OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE 1

Shipping Contracts in distress

Bulkform Annual Summit 27 April 2009

Finn Bjørnstad

OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Background

•  Collapse in all segments of freight and S&P markets – market values below debt

•  Oil price +/- USD 40/pb - affecting field developments and OilCo’s willingness and/or ability to pay

•  Capital market dead (?) – impatient/demanding lenders/creditors

•  More than 500 vessels/rigs on order for Norwegian interests at a time when shipyards and owners are facing severe challenges

•  Consequences are renegotiations, cancellations, bankruptcies, court protection/Chapter 11 and/or other “workout” situations

•  Understanding of legal implications and risks are important to assess how the future may be formed (who will survive and at how much will it cost)

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE 3

OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

The domino effect of a collapsing market

•  Renegotiations in all parts of a shipping transaction chain –  the market collapse hitting all parties in the chain –  one party's performance subject to performance of the later parties in the chain –  third party risks materialising and difficult to predict who will be hit, when and how hard –  you may be stuck in the middle and defend and challenge at the same time

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Shipyard Owner Chart. SubChart. 1 SubChart. 2 SubChart. 3

USD 50,000 USD 55,000 USD 60,000 USD 65,000

60 mnds 24 mnds 12 mnds 8 mnds

Resale USDM 125 Resale

USDM 130

Resale USDM 140

Spot rate USD 8,000

Market Value USDM 50

Purchase USDM 100

OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

The domino effect of a collapsing market (cont.)

•  S&P and CPs - most renegotiations are based on power play and fair of the alternative

–  is it possible to build a legal case (defence or to challenge)? •  technical due diligence – vessel performance •  poor contract work – advantage of unclear terms and strict interpretation •  proper authorisation – POA? •  no force majeure situation •  strategy to build case over time

–  demonstration of risk of not accepting new terms - alternative may be devastating –  OR, pure commercial discussions based on sharing of pain and long term relationship

•  The dilemma is whether to accept new terms with reduced earnings/profit or to take the risk that loss may be recovered through legal action

–  Vessel resold or fixed at a profit [any completion risk?] – exposure towards buyers/charterers –  financial strength of counterparty and exposure in case of bankruptcy –  is the proposal trustworthy or only the first of several renegotiation requests? –  what is the alternative to renegotiations (pest or cholera) – right to terminate

•  litigation takes time even if a good case •  bankruptcy – court protection •  arrest of vessel, accounts, cargo or other assets – forum shopping important

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

The domino effect of a collapsing market (cont.)

•  Many “blue chip” companies are playing hard ball - how to call the bluff? –  only opportunistic counterparty or is he running out of cash? –  understand overall financial strength and other commitments –  is the new “offer” part of overall plan to save the company – intelligence/advisors important –  equal treatment of owners/charterers? –  an alternative to force counterparty into court administrated work out proceedings? –  important with preventive quality control and contingency plans (plan B)

•  Many creative proposals for new terms in S&P and CPs –  adjust to market rate but keep or split profit from market upturn? –  longer contract on lower rate –  use of bonds/credit as part payment –  termination fee –  defaulting new terms should rewind to original terms and liability (?)

•  Is the market (including shareholders/board and lenders) expecting all means to be used in order to renegotiate or get out of S&P and CP contracts made at the high peak of the market?

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE 7

2.pr. Building Contract and Refund Guarantee

- 1.pr. pant byggekontrakt - Pant Refund garanti - Pant T/C

Building Contract - USD 100 mill.

- 20/20/20/20/20 - 15 montsconstruction

REDER Shipyard ShipOwner (SPC)

ShipHolding (guarantee?)

Refund Guarantee

Owners Bank USD 40 mill.

1.pr. Building Contract and Refund Guarantee

Charterer/Buyer (SPC)

Bondholders USD 20 mill.

Construction Financing

Refund Bank

ChartererHolding (guarantee?)

OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Renegotiation of Shipbuilding Contracts •  Reasons for renegotiations

–  contract(s) not full financed –  financed but not able to satisfy drawing conditions (no contract – breach of minimum value) –  market flex risk not to be underestimated –  resale failed -market collapse –  Shipyard not performing or in financial distress

•  Assessment of negotiating position –  is it possible to take advantage of a strong legal position? –  important to asses worst case legal exposure (cost of getting out) –  the Shipyard may also have problems (financing and/or performance)

•  Early warnings that the Shipyard may have problems (you may be lucky) –  financial strength/market information - stay informed and be prepared (site team important) –  lack of cooperation, information and reporting on progress –  conflicts and cooperation problems with class –  rescheduling of capacity to give priority to prior deliveries –  change order requests - force majeure notifications –  problems with subcontractors

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Renegotiation of Shipbuilding Contracts (cont.)

