Pareto World Wide Offshore AS - Pareto Project Finance

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