Market Analysis: Loan arrangers ride again

The glamorous yachting scene in Monaco and other hot spots has been heavily supported by loans | Photo by Raphael Montigneaux

A superyacht is perhaps the ultimate symbol of wealth, yet loans to help finance a purchase or new build are an established feature of the yachting culture. Indeed, conventional wisdom has it that about half of all superyacht owners take loans to finance their yachts. The fact that so many use credit to buy or build does not mean owners are renting dream lives they can’t afford, however – anyone doing so will have had that bubble popped painfully by the GFC. But what has that event meant for responsible yacht owners?

The reality is that, as put by Lisa Verbit, senior vice president and national marine executive for Bank of America, ‘Most clients who borrow from us aren’t borrowing because they need to, but because they want to.’

Yacht finance allows these people to keep their own money in investments that pay out more interest or other returns than they spend servicing their yacht loan. In other words, it is cheaper for them to pay off a loan than it is to release money that’s working hard for them elsewhere. Verbit estimates that about half of yacht finance (although again proportions may have changed recently) is taken out for this reason – and usually to finance medium to large superyachts.

The other half is taken for more obvious reasons. ‘At the lower end of the superyacht market,’ says Russell Crump, the new sales director of YPI, ‘if you wanted to buy a 40 foot (12 metre) Sunseeker for example, then you probably don’t have the cash but you’ve got the cash flow to cover the loan, which facilitates you buying it earlier.’

Despite the fact that yacht loans are generally secured by the asset – a moveable (stealable/sinkable) asset – Crump says that persuading a bank to finance your yacht purchase in 2004, 2005 and 2006 was relatively easy. ‘There was an abundance of bank financing,’ he says. ‘There wasn’t so much due diligence or compliance. It was all on the hope that the punter was going to pay his premiums.’

But then, of course, the GFC hit – and he didn’t pay them. ‘In late 2008 I was having nightmares about being crushed by yachts,’ says Verbit. ‘We took some hits but in the end it wasn’t horrific. But like most banks – and this is true of credit in general – the majority of our time was spent stopping loans from going bad, so your eye is not on new credit.’

This change of focus was certainly felt by owners and brokers. ‘It’s opened up a lot in the last year – it was frightening prior to that,’ says Jim Eden, senior broker at US firm Worth Avenue Yachts.

If banks are indeed returning to yacht finance, are they placing new requirements on loans to minimise the risk of being stung again? ‘The banks have not altered their criteria particularly,’ says Phil Bartholomew, a finance specialist at Seacoast Marine Finance, a division of Seacoast National Bank in the US. ‘In superyacht lending prior to the GFC, there was always emphasis on the applicant’s credit history, cash flow, available liquidity and the value of the boat, and those remain the key elements.’

But while the ‘rules’ may not have changed, the pressure of the current financial climate means the flexibility with which they are administered may have altered. ‘We’ve always been fairly conservative in terms of asking for all the information – we need a complete financial package,’ says Verbit, ‘but it’s even more so now. You’re working with a credit underwriter and if we don’t have the full picture it puts a doubt in their mind. So we try to coach clients to be very thorough in the package they give to us; it makes things go quicker, it causes less questions to get into an underwriter’s head that may be a roadblock to getting there. Providing a complete package also often results in more attractive pricing and terms.’

As Bartholomew puts it: ‘Risk is assessed more conservatively and banks are generally less likely to make any exceptions to their lending policy.’

But some brokers have also reported an increased demand from banks for their commitment to finance yachts. ‘The banks say they’ve got loads of funds,’ says Crump, ‘but show me. They say that if you want to borrow $40 million, you give us $40 million worth of assets. They’ve got to put up exactly the same amount in managed financial assets.’

Verbit says that this is not always the case. ‘In the smaller end of the market – the more vulnerable segment – we want assets. Those are the people that in general are vulnerable to economic downturn. For larger credit and if they have the correct profile, we do not require assets to get a loan. We may offer some pricing incentives, but they have liquidity and there’s an opportunity to bring that over, over time.’

Bartholomew adds that, ‘For loans up to $4 million we rarely, if ever, require additional assets to be pledged. The loan is secured solely by the vessel. Above $4 million, the vessel is still the security but most banks are looking for an additional deposit or wealth management relationship. The amount is completely negotiable.’

‘Our problem,’ Verbit says, ‘has been a lack of appetite for yacht finance from clients; 2008 and 2009 were our best years ever, by 20 per cent over our previous best years,’ she says. ‘Our volume dropped off a cliff in 2010 due to lack of demand not because we were out of the business, and then grew by 47 per cent year over year in 2011 due to increased demand. This year so far is about flat, year over year.’

So, as superyacht owners cautiously return to the market, they will find equally cautious banks waiting to help them buy their dream boat.

‘We are seeing a fairly significant up-tick in conversations with people looking to buy or build new yachts,’ says Verbit, ‘and if you have enough of them, eventually some will turn into business.’