Page 24: of Marine News Magazine (November 2011)

FINANCE24MNNovember 2011Excluding occasional boomlets, if you were to determine when the largest numbers of new commercial vessels were built recently for the U.S. market, examine the years from 2002 to 2008. Thus, the age of most of these vessels is roughly between four and nine years and most have many years of dependable life in them. With refits and repowering as viable options, many should see decades of use still ahead. Separately, and while there seems to be increased activity in the shipyard sector, few order books are bulging as they did during the mid-decade boom. Replacement costs are significantly higher than five or ten years ago, therefore most vessels from this time frame have kept their values significantly intact, and some have likely appreciated. Beyond this, many of those circa 2002-2008 boats were probably financed and not paid for in coin of the realm. With an average term of 10 years term and 10 years amortization of principal, many loans have now been paid down to the point that they are ideal candidates for refinancing or a sale/leaseback. For shipowners, this could amount to a serious bonanza.When a loan is originally cast, the monthly payment iscomputed based on a specified term and a period for theamortization of principal. Payments are computed on a schedule of principal repayments plus interest charged for use of the money during that period. Loans with end-of-term ?balloon payments? were less common, although they too would benefit from refinancing. Most non-bal- loon, fully amortizing loans made for any term will have less than one half of the original principal borrowed out- standing at their mid-life. As an example, table 1 below shows the date from the loan commencement date and then, in column 2, how it might look if we refinanced it at ?mid-life.? The net difference between the original loan payment and the refinanced loan payment is $17,271 or $207,261 per year. This amount goes directly to your bottom line. Another way to free up equity for increased cash flow is to enter into a sale/leaseback instrument with a shipowner (a.k.a. lessor, or other finance source) who buys your boat from you and then leases it back to you. Simply put, you and a potential shipowner determine a fair market value price for your vessel; the shipowner buys it from you and rents it back to you for a given period of time. The sale/leaseback can fall into two principal types of leases (or in marine parlance ? bareboat charters) that may apply ? Capital and Operating Leases. How the lease will be categorized depends on the terms and conditions of the lease. How the lease is categorized will also deter- mine how it is treated from a tax standpoint. According to the concept of a lease under the Financial Accounting Standard No. 13 (FAS13), a Capital Lease is a finance contract; an Operating Lease is a rental agree- ment. If a lease fails to qualify as an Operating Lease, it will be considered a Capital Lease for accounting purpos- es. Find out more about leases here: http://www.elfaon- line.org/pub/abtind/Fin101/Types.cfm To qualify as a Capital Lease the following terms apply: The Shipowner transfers ownership to the Charterer at the end of the lease.The Charter contains a bargain purchase option for the vessel at the end of the Charter. The Charter term is equal to 75% or more of the esti- mated economic life of the vessel. By Richard J. Paine, Sr. There?s Gold in Them There Hulls! Table 1. ? Loan (Re)finance Comparisons Original Loan Commencement Date: Jan. 1, 2007Refinanced at ?mid-life?Original Loan Maturity Date: December 31, 2016New Loan Commencement Date: January 1, 2012Original Loan Amount: $3,000,000New Loan Maturity Date: December 31, 2021Term and Amortization: Ten (10) Years New *Loan Amount: $1,444,271.27Interest Rate: 6% Fixed for Term Term and Amortization: Ten (10) Years Principal Balance at Termination: $0 Interest Rate: 6% Fixed for Term Principal Balance as of December 2011: $1,444,271Principal Balance at Termination: $0 Monthly Payments: 120 @ $33,306/monthMonthly Payments: 120 @ $16,034/monthMN#11 (18-31):MN 2011 Layouts 10/27/2011 9:21 AM Page 24