMünster Köln

Berlin RostockMagdeburg Leipzig Dresden

Deutsche Deutsche VerkehrsBankVerkehrsBank AGAG

19971997

Essen KasselMainz NürnbergSaarbrücken

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We are the unique asset expert in Transport Finance

DVB at a glance | 1. Key facts

Asset & Market Research

Structured Asset Financing

Equity Sourcing and Investments

Risk Distribution

Advisory Services

Loan Participations

Shipping Aviation Land Transport

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Shipping division – 10 global sectors

DVB at a glance | 1. Key facts

Three existing and seven new sectors

Container Box Group11

Cruise & Ferry Group22

Crude Oil & LNG Tanker Group33

Chemical & LPG Tanker Group44

Container Vessel Group55

Dry Bulk Group66

Floating Production Group77

Offshore Drilling Group88

Offshore Support Group99

Product Tanker Group1010

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Mission Statement

We are the leading specialist We are the leading specialist

in international transport financein international transport finance

Page 8

The Credit Crunch

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Page 9

What is Subprime?

The US Mortgage Market is worth USD10 Trilllion

Of this USD7.2Trillion has been issued in the capital markets as Mortgage Backed Securities.

12% of the Mortgage Market is classified as Subprime. A further 10% is Alt-A. That’s about USD2.2 Trillion in total. Most of this has been “Securitised”, ie: Pooled, Tranched and sold to the capital markets

Subprime borrowers are typically low credit scoring with high gearing and low incomes.

Market forces have made this market more and more aggressive in recent years:

Interest Only – 37% of new loans

No deposit – 38%

No proof of Income – 43%

ARM - Low introductory interest rate, “exploding” after 2 years – c. 80%

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Who would invest in that?

$40mn4%Equity$1000mn100%Total

$10mn1%BB$10mn1%BBB-$10mn1%BBB$20mn2%BBB+$60mn6%A$50mn5%AA

$800mn80%AAA

$%Mortgage Backed Security Tranches

Originator of Mortgages

Pool of Subprime Mortgages- $1bn, 5000 loans

BBB paper can be still further pooled and re rated up to AAA

Rating Agencies made most of this paper, or up to 95% of the value of the underlying property valuation appear very safe indeed, and it attracted a wide investor base.

“The empires of the future are the empires of the mind”

Winston Churchill.

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Housing decline – An accident waiting to happen?

Event, Venue, Date 2008

Source: Irrational Exuberance (2nd Edition, Robert Shiller)

US Real House Price Index since 1890

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Housing decline

Event, Venue, Date 2008

US House Price Movements since 1988

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Subprime Lending - …

Event, Venue, Date 2008

Source: Bloomberg - May 2008

Subprime delinquency as % of total subprime loans

0123456789

10111213141516171819

Mar-98

Sep-98

Mar-99

Sep-99

Mar-00

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

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0

20

40

60

80

100

120

7/19

/06

8/2/

068/

16/0

68/

30/0

69/

13/0

69/

27/0

610

/11/

0610

/25/

0611

/8/0

611

/22/

0612

/6/0

612

/20/

061/

3/07

1/17

/07

1/31

/07

2/14

/07

2/28

/07

3/14

/07

3/28

/07

4/11

/07

4/25

/07

5/9/

075/

23/0

76/

6/07

6/20

/07

7/4/

077/

18/0

78/

1/07

8/15

/07

8/29

/07

9/12

/07

9/26

/07

10/1

0/07

10/2

4/07

ABX 2006-2 AAA ABX 2006-2 AA ABX 2006-2 A ABX 2006-2 BBB ABX 2006-2 BBB-

Financial Turmoil – The Decline of Securitised Products

Event, Venue, Date 2008

Source: ABX, DVB Analysis – May 2008

ABX Index: Implied Value of Asset-backed Bonds Issued July - 06

Its got worse:AAA 72.5cAA 22.48cA 9.47cBBB 5.53cBBB- 5.40c

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Financial Turmoil – Halfway through?

