Dry Bulk Shipping Report 2015-16

There is a history of EIS investment in

this sector – through British Marine plc,

a UK owned and managed ship owner

and operator with a 14-year track record

of successfully operating mid-size bulk

carriers under the UK flag and Tonnage

Tax regime. British Marine was originally

set up in 1999 by CEO Alan Bekhor who

personally invested the funds in its

series of three EIS companies, which

between them purchased seven vessels

from 1999 to 2002. At the time of the

merger of the companies in 2007 the

accumulated cash and fair value of the

vessels showed an IRR of 37% over a

seven year period

Asset backed EIS, London Shipping Ltd

was also launched in 2014, although

fundraising issues prevented it from

progressing.

TIME Investments has recently

introduced its own Dry Bulk shipping

EIS and is also taking advantage of the

expertise of British Marine. The project

is looking to raise funds through EIS

companies, which will each seek to raise

£5 million in any 12 month period. This

should generate sufficient capital to

acquire a vessel outright without the

need for gearing.

A three to five-year holding period is

anticipated for each EIS company to

provide adequate time for a recovery in

the shipping market and the targeted

exit is for the acquired vessel(s) to be

sold and the EIS companies liquidated

at that time.

TIME Investments believes that

there is a healthy market for second

hand vessels, citing Eggar Forresters

Shipbrokers November 2015 sales

report of 40 Dry Bulk second hand ships

being sold in that month alone.

TIME Investments is well aware of the

market dynamics and the variances

between vessel types and returns and

has focused on Supramax/Handymax

class ships as its intended acquisition.

This is unsurprising given Scorpio

Bulkers assertion that a feature of

the recent downswing in the freight

market cycle was the relative resilience

of earnings in the Handymax and

Handysize sectors compared with

the larger vessel sizes. This can be

partly attributed to the greater trading

versatility offered by the cargo gear on

these vessel types

Stephen Daniels, Head of Tax Products

and Partner at TIME is positive about

the company’s Dry Bulk shipping EIS,

asserting that, “With the Baltic Dry

Shipping index hitting a new all-time

low in November 2015 and ship prices

falling to a level where an EIS can

purchase a ship without debt, this is a

great opportunity for investors to enter

a non-contentious sector that few have

previously had access to, whilst taking

advantage of all the tax benefits an EIS

can offer”.

To provide additional guidance on the

shipping industry and specifically dry

bulk operations, the EIS companies will

also appoint an Independent Advisory

Committee comprising experts with

extensive industry experience, with the

aim of achieving between £1.27 and £1.94

for each 70p (£1 net of tax relief) invested.

The EIS fees are not insignificant, but

fairly typical of the EIS market, with a

3% transaction fee on subscription (this

can be up to 5%)

, up to 1.75% yearly

services fee and a performance fee of

20% of the proceeds between £1.05

and £1.25 per £1.00 of net subscription,

with all proceeds in excess of £1.25

per £1.00 of net subscription subject

to a 40% performance fee. The second

tier of this performance fee is higher

than is generally the case, but is shared

equally between TIME Investments

and the Asset Manager, and reflects

the specialist and complex nature of

the investments and their ongoing

management. However, unusually and

in order to align the Manager’s interests

with those of the investors, TIME is not

charging an annual management fee.

PRODUCT DEVELOPMENTS

Taking into account the environmental,

regulatory, operational and economic

challenges which face the Dry

Bulk shipping fleet, the continuing

development of new features, methods,

products and processes to drive

improvement is, in some instances, not

just a promising development, but a

necessity.

These include:

EMISSIONS REDUCTIONS

New regulations are currently pushing

development in this area and these

include the Harmonised Common

Structural Rules (HCSR) and International

Maritime Organisation (IMO) Nitrogen

Oxide (NOx) Tier III requirements.

The two main methods of compliance

are exhaust-gas recirculation and

selective catalytic reduction systems,

both of which are still in development

for slow-speed, two-stroke engines.

The technology has to achieve a 76%

improvement on the current Tier II

levels

Such improvements are likely to prove

costly to existing vessels, although the

Tier III regulations only apply to new

vessels and engines, and potentially

delay delivery of newbuildings.

Nevertheless, according to the DNV

Shipping Report, 2020, they will be

worth it from both an environmental

and cost perspective, “Newbuildings in

2020 will emit from 10% to 35% less CO2

than today’s ships. The largest reduction

will be experienced with tank, bulk and

container vessels. Environmentally

efficient designs will gradually

improve throughout this decade and

a newbuilding contracted in 2020 will,

depending on type, emit 10-35% less

CO2 than a current ship. Between one-

third and one-half of this reduction will

be motivated by cost-efficiency alone

and would be implemented regardless

of the EEDI requirements.”

The possible use of different fuels is

already being explored, with a cross-

industry collaboration of partners

about to start research and ultimately

aiming to realise the commercial

and environmental benefits of using

liquefied natural gas (LNG) as a shipping

fuel for deep sea marine transportation.

LNG is the cleanest of the hydrocarbon

marine fuels.

Biofuels and hydrogen are also

amongst new methods being looked

“Newbuildings in 2020 will emit from 10% to 35% less CO2 than today’s ships”

DNV Shipping Report 2020