As with many things associated with moving up in class, large yacht finance is a different dance with new steps to learn. Gone are the days when you negotiate a price with a salesman at a boat show and walk down the dock to a stand where you fill out a loan application and receive a floating key fob for your trouble.
Now large yacht finance is a complex transaction typically handled by a bank's private wealth management division or a broker who works with a bank that specialises in this trade. The difficulties that have swept the globe since 2008 have made it marginally more difficult to obtain large-yacht financefewer lenders are engaging in yacht finance and their requirements are tougher but for those with the will and the liquidity, there are ways.
As Lisa Verbit, senior vice president and national marine executive, US Trust, Bank of America Private Wealth Management, says 'Qualified people can still get credit.'
Securing financial packages
Moving up from a small boat to a superyacht involves many layers of added complexity, extra digits in the purchase price and a new financing paradigm. You likely won't be dealing with a traditional lending institution for a 20 year, fixed-rate loan with 20 per cent down based on your credit score.
At values above $5 million or so, you'll likely be dealing with a superyacht specialist to customise a package that accomplishes your goal of acquiring the boat while protecting your liquidity and theirs.
An anecdotal survey of superyacht industry professionals suggests that half to three-quarters of new build and brokerage clients finance some of the purchase price of their yachts, even if they can afford to pay entirely in cash. The decision to finance likely has more to do with a broader financial strategy than the ability to pay.
The decision to finance likely has more to do with a broader financial strategy than the ability to pay
'One of the primary reasons our clients finance is to take advantage of an arbitrage opportunity to be able to earn more by keeping liquid assets deployed into the stock market or some other businesses investment than the cost of borrowing against the yacht,' Verbit says. 'The arbitrage play is more difficult today so we've seen many of our clients pay cash or borrow against their securities portfolios.
'Borrowing against a securities portfolio is less expensive than borrowing against a yacht, but there may also be an opportunity cost to tying up availability under a line collateralised by securities. We expect that some of those clients will seek to monetise their yachts as investment opportunities arise. In fact, we're already seeing a bit of that.'
The yacht finance process generally starts with a conversation about the client's goals, says Verbit. Each client is different, with some seeking truly customised financing, but most fall into one of the bank's standard products.
A typical superyacht financing scenario might involve a loan for 75 per cent of the purchase price of the yacht with payments amortized over 15 years, with a balloon payment due within a period of up to seven years.
A typical superyacht financing scenario might involve a loan for 75 per cent of the purchase price of the yacht
Factors the bank will look at to establish the terms include the size of the loan, the risk profile of the client determined through financial underwriting analysis, and the client's relationship with the bank.
US Trust, Bank of America requires clients provide:
- A personal financial statement dated no earlier than three months prior;
- The last three years of personal federal tax returns, including Schedule K-1 forms;
- Verification of liquidity in the form of bank and/or brokerage statements, including details of account holdings; and
- Three years of financial statements for businesses representing 20 per cent or more of the client’s net worth.
Three years of financial statements for businesses representing 20 per cent or more of the client's net worth.
If the yacht will be owned by a separate entity such as an offshore corporation, the bank also will require copies of the formation documents of the ownership entity.
A year or so before the balloon period matures, the owner and the bank will reassess the owner's goals and intentions. At that time, the owner may decide to renew the financing package.
If all is well with the owner's financials, the bank may choose to renew the package, but likely with a shorter amortization.
Setting the cost
Rates in Verbit's division at are based on LIBOR (London Interbank Offered Rate the average interest rate that leading banks in London charge when lending to other banks). She says yacht finance rates range from about 2 per cent over LIBOR to about 3 per cent.
'The key driver on pricing is the overall financial profile of the client,' Verbit says. 'It's not driven by the nature of the purchase, whether the client is buying a new yacht, a brokerage yacht, or is entering into a new build contract. If a client has a current relationship with us, that will factor into pricing, although a current relationship is not required.'
Securities-based lending is an option most large banks offer. Darran Blake of The Blake Group and senior vice president investments, UBS Financial Services, Florida, says her group uses a strategy called 'collateralised portfolio lending'.
Basically, the bank will monetise against a portfolio with lendable assets in it, such as a stock portfolio, to buy a yacht, a jet or real estate.
'Whatever we can hold in a UBS account, we can lend against,' says Blake. 'Every asset has a specific lending value, but not everything is lendable.'
The UBS program is aimed at those who may have accumulated a healthy stock portfolio or other liquid assets over the course of their careers. The client presents it to the bank, which assesses its value and potential.
If it meets their tests, the owner is presented with what amounts to a credit line with a chequebook he can use to pay for anything he wants (except to buy stocks) be it a new build, a brokerage yacht, or operating expenses.
