Page 15: of Maritime Reporter Magazine (May 2000)

Marine Finance pensate for these potential downside risks. Specifically, they are not struc- tured to share in the financial upside of the project if, or when, the owners suc- ceed in the business venture. These opportunities may, instead, represent a risk that is more appropriately funded with equity from investors, or through a private placement or other capital mar- ket services.

Let's say a banker makes a loan for $1 million. If that loan becomes uncol- lectible and deemed a write off, it will take $50 million at a two percent spread over a one-year period to make up the difference. An offset of this magnitude represents a costly mistake in risk man- agement.

The duration of a loan is another fac- tor in assessing risk. The longer the term, the greater the risk. Part of a banker's job is to match loan repayment with the appropriate asset life and cash flow. Generally, it is more beneficial to finance short-term assets with a short- term loan or line of credit, or to finance longer-term assets with term debt. How- ever, some of the equipment used in the marine industry has a very long asset life. In these cases, a bank may seek to limit the risk imposed by a lengthy amortization requirement with a short- term balloon payment.

Maritime companies have financing needs that are unique. Their needs may be substantially large due to a variety of circumstances: the necessity to enlarge the fleet with new or used vessels; acquisition of another company; or a greater loan than the bank will normally finance. Under these circumstances, it may be appropriate for the customer's lead bank to arrange a "club" or "syndi- cated" loan. A club loan is usually a loan held by two to three banks. A syn- dicated loan may be larger in size and include up to 10 banks or more in the group.

Customarily, maritime customers use sophisticated capital markets products to finance various long-term growth opportunities. Privately placed long- term mezzanine loan and/or equity can be used to support a management buy- out, a large acquisition or other substan- tial financing needs. Longer-term debt and equity can help a business weather a downturn.

For maritime business success, bankers must be aware of the unique- ness of the industry and determine what is a "bankable" deal in order to effec- tively meet the important challenge of correctly assessing and managing risk.

Summit Bank's Marine and Surface

Transportation (MAST) group offers specialized lending expertise to compa- nies within the maritime and transporta- tion industries, as well as a full range of

May, 2000 financial services, including equipment leasing, cash management and personal banking. A division of Summit Com- mercial, MAST focuses exclusively on serving the needs of maritime customers in this specialized industry by providing the experience, resources and flexibility to recommend the best industry-specific banking solutions that meet the compa- ny's strategic short and long term goals.

Circle 36 on Reader Service Card

Summit Bank, a subsidiary of Summit

Bancorp, is a financial services compa- ny headquartered in Princeton, New

Jersey, with $36 billion in assets and $25 billion in deposits, it provides com- prehensive financial services to an extensive retail, commercial and private banking customer base in New Jersey,

Eastern Pennsylvania and Connecticut.

For additional information about the company, please visit its web site at www. summitbank. com

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Circle 283 on Reader Service Card 15