Pareto World Wide Offshore AS - Pareto Project Finance

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Portfolio News (continued)Asian Offshore III ISA more extensive comment on this project can befound on page 5 under “This quarters investmentreview”. We are, however, pleased to report that wehave created a new operational set-up for this projecttogether with two partners with a similar fleet ofvessels. We now have a fleet of 15 5,000-6,000 BHPAHTS operating in a pool in Asia and West Africa. Thepool is operated by a jointly owned company, RKOffshore International. This company is alsoresponsible for the technical operation of the ships, aswell as for another six offshore support vessels. Theemployment and earnings of the vessels is generallyimproving with an increasing number of tenders in themarket. We have also negotiated terms with our banksthat will help safeguard underlying vessels.Master and Commander ISPWWO purchased 5% in this project through thesecond-hand market. M&C was established in 2006 andconsists of two seismic vessels on bareboat contracts.The largest and most valuable vessel is on a bareboatcontract until 2019 which is guaranteed by CGG Veritas– the world’s biggest listed seismic operator. Thesmaller vessel is on a bareboat contract until 2015,which is guaranteed by a smaller operator namedReflect Geophysical. The fund manager is particularlyoptimistic about this investment, because the projectyields a solid cash flow and the residual value risk ishighly limited. Furthermore, the seismic market isparticularly attractive at the moment, with a healthysupply/demand balance and decent dayrates for bothnew and old vessels.New investmentsThe Board and the manager are actively seeking toexploit particularly attractive investment opportunitiesarising from financially distressed owners and tuningthe portfolio towards a planned liquidation or sale in2014. PWWO therefore invested NOK 8m in Master andCommander during Q3’12. In addition, NOK 2m waspaid in to Asian Offshore III to boost working capital inthis project.Project salesThere have been no straight project sales during Q3’12.Payments from projectsDuring Q3’12, PWWO received a final payment of NOK0.4m in relation to the previous sale of Middle EastJackup Ltd. and NOK 7.6m as partly repayment of theconvertible bond in Neptune Offshore. The rest of thebond was converted into equity at NAV.
This Quarter’s Investment Review:Asian Offshore IIIThis project was started in 2007 to construct a total of six 5,000 BHP AHTS, which were bareboat chartered to RKOffshore, which had back-to-back contracts with Sanko Steamship Ltd in Japan. The vessels were delivered in 2009-10. As Sanko filed for bankruptcy protection in July this year, the contracts were cancelled and the project now hasdirect market exposure, instead of a fixed bareboat charter income. As a result, a restructuring was needed toprovide the best possible platform for continued employment of the ships.Up until this year, this project developed according toplan, along with its sister project Asian Offshore I(virtually identical set up). The vessels were deliveredlargely on time and the charterer paid the hire punctuallyfrom delivery, sheltering the projects from the plunge inthe underlying charter markets. As the broker values ofthe vessels held up well despite the market volatility, theprojected returns on the project were solid, around 15%IRR.However, Sanko finally folded this year as weak shippingmarkets, singificant charter obligations and a largenewbuilding programme took its toll. As a result, AO IIIcancelled its contracts through RK Offshore in July thisyear and were left with 6 vessels with direct exposure tothe underlying markets.Since then, AO III has teamed up with its sister projectAO I as well as Tufton Oceanic, a fund with a nearidentical set-up through RK Offshore to Sanko, toestablish a new organization to cater for the commercialand technical operation of the vessels.This was established with effect from 1 October underthe name RK Offshore International. RKOI will operateone pool for a total of fifteen 5,000-6,000 BHP AHTS(including 5 from Tufton), as well as a pool for four10,000 BHP AHTS (owned by Tufton). A subsidiary ofRKOI will also operate the vessels technically, with theaddition of up to five other offshore support vessels.RKOI is jointly owned by AO I, AO III, Tufton and themanagement. The vessels continue to be owned by AO I,AO III and Tufton.We expect that this pooling of interests will have apositive impact on overall utilization levels and effectiveearnings. Moreover, RKOI could be developed further,which in turn could provide the potential for a strategicexit that can create incremental value. Already, RKOI isone of the largest vessel operators in West Africa andhas a meaningful presence in South East Asia.In parallel, new terms with our banks have been agreed.These terms are acceptable, although AO III had to payin additional capital to boost working capital reserves. Inthe short term, the earnings in both projects are wellbelow the levels under the Sanko contracts, as dayratesand utilisation levels have not fully recovered. There is,however, good upwards momentum right now, and weremain optimistic of securing an improved backlog forthe fleet going forward. Asset values are holding up well,so it is really a question of weathering a period ofsomewhat depressed earnings. In a few years, theproject should be able to resume dividend payments,and we retain full exposure to potentially rising assetvalues. Despite the problems, the project has beenprofitable for PWWO.Project start: May 2007Segment: AHTSNo. of vessels: 6Contract: Spot marketCharterer: Employed in RKOI poolPaid in equity: NOK 17mPaid out equity: NOK 3mLast valuation: NOK 20m
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