2nd November 2016

Current Ship Finance in Korea - Challenges and Opportunities

Maritime Finance Department Presented by Brandon Kim

Contents

Part 1 Ship Finance Market in Korea

Part 2 KDB Activities in the Market

Part 3 Challenges & Opportunities

Part 1 Ship Finance Market in Korea

4

Korea Shipping Companies & Fleet Size

Source : Korea Shipowners’ Association

(No.) (GT, ‘000)

Investment by Korean Shipping Companies

Source : Clarkson

(U$bn) (U$bn)

1.9 1.4

■ Korea shipping industry is at a standstill - World’s 6th largest maritime industry (’16.1)

- Fleet size was rapidly increased in 2005-2013

■ Korean shipping finance market decreased

- ship orders(U$bn) : 9.7(’07) → 1.4(’14), △85.6%

- average annual newbuilding order was U$8.5bn in 2006-2008, but U$3.5bn in 2009-2015

- domestic shipping companies faced difficulties due to the global recession

Source : Korea Shipowners’ Association

Source : Korea Shipowners’ Association

Global Fleet Share

Korean Fleet

Ranking 1 2 3 4 5 6

Country Greece Japan China Germany Singapore Korea

Share 19.35% 15.97% 10.91% 8.45% 5.82% 5.55%

8.0 9.7

7.7

1.4 4.6

3.0 1.9

5.0

1.4 3.9

149

190

130

20

108

69

40

127

40 50

0

50

100

150

200

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Amount # of Vessel

11,857 11,174 13,717

18,038 23,737

32,163

39,747 43,269

- 20 40 60 80 100 120 140 160 180 200

- 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

2000 2003 2005 2007 2009 2011 2013 2015

GT # of companies

Year '05 '07 '09 '11 '13 '15 CAGR

Fleet(mGT) 13.7 18 23.7 32.1 39.7 43.3 21.1%

Korean Shipping Industry at Glance

■ Fall of Large Container Shipping Lines - Hanjin filed for bankruptcy - HMM on restructuring ■ Stable Growths by Mid-sized Sectors - Type 1 Group : Sinokor, Polaris under LT contract with global major sponsor (BP, Shell) - Type 2 Group : H-Line, Hyundai LNG under controls of PEFs focusing on stable LT contract - Type 3 Group : Pan Ocean, KLC with strong financial back-up from parent companies ■ Big Depressions for Small Sectors - financial deteriorations due to operating slumps - bankruptcy of operators (Chang Myung, Daebo Int’ ) - reduction in bank loans, LTV shortages ■ ‘Polarization Syndrome’ - small number of companies with capabilities can

invest in the low market - large number of small companies are struggling

Korean Shipping Industry at Glance

5

02,0004,0006,0008,000

Hanjin HMM SK PanOcean

Sinokor Polaris KLC KSS

2013 2014 2015

-600

-400

-200

0

200

400

Hanjin HMM SK PanOcean

Sinokor Polaris KLC KSS

2013 2014 2015

Company Name Credit Rating(‘15) Credit Rating(‘16) Hanjin Shipping BB+(KIS, KR) D(KIS, KR)

Hyundai Merchant B+(KIS, KR) D(KIS, KR) SK Shipping A-(KIS, KR) A-(KIS, KR)

H-Linie BBB+(KIS, KR) BBB+(KIS, KR) Sinokor Maritime BBB-(KIS, KR) - Polaris Shipping BBB+(KIS, KR) BBB+(KIS, KR)

Korea Line BBB(KR) BBB(KR)

Comparisons of Fleet Sizes

Credit Ratings of Shipping Companies

Comparisons of Operating Profits

■ New investment decreased or disappeared - Lack of capabilities blocked new investment ∙ Low profitability eroded Korean shipowners’ credit

- Market yet to be settled down ∙ Overcapacity and uncertainty issues remain

■ Investment trends in Korean Shipping Sector

- Who are the investors? ∙ Mid-sized companies with sound credit

∙ Major liners stayed back due to financial burdens

∙ Small companies have no capability at all (shipowners with capital less than U$2m take 70%)

- What do they invest for? ∙ New vessels to be employed by long-term contracts

∙ Mega investment disappeared since KOGAS project

- How do they borrow the funds? ∙ only the survivors could enjoy excessive liquidity

∙ severe competitions by global lenders

6

Source : Alphaliner (27 Oct 2016)

(TEU, ‘000) Major Liner Companies’ Fleet

New Vessel Orders of Major Korean Shipping Companies

Source : Clarkson

0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

'07 '08 '09 '10 '11 '12 '13 '14 '15. Q1

Total PCC PCC(%)

(CGT ‘000) (PCC, %)

413

70 139

Korean Shipping Industry at Glance

3,198 2,792

2,139

457 174

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Maersk(1) MSC(2) CMA-CGM(3) HMM(13) Hanjin(18)

2015-12 2016-08 2016-10

■ Asian banks’ importance growing

- Europe : 373(’10) →276(’14), △26%

- Asia : 66(’10) →105(’15), 59%

- Related to high financing power and Asian shipyards’ key position

- Asian state-run banks are active in market due to government policy to boost shipping/shipbuilding

■ Diversification of financial sources

- Bank loan shrank : 82%(’08) →60%(’13)

- Global banking condition remains unsupportive due to Basel III and liquidity/capital constraints

- Increase reliance on other form of finance such as Corporate bond, IPO, Private Equity, Public Shipping Fund

Source : Dealogic

Top 40 Ship Finance Banks’ Portfolio

373 360

317 292 276

66 86 93 98 105

449 454 422

400 391

0

100

200

300

400

500

600

'10 '11 '12 '13 '14

Europe Asia World

Source : Petrofin Research * Asia : Far east and Australia

(U$bn)

Corporate Bond

Convertible Bond

Bank Loan

IPO

Follow-on

Private Placement

Equity (Other)

Leasing

Bank Loan 82%

2008

17%

1% 2%

6%

7% 3% 4%

Bank Loan 60%

2013

Value of Shipping Deals by Transaction Type (U$Mil)

7

Current Shipping Finance Activities

■ Bank loans as primary sources - Domestic commercial banks disappeared ∙ only 0.2% of banks’ total exposures (as of Dec. 2014)

∙ reducing current portfolios in shipping/shipbuilding

- Market led by government banks & ECAs ∙ KDB, KEXIM and K-Sure are key players

∙ ECAs have focused on non-Korean shipowners

∙ facing limits (e.g. exposure to Main Debtor Groups)

- Selective participation by global shipping banks ∙ Foreign banks selectively participated in deals with

good quality credit clients (KOGAS, Glovis, Eukor)

■ Shipping funds as complementary sources - Shipping funds led by government banks ∙ KDB, KEXIM, and KAMCO launched fund programs

- Korea Maritime Guarantee Insurance Co. (KMGIC)

∙ enabled broad market participation by institutions

∙ stimulated junior loan markets under recession

8

Trends in Korean Shipping Finance Market

Bank Shipping Finance (’14)

Source : KDB Survey

Shipping Finance Size of Government Banks and Commercial Banks

Source : Ministry of Ocean and Fisheries

1,139

396

1,851 2,191

2,531 2,130

3,300

2,380

3,710 3,712

2,161

617

1,126 822

1,639

639 633 369

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Government Bank Commercial Bank

(KRWbn)

1,844

25 43 130 24 40 51

24

1

5

17

3 2

10

-

5

10

15

20

25

30

- 200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

KDB KEB KB Woori Suhyup NH Shinhan

Commitment # of transactions

Part 2 KDB Activities in the Market

Market Leader in Korea

Lead Arranger

Chapter 1. KDB Let’s Together Shipping Fund

Chapter 2. KDB Ocean Value-up Fund

10

K D B

M A R K E T

Market Leader in Korea

Government-planned shipbuilding program (by KDB)

Deferred payment export program (by KEXIM)

Government-Planned Shipbuilding

(‘76)

Support given to shipping companies ordering at

Korean shipyards

~ 1990

Introduction of Euro-dollar by commercial banks

LNG shipping finance began by KOGAS

Launch of Shipping Finance Team

(‘90)

First in Korea to start LNG shipping finance

1990s

Recession of shipping finance due to foreign exchange crisis in Asian countries

Management of Shipping Finance Risk

Selective financing for projects with strong contracts

1997 ~ 2004

Booming of shipping finance

Introduction of SIC (Ship Investment Company)

Leader of Korea’s Shipping Finance Market

First financing for non-korean shipowner (2005)

Package financing with ECA coverage and junior loans by funds

2004 ~ 2007

Severe slump of shipping finance due to the global financial crisis

Government-owned banks strengthened policy financing services to support shipping industries

Support for Restructurings of

Shipping Companies

Launch of shipping fund program (Jul.2009)

Launch of Shipping & Aviation Desk in Singapore (Feb 2013)

2008 ~ 2013

Comprehensive Shipping Finance

Provider

Maritime Finance Center was founded in Busan (Sep 2014)

Government Institutions (KDB, KEXIM,KAMCO) launched shipping fund programs

KDB Maritime Finance Center was established (Sep 2014)

Launched KDB Ocean Value-up Fund (Mar 2015)

Expansion of shipping portfolio to foreign client bases

2014 ~

■ Largest shipping finance arranger in Korea

- since the market collapse in 2008, KDB has led arranging and financing for Korean ship owners