Event, Venue, Date 2008

Source: Bloomberg – May 2008

Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital Loss Capital

Americas 152.9 125.4 0 49 58.7 47.9 68.8 27.7 24.8 0.8 0.7 0Europe 147.6 105 0 54.7 52 23.4 77.6 16.5 15.2 5.4 2.8 5

Asia 18.2 2.3 0 0 1 2.3 12 0 5.2 0 0 0Worldwide 318.8 232.6 0 103.7 111.7 73.6 158.4 44.2 45.2 6.2 3.5 5

3Q07 PriorTotal 2Q 08 1Q08 4Q07UBS stated in a report earlier this year that US$ 600bn were to be expected in global writedowns.

The worst projection is USD1.3 Trillion…

Writedowns vs. Capital Raisings Q307 – 2Q08

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Financial Turmoil – Banks Writedowns vs. Credit Raisings

Event, Venue, Date 2008

Source: Bloomberg – May 2008

Writedowns vs. Capital Raisings Q307 – 2Q08*Rank Bank Loss Capital Raise Difference Market Cap

1 Citigroup 40.9 41.7 0.8 140.422 UBS 38 26.7 (11.3) 70.023 Merrill Lynch 31.7 16.1 (15.6) 50.604 Bank of America 14.8 17 2.2 174.735 Royal Bank of Scotland 14.8 23.8 9.0 71.406 Morgan Stanley 12.6 5.6 (7.0) 54.317 HSBC 12.5 2 (10.5) 205.518 JPMorgan Chase 9.8 6 (3.8) 163.929 Credit Suisse 9.5 1.5 (8.0) 63.24

10 IKB Deutsche 8.9 13.1 4.2 0.6611 Washington Mutual 8.3 10 1.7 10.1512 Deutsche Bank 7.6 3.1 (4.5) 63.9713 Wachovia 7.3 10.5 3.2 64.1514 Credit Agricole 6.4 0 (6.4) 56.6815 HBOS Plc 6 7.9 1.9 37.54…16 Mizuho Financial Group 5.6 0 (5.6) 60.0019 Societe Generale 3.8 8.6 4.8 68.2929 Lehman Brothers 3.3 6 2.7 25.6430 Barclays 3.2 9.7 6.5 61.2031 Bear Stearns 3.2 0 (3.2) 2.6132 West LB 3.2 7.7 4.5 n/a35 Goldman Sachs 3 0 (3.0) 84.5038 ABN Amro 2.4 0 (2.4) 111.9739 Fortis 2.3 0 (2.3) 58.5940 HSH Nordbank 2.3 0 (2.3) n/a43 Natixis 1.9 0.8 (1.1) 21.3144 BNP Paribas 1.6 0 (1.6) 98.6645 Unicredit 1.5 0 (1.5) 101.2446 DZ Bank 1.5 0 (1.5) n/a

Total: 267.9 217.8 (9.0)

*Table shows the 15 biggest losers and selected others. Major Shipping lenders are highlighted in blue

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Financial Turmoil – Writedowns vs. Credit Raisings

Event, Venue, Date 2008

Source: Bloomberg – May 2008

Writedowns vs. Capital Raisings Q307 – 2Q08US$bn %

0

5

10

15

20

25

30

35

40

45

50

Citigrou

pUBS

Merrill L

ynch

HSBC

IKB Deu

tsche

RBS

Bank o

f Ameri

ca

Morgan

Stanley

JPMorg

an C

hase

Credit S

uisse

Washin

gton M

utual

Credit A

grico

le

Lehm

an Brot

hers

Deutsc

he Ban

k

HBOS PlcFort

is

Lehm

an Brot

hers

Barclay

s

Societe

Genera

le

Mizuho

West L

B

Goldman

Sachs

Natixis

Bear S

tearns

HSH Nord

bank

BNP Pariba

s

ABN Amro

DZ Bank

Unicred

it

Writedowns/Losses Capital Raisings

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Pricing - US Commercial Mortgage Backed Securities