•  Exposure towards Shipyard in case renegotiations fails? –  not only to give up paid instalments Owner may have to pay its way out (underestimated exposure?) –  responsible for net direct economic loss, including currency and loss of profit on the contract –  indirect and consequential losses normally excluded –  Shipyard general duty to mitigate - sell the vessel in complete/incomplete state –  SPC or recourse to owner? –  Shipyard not obliged to terminate on basis of buyer’s breach

•  Any legal basis for threatening with termination? –  delay in “Contractual Delivery Date” plus ”permissible delay” (180/270 days) –  delay in construction schedule not sufficient to terminate (unless expressly agreed) –  do not rely on an anticipated breach concept as under Norwegian law –  identified defects and non-compliance with performance criteria (beyond LDs) will give extensive

rights to remedy –  Shipyard in financial distress - bankruptcy/debt negotiations –  other contract specific - failure to provide Refund Guarantees –  force majeure and total loss situations

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Renegotiation of Shipbuilding Contracts (cont.)

•  Negotiation strategy –  early dialogue and create trust –proposal must be clear and convincing (cancellation,

suspension, price reduction and/or delayed delivery) –  understand the Shipyards weak points, exposure and estimate of loss (resale of slot/long

lead items, currency exposure) - Shipyard may be one of the biggest stakeholders –  build a case to create a “win - win” situation? – creativity –  make it clear how the Shipyard may gain from a solution (alternative scenario may be

worse) –  main driver may be to keep the Shipyard going long term –  show how part of a bigger restructuring/refinancing plan and other stakeholders

contribution (may be conditional on renegotiated Shipbuilding Contract) –  if series of vessels, early deliveries may be saved if reduced price and cancellation of

later vessels – swapping of vessel type –  the Shipyard (if financially strong) may be a creative contributor to a solution (deferred

payments/delivery, price reduction, sellers credit, equity participation etc)

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Renegotiation of Shipbuilding Contracts (cont.)

•  What happens if the Building Contract is terminated? –  dispute with the Shipyard regarding right to cancel may take years of litigation –  right to receive repayment of advances back plus interest –  no claim for loss of profit (if Shipyard in breach) –  step 1, claim against the Shipyard ( assuming not able to pay claim in full) –  step 2, claim against the Refund Guarantor (for amount not recovered for the Shipyard) –  step 3, claim against the uncompleted Vessel (if not covered under 1 and 2 - right to take

possession/ownership?)

•  Any risk for non payment under the Refund Guarantees? –  amount of the RG compared to aggregate of advance payments –  financial strength of Refund Guarantor – bank or insurance company –  formal requirements for valid and enforceable guarantee – SAFE registration –  survival clauses covering amendments and/or novation? –  on demand guarantee or subject dispute resolution – jurisdiction and enforcement issues –  validity period and hopefully automatic extension in the event of litigation?

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Renegotiation of Shipbuilding Contracts (cont.)

•  What happens if the Shipyard becomes bankrupt? –  if Refund Guarantees not sufficient, the Owner may be better off by taking possession/

ownership –  normally no contractual right but some contracts with progressive title scheme

•  difficult to secure progressive title rights against bankruptcy risk –  right to take delivery against payment of unpaid instalments? [minus the value of the

remaining work?] – what if the Vessel 95% ready only last 20% outstanding –  the alternative is that the value of the vessel goes into the bankruptcy estate and that

Owner is only entitled to a dividend claim for the repayment of the advances [minus payment under the Refund Guarantees]

–  very few jurisdictions allow for the Owner to take possession of the Vessel •  Norway - possible to mortgage Owners rights in Building Contract under the Liens/Maritime Act •  Maritime Act is not differentiating between “building contract” and “vessel” both may mortgaged •  conflict between rights of Shipyard creditors and Owners creditors in same asset •  legal situation unclear (separatist rett i skipet?)

–  in any event, expect problems with unpaid subcontractors!

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE

Renegotiation of Shipbuilding Contracts (cont.)

•  Rights of lenders/bondholders with security in Shipbuilding Contract/RG –  no more extensive rights than the Owner (no protection if Shipyard bankrupt) –  no value if Shipbuilding Contract in default (notification and remedy rights?) –  no value unless willing and able to perform remaining obligations (pay up remaining

instalments) –  “step in very complicated” and will require new/additional funding –  normally no right to sell the contract without the consent of the Shipyard

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OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE