KAMCO - A White Knight for Korean Shipping

There are many intrinsic reasons for governments in Asia to formulate policies to support their domestic shipbuilding industry, either through direct loans to the yards or their clients. The shipping sector, however, has in sharp contrast, failed to benefit in the same way, with the exception of South Korea. As a resource-poor country, South Korea recognizes shipping as strategically vital to the nation’s economic wellbeing. During the Asian financial crisis in the late 1990s, cash strapped Korean shipping companies sold 112 ships at distressed prices to foreign buyers and as a result, the country had to grapple with the repercussions from the loss of its national fleet. This painful lesson has strengthened the nation’s determination not to allow history to repeat itself, at a time when shipowners are once again facing huge challenges on multiple fronts including a weaker demand due to the current acroeconomic uncertainly, capacity glut across all vessel types and rising bunker costs.

Armed with the mission to assist in the restructuring or liquidation of distressed assets, Korea Asset Management Corporation (“KAMCO”) has been playing a vital role in alleviating domestic shipping companies from a liquidity crisis. In 2009, the state-run financial restructuring agency established a maritime fund, designed to help shipping companies reduce their capital costs on their vessels. Since then, KAMCO has acquired 27 vessels of over USD 720 million directly from the shipping companies. This strong (and unprecedented) support for the shipping sector has allowed South Korean shipping companies to weather the after-effects of the Lehman crisis.

In a typical fund structure, a ship investment company (“SIC”) is established with equity financing from KAMCO’s own restructuring fund, pension funds, insurance companies, investment companies and/or individuals looking for tax benefits. At the same time, a special purpose company is created to acquire the vessel through a sale and bareboat charter back agreement with the shipping company, in most cases BBCHP (Bareboat Charter Hire Purchase) for a minimum of 5 years. Financing is typically made up of a senior loan tranche provided by a commercial and a subordinated loan from KAMCO’s SIC. Being a government entity, KAMCO is able to offer shipowners a highly competitive rate as a junior lender. And in the absence of a senior lender, KAMCO is also able to provide a direct senior loan to the SIC. All SIC funds are managed by KAMCO Ship Investment and Management Corporation.

The BBCHP model allows rates to be set so that owners can continue to operate ships reasonably in the current challenging environment. Typically, only interest payments are to be made over the life of the loans with a balloon payment at the end. The investors will be exposed to minimal residual and equity risks under the BBCHP structure as the shipping company will be obligated to purchase the vessel at the end of the charter. KAMCO can accommodate bareboat charters in the structure as well, depending on the preference of the shipping company.

Last week, Korea Asset Management Corporation (“KAMCO”) acquired four ships from four Korean shipping companies – Hyundai Merchant Marine, Dong-A Tanker, Sinokor Maritime and Daebo International. According to an official from KAMCO, DVB will be providing the state-run agency senior loans of a total USD 71 million for the acquisition of the latest bag of ships, valued at a total of USD 148 million. The senior loans, to be repaid on December 2014, have a three year tenor and an average eight year loan profile. KAMCO has also acquired two chemical tankers from Dong-A Tanker at USD 15 million apiece. All 6 vessels will be delivered by December 2011. We credit KAMCO for its ability to work closely with both domestic and international lenders in delivering a timely and effective way for Korean shipowners to monetize assets. The latest spate of ship acquisitions various types and sizes clearly Demonstrate KAMCO’s capability and we expect the agency to continue its strong support towards the Korean shipping sector well into 2012.