- 89 clients out of 173 members of KSA (as of 2015)

- provided KRW1.5tn of shipping finance and issued KRW7.3bn of RG

- arranged U$2.5bn, 23 transactions as MLA (2015)

- total outstanding balance of maritime finance was KRW8.4tn (as of Dec 2015)

■ Awards

Mandated Lead Arranger

11

Performance as MLA in Recent Years

(17) (15) (14) (14) (23)

Marine Money Deal of the Year

KDB’s Shipping Finance (U$bn) (U$bn)

* Annual deal volumes

Year Transaction KDB's Role

2009 Bank Debt Advisor, Bookrunner, MLA

2010 Structure Finance MLA

2011 Export Finance MLA

2011 Bank Debt MLA

2012 Project Finance MLA

2014 Bank Debt Bookrunner, MLA

1.9 1.8

2.5

1.8 2.2 25

15

20 24

11

0

5

10

15

20

25

30

-

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016.3Q

Arranged Amt # of transactions

(U$bn)

0.12

0.35

0.73 0.68

1.02 1.16

1.06 1.08

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2008 2009 2010 2011 2012 2013 2014 2015

Ship Finance RG

(Unit : U$ mn, KRW bn)

12

■ Korea’s 1st Public Shipping Fund - launched in 2009 to support Korean shipping

industry under recession caused by financial crisis

- completed investment of U$427mil for 41 vessel

- the nation’s first ‘public’ shipping fund

- led restructuring of Korean shipping companies

■ Overview of Program - Inception : Jul 2009

- Total Amount : U$1bn

- Investor : KDB(70%), Dongbu, Sinokor, DSME

- Total Package : Senior Loan + Junior Investment

- Total Commitment : USD427mil (41 vessels)

- Return (WARR) : 10.8% p.a. (as of Jul 2016)

- Clients : KLC, DAT, POL, PO, HJ, SNK

- Expiration : Nov 2014

Chapter 1 : Let’s Together Shipping Fund

Bulk Carriers

56%

Tankers 44%

D-Shipping 13%

H-Shipping 5%

J-Shipping 5%

K-Shipping 18%

P'-Shipping 10%

P-Shipping 13%

S''-Shipping 5%

S'-Shipping 13%

S-Shipping 18%

B Company 19%

G Company 3%

G' Company 3%

K Company 8%

M Company 3%

P Company 13% Spot

5%

S Company 13%

S' Company 3%

T Company 3%

U Company 5%

V Company 22%

Key Factors of LTSF Portfolio

by Asset Type

by User

by Shipper

■ Key Features - Inception : Feb. 2015 - Commitment : U$1bn or equivalent in won - Target : Bulk Carrier, Tanker, etc. (newbuild / secondhand)

- Method : subscribing private bond issued by SPCs - Return : targeting 6.00% p.a. (for junior tranche) - Maturity : 5~10 years (bullet repayment applicable) - Leverage : extra 15~30% of the vessel price - Investor : KDB (up to 70%), FI, SI

■ Milestones (OVF No.1~8)

■ Structure

13

* based on total commitment amounts including other investors’ shares

Charter 2 : KDB Ocean Value-up Fund

15.45 38.58 38.58

178.96 178.96

208.96

239.96

-

50.0

100.0

150.0

200.0

250.0

Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16

Investment

Private Special Asset

Investment Trust

BB Charterer

Overseas SPC

Time Charterer

Loan

Distribution

Charter Hire BBCHP / BBC

Long Term COA / TC Freight / Hire

Shipbuilder (Seller)

Sales

Senior Lender

Collective Investment Company

* for the case of investment in junior tranche, KMGIC coverage applicable (coverage on 95% of the investment amount)

Part 3 Challenges and Opportunities

■ Struggling shipping industry

- market uncertainty due to fleet oversupply and slow-down of economic growth

- weakening industry competitiveness

- lack of investment capability

- commercial banks and institutional investors avoid investment in shipping industry

■ Growing needs for industrial restructuring

- focusing on specialized services

- scale-up fleet operators by M&A and strategic alliance

- optimize fleet management efficiency

- invest in high-performance vessels (eco-ships)

■ Market stimulation with new incentives and financial instruments

- continued support from government e.g.) tonnage tax, special zone for ship registration

- attracting participation from private sectors

- development of new ship financing instruments for commercial banks and institutional & individual investors

■ Paradigm shift in shipping finance market

- Transition to new vessel types LNG-fuelled ships and eco-ships

- Cooperation by government sides (KDB – KEXIM - K-Sure – KMGIC – KAMCO)

- Charterer’s Strategic Investment in the form of establishing JVs (e.g. KOGAS-Shipping Co.)

15

Challenges and Opportunities

Thank You