Among the advantages, says Blake, are that the client doesn't have to sell the stock to pay for the boat and take the tax hit. The loan rate can be locked in at the outset for up to five years, be variable or fixed.
The minimum amount the program will accommodate is $55,000. The maximum is $50 million, although Blake says that limit is not set in stone. The maximum is authorised on the higher side on a case-by-case basis by UBS.
Cash buyers
Those who do choose to finance, might finance up to 80 per cent of the cost of the boat, but that number can vary widely. In a reflection of the diversity of superyacht owners and their individual financial strategies, some industry sources say that nearly all their new-build clients finance some part of their yachts, while others say nearly all pay cash.
Michael Joyce, chief executive of Hargrave Custom Yachts, says prior to the economic downturn in 2008, most of this firm's clients paid cash for construction of a new yacht, but would take notice if loan rates were low enough.
Now, he says, probably half look at the option of financing some, of all, of the actual construction. With brokerage boats, that number may be 35 per cent. He estimates 80 per cent of the buyers of Hargrave vessels, which range in length from 21m to 42m, pay all cash.
'The decision to finance has to do with the personality of the buyer,' says Joyce. 'Many have grown up with the philosophy that if you can't afford to write the check, you shouldn't buy it. [Our yachts] run from $5 million to $20 million, and we don't see any price point that impacts the decision to finance.'
Alternative credit sources
While dealing with institutions that specialise in large-yacht lending and know the vagaries of the business may be a wise course to pursue, a prospective owner can approach his own bank, which may hold his investment portfolio and other loans and with whom he has a strong relationship, or he may consider financing through an engine builder assuming he's talking to one in particular.
Cat Financial, a division of industrial giant Caterpillar, offers ground-up consumer financing for yachts, provided they are equipped with Caterpillar engines. According to Vern Patterson, senior international account manager, Cat Financial, the division offers yacht financing with no ceiling on size.
Verbit says her bank's appetite for yacht loans has not changed since before 2008, nor have approval rates. What they experienced was a lack of demand for yacht loans.
'I can say that we are still in the construction lending business,' she says. 'We're careful about it, as we always have been, but our appetite remains.
'As for brokerage, within the last year we've seen some one-off yacht loan fundings, and some very large deals at that, by banks that are not typically involved in the yacht business. The reason: We all need good loans, and the clients purchasing superyachts are people we all want to bank.'
Milestone Payments
Yacht construction loans are often structured around 'milestone payments'. A lending institution may enter an agreement with a client where the bank finances 70 per cent of the build cost.
The bank will release payments to the yard at clearly defined stages of the build, such as when the keel is laid, the engines are installed, the superstructure is completed or the fairing and painting are done.
At each stage, or milestone, the banks will require a surveyor or project manager to verify the work has been done properly before releasing the funds. The loan will be interest-only during construction.
Irrevocable Commercial Letter of Credit
International commerce revolves on letters of credit (LCs).
An LC means that a bank ensures that the yard or seller will not be paid the buyer's money until the bank receives confirmation that the yacht has been delivered in the agreed upon condition and within a specified time frame. It also serves to assure the yard or the seller that the necessary funds will be available when the transaction is complete.
If for some reason the buyer is unable to complete the transaction, the bank is required to cover the full or remaining amount of the purchase, which protects the yard or seller.
In today's global market with the commercial laws differing from country to country and/or a yard's lack of a known track record, an irrevocable LC is generally seen as a safe way to protect the interests of an owner and a lender during yacht construction or a brokerage transaction. A solvent yard can use the buyer's LC as a form of collateral to obtain its own construction financing from its regular lender.
LCs require that the conditions for any draws and final payment are well detailed by someone experienced in construction and contracts rather than a banker or attorney determining if the yard has met the requirements.
One yacht owner told us the LC absolutely protects the yacht owner, not just by minimizing risk, but by eliminating it completely.
'Only when the yacht owner is happy with the product can the bank release money for an LC payment,' he said. 'Your signature is the only way an issuing bank will pay for product.'
Meanwhile, the owner's funds on deposit have been earning interest in that bank.
The caveat is that an LC should be prepared by an lawyer specialising in financial instruments with properly defined trigger terms and key objectives stated within them.
The issuing bank makes payments only when terms are met, taking the owner out of the fray, and in the case of draw payments, frees the owner from having to visit the yard on demand.
Every LC should be tailored to a final execution date and a reasonable delay clause. Any specific quality standards, such as class compliance, should also be stated. Sometimes, stage payments and LCs have been combined to advance capital to the builder with a nominal payment of 15 to 20 per cent. This compromise increases the LC's liquidity for the builder.
Originally published: Superyacht Owners Guidebook 12