Page 22: of Marine News Magazine (April 2012)

22MNApril 2012 What financial instrument can take soft credit and firm it up dramatically in the eyes of a banker or credit analyst? What can make a good credit even bet- ter? What can shave tens of basis points off a term loan rate? What can help you to secure the construction or term loan financing that you need for a new vessel to grow your business? The answer could be as simple (or as difficult, for that matter) as a Bareboat or Time Charter agreement on a vessel or vessels in your fleet. Lets say that you want to build or buy a new boat, but your credit is not quite pretty. You have weathered the storm over the last few years (but only just), have no real huge black marks against you or your companys credit, but the num- bers just arent quite there,? either. Beyond this, you may have had some previous financial difficulties, possibly due to market downturn or other external forces. Your loan may not easily sail through the loan committee at your bank.If youve had some problems, its possible you might be what we in the industry would call a story credit.? In banker jargon, it means that you are a potential candidate for a loan, but your company has a mediocre B? or poor C-D? implied credit rating. A credit rating is determined by four basic financial ratios taken from your financial statements: Interest Coverage (<1.69), Current Ratio (<1.19), Debt to Tangible Net Worth (>3.81) and Cash Coverage ratio (<1.07). See Standard & Poors Ratings Criteria for more details: (http://www.standardand- poors.com/ratings/articles/en/us) What creates the story? aspect is the ultimate level of comfort or discomfort gained by the lender about the company, after its goals and history, clientele and circum- stances (that have resulted in less than stellar financial per- formance) have been evaluated. Once these are under- stood and perhaps solutions to problems might be found, the lender may look more positively towards the loan request. THERESTOFTHE STORY As with any loan request, your financial statements, tax returns, business plan and projections will be under the cautious eye of the lenders credit group. Beyond verbal explanation, be prepared to show, if appropriate, the steps you have taken to improve your companys financial con- dition. For example: Have you downsized your labor or stacked equipment to compensate for lower utilization or day rates? Have you used available Capex to repair or improve your fleet during the slow down or, have you been actively marketing your company to increase and sta- bilize your cash flow by securing Time Charter and Bareboat Charter agreements to supplement or replace spot market trading? In the spot market, your vessels are deployed without a long term contract. It is generally acknowledged by most that here, rates are generally higher than time charter rates might be. If your utilization rates are consistently high, you can probably demonstrate some stability in your rev- enues. The spot market, however, does not guarantee rev- enue and depends on market trends and is ultimately uncertain and therefore spotty.? From a lenders stand- point a contract between your company and a strong cred- it is both a mitigant to negatives found in your story and a credit enhancement, as you now have a guaranteed rev- enue stream and profit to document in your financials projections. Unless you really mess-up, you have money in the bank.? As lenders we evaluate the two principal types of charter agreements: Bareboat (or demise) and Time charters for their contribution to your cash flow and projected debt service. BAREBOAT In a Bareboat Charter, the shipowner maintains owner- ship of the vessel with all tax benefits of ownership but without the requirement to crew or provision the vessel. Under what is in effect rental agreement with the charter- er, a term is set and amount of rents, termination, rechar- ter and possible end of term purchase of the vessel are all specified. The charterer assumes responsibility for person- nel, insurance, fuel, port charges and other operating and maintenance expenses. The monthly rent charged to the charterer of the vessel during the term of the charter is a multiple of the monthly finance payment, taxes, overhead and other costs. Ultimately, the lender will determine if the amount is sufficient to provide revenue that covers FINANCEBy Richard Paine Charterer as Underlying Credit