…when prices fall, yields rise…

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Bank Pricing (Credit Default Swaps)

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Airline Pricing

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Shipping Finance

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Financial Turmoil – Impact on Shipping Banks

Event, Venue, Date 2008

Source: Bloomberg – May 2008

Writedowns vs. Capital Raisings Q307 – 2Q08*

0

5

10

15

20

25

RBS

HSBC

JPM

orga

n Cha

seDeu

tsche

Ban

kCre

dit A

grico

le

HBOS

Plc

Mizuho

Socie

te Gen

erale

Barc

lays

Wes

t LB

ABN A

mro

Fortis

HSH N

ordb

ank

Natixi

sBN

P Pa

ribas

Writedowns/Losses Capital RaisingsUS$bn

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Bank Portfolios

0

5

10

15

20

25

30

35

40

45

HS

H N

ordb

ank

Roy

al B

ank

of S

cotla

nd

Nor

dea

KF

W IP

EX

- B

ank

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tsch

e S

chiff

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k

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Nor

Cay

lon

Lloy

ds T

SB

Miz

uho

Ban

k of

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tland

DV

B

Com

mer

zban

k

Dan

ish

Shi

p F

inan

ce

SM

BC

For

tis

Bre

mer

Lan

desb

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HV

B

AB

N A

mro

Dan

ske

Ban

k

BN

P P

arib

as

9 of the top 20 shipping lenders directly impacted by sub prime.

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The Implications in the Syndicated Debt Market

Syndicated Shipping Loans

3740 39

43

56 5760

71

5356

7783 82

89

74

91

57

34

0

5000

10000

15000

20000

25000

30000

2004 Q

1

2004 Q2

2004 Q

3

2004 Q4

2005 Q1

2005 Q2

2005 Q3

2005 Q4

2006 Q1

2006 Q2

2006 Q3

2006 Q

4

2007 Q1

2007 Q

2

2007 Q

3

2007 Q4

2008 Q

1

2008 Q

2

USD

mln

0

10

20

30

40

50

60

70

80

90

100

Volumes $mlnNumber

Syndicated Shipping Loans: Total Volume and Number of Deals Q1 2004:Q2 2008

Sudden drop off in syndication business –banks’ liquidity squeeze, pricing confusion.

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0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

1980

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2002

2003

2004

2005

2006

2007

Mar

gin

in B

P

Ship FinancePrice Development – Reported Deals (to May 2008)

Source Dealogic

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Borrower’s Objectives, Lender’s Objectives

Borrower:

High Leverage

Back ended Repayment (Profile)

Long Term

Low Price

Freedom to pay dividends

Free movement of cash

Limited Recourse (walk away option)

Payment Default only

High Certainty of drawdown

Underwritten or “Bought” deal

Lender:

Low Leverage

Rapid repayment

Short Term

High Price/Market Flex

Dividend restrictions

Ring fenced cash

Full Recourse

Financial and VMC Covenant Triggers

Conditionality on drawdown (CPs)

Book Building or Club Deal

Flash Points are related to RoE, Cash and Covenant Controls, and Recourse

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Libor and the Cost of DebtLibor and the Cost of Debt

6 Month USD Libor

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Cheap in historical terms, but margins are up by 40-60 bp

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The strange story of LIBOR

•British Banker’s Association sets interbank interest rates for 10 currencies.

•Quotes are provided by 16 banks based on their own cost of funds and the average of 8 median quotes is used.

•The question is – are they telling the truth?

•The suspicion is that the panel is keeping rates artificially low:• to suggest they are less desperate for liquidity than they are• to reduce their borrowing costs on existing LIBOR based deals

•BBA is investigated, but many banks are still unsatisfied by its remedies

•In the meantime non bank borrowers are getting a great deal on short term money

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Optimism or Experience? …and where will the money come from?

Page 30

Shipping Finance’s biggest challenge: Optimism or Experience?

