Purchasing and operating dry cargo vessels

Project summary

The Project objective is to acquire ownership of dry-cargo vessels on raised funds, return in full of investments attracted for the purchase of ships and profit earning.

The planned implementation period for this project is 5.5 years.

The project applicant has been in the maritime industry for over 26 years. His experience includes more than 10 years of sea-going experience in rank from deck officer to deep sea Captain and about 16 years in operational and commercial management of dry cargo fleet. He has deep knowledge, strong skills and extensive experience in dry cargo ship operation and management, good understanding the vessel’s operation economy. He has successful experience in implementing and managing an investment project for the acquisition and operation of 4 «sea-river» class vessels.

To implement the project, it is planned to search for and purchase 5 sea-river class vessels with a deadweight of about 6,000 metric tons on draft of 4.2-4.5 meters, built in 2006-2012.
Within the project management company is established in Malta or a jurisdiction that meets the conditions of raised funds. The founders of management company are individuals/legal entities who are the project participants or are associated with them.
The management company is recipient and debtor of financial resources required to implement project. For acquisition of each vessel, the management company establishes shipowner company in Malta or similar suitable tax jurisdiction. Each new shipowner company founded in this way is the registered owner of acquired vessel.
Vessels purchased are registered under Maltese flag or a flag of similar suitable tax jurisdiction recognized by international communities.
On basis of BIMCO Standard Ship Management Agreement the management company transfers full management of acquired vessels to ship management company registered and located in Ukraine, which will operate the vessels for and on its behalf for fixed management fee. Thus, all cash flows related to implementation of the project will pass through bank account of the management company.
The ship management company will have necessary experienced staff, licenses and certificates to carry out activities related to operation of dry cargo ships.
Search for and acquisition of vessels will be carried out in two ways:
1. Through reputable specialized broker companies that have significant successful experience in sale and purchase of vessels and wide communication network with actual owners of vessels of type considered in project.
2. Through our own communication network in the industry.
Vessels will be employed for carriage different kinds of cargoes in Azov-Black Seas and Mediterranean Sea market via own network of charterers and ship’s brokers.

The main clients of the company will be traders, sellers and buyers of grains, agricultural products and raw materials in bulk who charter vessels to carry such cargoes by lots of 5-6,000 metric tons from shallow ports of Azov and Black Seas at ports of Black Sea and Mediterranean Sea basins. These are companies of various sizes, from small grain traders of Turkey, Egypt, Russia, Ukraine, Europe and steel and power plants of Bulgaria, Romania, Turkey, Egypt and Italy till big commodity market operators such as Cargill, Bunge, Glencore, Sibanthracite, Mechel, Mirtrade and big Turkish industrial corporations such as ICDAS, Isdemir, Erdemir.

Market of vessels considered in this project is low competitive due to their shortage in the Azov-Black Sea region, especially in seasons of export of grain and agricultural products. This shortage of ships will not be fully replenished during the project implementation period.
Average annual cargo turnover of only Azov Sea shallow ports is over 40 million tons of dry cargoes, including over 20 million tons of export cargoes of bulk grains, agricultural products and raw materials. Such ports develop their cargo storage and transhipment facilities to ensure handling of growing flows of export dry cargoes. Such cargo flows are served by vessels of sea-river classes.
As of the end of December 2019, there were 223 units of dry cargo vessels in operation, similar to those considered in this project and built before the end of 1999. Average age of these vessels was 36,8 years. According to forecasts, 170 of these vessels will remain in service by 2025, and 93 vessels by 2030. Besides, there were 71 new dry-cargo vessels of such type built and put into operation during the period 2000-2019. Another 55 vessels of this type were contracted for building until 2025. Requirement for vessels of this class is about 300 units.
Competitors are number of Ukrainian, Turkish and Russian shipping companies owing and/or operating shallow draft vessels of sea-river classes in quantity from several to dozens of ships in Azov-Black Seas and Mediterranean Sea region. However, most of such vessels are over 25 years old.
Market is low competitive due to shortage of such type vessels in this region, especially during export seasons of grains and agricultural products, which will not be fully replenished during project implementation period. Market of considered in this project modern vessels with cargo carrying capacity of 5-6,000 metric tons, cargo volume capacity of about 9-10,000 cubic meters and draft of up to 5 meters is represented in Azov-Black Sea region by limited number of vessels of several shipowners.
Main differences from most competitors are following:
1. Vessels’ young age: significant number of Customers do not accept ships over 25 years old for carriage of their cargoes.
2. Recognized vessels’ classification society and insurance company: significant number of Customers accept only ships classed by IACS members and insured by first-class insurers.
3. Vessels’ proper technical condition: significant number of vessels are restricted by their owners to call for EU ports due to threat of ship’s detention by port authorities because of her improper technical condition.
4. Vessels’ flag recognised by international communities: advantage for a significant number of Customers.
5. Vessels’ large cargo volume capacity: ability to load more quantity of volumetric cargoes, such as sunflower seeds, sunflower seed meal, coke, coke breeze, etc.
6. Agreement with trade union that is ITF member: advantage in employment of proper vessels’ crew.
7. Proper updating Customers in respect of vessels’ current operations and positions.