VLCC Resale ProjectCost: USD180mn

Debt Cost: 4.50% + 1.25% = 5.75%

Opex USD10,000

Employment: Spot or 1 Yr TC

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Interactive

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

USD

per

day

VLCC I year TC Average

1 year VLCC Time charter rates (Clarksons). Range of possible TC

Rate Projections

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InteractiveVLCC 5 year old Value

0

20

40

60

80

100

120

140

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

USD

Mn

VLCC 5 year old Value

Range of 5 yrLoan Oustandings

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Interactive – Project Resale

VLCC Resale Project

Purchase Price 180,000,000 IRR (Base Case) 14%Debt 126,000,000 % Finance 70%

Opex 10,000$ Swap 4.50%Margin 1.25% Day Rates (USD)Interest Cost 5.75% Historic Average 1 yr TC 30,233$

Current 1 yr TC Rate 80,000$ Repayment Profile (years) 16.15 Spot YTD 102,325$ Book Value Year 5 144,000,000 Spot Rate 57,374$ Balloon o/s Year 5 78,000,000

Adjusted Repayments

Breakeven Base Case Low Case

Repayment as %

Yr 1 14,000,000 68,205 80,000 45,000 11.111%Yr 2 12,000,000 60,771 65,000 40,000 9.524%Yr 3 10,000,000 53,657 50,000 30,233 7.937%Yr 4-10 6,000,000 41,385 45,000 30,233 4.762%

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The perennial question - where will the money come from?

•USD600bn newbuilding book, of this perhaps USD200bn debt finance still to be arranged

•Some banks still “slow steaming” or reserving capital for top clients, but even they are paying higher margins

•Top clients are generally those flush with cash

•But what about their s&p buyers?

• IPO candidates, new entrants, financial entities

•Will they get the leverage and terms they need to make buying a USD180mn VLCC resale viable?

•Could that ultimately reduce demand and vessel prices?

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Page 35

Conclusions

1. All banks are in some way affected by the credit crunch and have significantly increased funding costs

2. All borrowers are experiencing this through increased margins, more conservative terms etc

3. Shipping needs to compete with other industries for capital, so pricing will always be comparable

4. The loan syndication market has been difficult, forcing club andbook build deals

5. In general it looks like bankers are being more conservative But…

6. At the right price the newbuilding book will find the USD200bn finance it needs, but perhaps not the leverage they are hoping for

7. Some contracts will be cancelled

8. This will pass, but few are gambling on that happening soon…

Thank you for your attention

Peter IllingworthPeter Illingworthpeter.illingworth@dvbbank.competer.illingworth@dvbbank.com

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Basel 2

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They said it would never happen…The new BIS Rules - Basel II

New Basel Capital Accord (Basel II)

Pilla

r 1M

inim

um C

apita

l Req

uire

men

ts

Pilla

r 2

Sup

ervi

sory

Rev

iew

Pro

cess

Pilla

r 3M

arke

t Dis

cipl

ine

Credit Risk is part of this:

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Page 39

Basel II – Advanced approachThree step calculation of Expected Loss and Capital Requirement

LGD

Likely loss after realising

security

Calculated using Monte Carlo

simulation

EAD

Principal andInterest

over next 12 months

Calculation favours amortising facilities

PD

Financial Ratios:SolvencyLiquidity

ProfitabilityScale

Rating Class determines default rate

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LGD: Future Market Value Method

95%Monte Carlo Scenarios

Lower boundary of the 95 % confidence interval

Upper boundary of the 95 % confidence interval

Expected value

Time horizon of 1 year

Distribution of the results from the 10.000 scenarios

drift

2 out of approx. 10.000 simulation scenarios (simulated paths)

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How will Basel 2 Influence Pricing?

Today – fixed 8% Capital (Simplified)

1% Margin = 12.5% RoE

Basel 2 – changed capital could dramatically change pricing:

4% Capital 50 bp Margin = 12.5% RoE

12% Capital 1.5% margin = 12.5% RoE

Borrowers may be able to arbitrage the differences between banks…