The source of project revenue is freight payments received from Charterers (Customers) for carriage of cargoes by vessels acquired in ownership. 
Financial indicator of ship's operation is time-charter equivalent – income received by vessel per day during the voyage, deducted with voyage costs (port/canal dues and charges, additional expenses, cost of fuel consumed, brokerage commissions on freight). 
This income is used to pay for:
- return of raised funds for the vessel acquisition and the respective interest; 
- administrative expenses;
- vessel’s running cost.
Administrative expenses are expenses for maintenance of the management company, the shipowner company of the vessel, including cost of registering and maintaining vessel’s jurisdiction, and fee of the ship management company for management of the ship.
Ship maintenance costs are divided into the following categories:
- regular or running cost (crew wage and victuals, crew change, fresh water, supplies, consumables, spare parts, services and maintenance, regulated class surveys, lubricating oils, communications, classification society, insurance, etc.) i.e., expenses that exist continuously, regardless of vessel operation condition. Amount of running cost is determined for one classification period (5 years) and is distributed on average for each year/month/day of such a period;
- variable or voyage cost (fuel bunkering, port dues and charges for the passage of canals/straits (disbursement accounts), brokerage commissions on freight). Voyage cost is taken into account for each voyage of each vessel.
Estimated time-charter equivalent for the vessel type considered in this project is over USD 4,500 per day based on average freight rates over the last 5 years (2016-2020) for cargo transportation in Azov-Black Sea and Mediterranean Sea regions. 
Estimated time-charter equivalent considered in this project for calculations is USD 4,200 per day.
Estimated average annual revenue of 5 vessels operation is USD 7,455,000.
Estimated annual administrative expenses of 5 vessels is USD 765,000.
Estimated annual running costs of 5 vessels is USD 3,345,000. 
Raised investments are estimated to be returned in full within 4.5 years by equal monthly or quarterly payments, beginning from the second year of project implementation.

Following risks that can significantly affect course of project implementation are taken into consideration:
1. Failure to comply with cargo loading/discharging rates in ports.
2. Growth of prices of fuel and energy resources.
3. Unfavorable trends in the transport industry.
4. Actions of competitors.
5. Actual costs of project implementation overdraw the estimated ones.
6. Delay in payments for services rendered.
7. Risks of loss (destruction) of the vessel.

The investments are required for purchasing 5 vessels on the secondary market and taking them in operation.
Estimated average cost of one vessel: USD 3,500,000.
Estimated cost of one vessel taking in operation: USD 150,000.
Cost of vessel taking in operation includes changing the ship’s registration jurisdiction, her equipping and supply, port dues (disbursement account) in the first loading port.

The offer to Investor:
- full return on investment;
- share in the ownership of vessels acquired on investment, the size of which should be discussed and agreed.