Page 18: of Maritime Reporter Magazine (September 2014)

18 Maritime Reporter & Engineering News • SEPTEMBER 2014

FINANCE UPDATE

T he surge in the shale gas in- dustry in the U.S., as well as stepped up oil exploration in the Gulf of Mexico, is creating enormous demand for marine assets to transport fuels and supplies. To seize this growth opportunity, mid-size marine op- erating companies with annual revenues from $10 million to $1 billion must ad- dress several important issues.

First, what is the most effi cient way to fi nance equipment to keep up with the robust demand? Is ownership of the vessel through a loan structure the best option, or would a lease make better use of working capital? Another issue that operators face is how to evaluate the wave of marine lenders now entering the market and vying for their business.

It’s more critical than ever to consider a lender’s depth of knowledge and experi- ence in the industry to get the best pos- sible fi nancing and long-term fi nancial ally.

The Collateral Equation

Marine collateral can be varied and can be diffi cult for inexperienced lend- ers to value. These assets include in- land towboats and ocean tugs, inland and ocean barges, marine construction equipment and offshore oilfi eld services.

Adding to the valuation challenge is the absence of an active re-sale market to regularly and transparently value these assets in an open market.

As a result, a specialty lender with deep domain knowledge is going to be more comfortable with the collateral, which often means a higher residual value and thus better pricing for the bor- rower. A knowledgeable lender may also be willing to fi nance individual compo- nents of the boat, such as a new engine or other technologies, as opposed to only being willing to fi nance the entire vessel.

Long-Term Commitment

A specialty lender that’s been involved in the marine industry is also more ex- perienced with the industry’s cycles and more likely to stick with a borrower through the entire business cycle. The industry is now booming thanks to oil and gas, but this tight link to the oil and gas industries is a double-edged sword.

A mid-size company borrower needs a lender that’s committed to the industry and will not look to exit at the fi rst sign of a downdraft.

Longer Loan Terms

Given all this insight, a specialty lend- er is likely to offer a wider range of fi - nancial products with fl exible loan and lease structures and payment terms. That makes the lender better able to match the unique needs and goals of customers whether the company is looking to op- timize depreciation, lower monthly pay- ments or monetize assets.

Lending can be ideal for customers with long-life equipment needs, who prefer asset ownership and the associ- ated tax benefi ts. Typically, borrowers can get 80%–100% advance rates from lenders depending on credit quality.

One facet of the loan structure where a specialty lender can often make a big difference is the term of the loan. For new vessels, many lenders prefer to offer a 3-5 year term loan with a 7-10 year amortization. But specialty lenders are more likely to offer a 7-10 year, full term, full amortization loan for new ves- sels, allowing the borrower to lock in to- day’s ultra low interest rates for up to 10 years. With a specialty lender, there’s no adjustment period and no need to redo the loan 3-5 years down the road.

The Lease Option

Many banks don’t offer tax and non- tax operating leases because they are uncomfortable owing the asset given the potential risks of costs and accidents.

Although specialty lenders will not lease just any marine asset—for example, they typically don’t offer leases on tank barg- es that carry hazardous material or pe- troleum products—they are more likely to lease certain marine assets than banks because they are more familiar and com- fortable with the assets.

Leasing allows customers to use the equipment without tying up capital by owning it. This helps borrowers to en- hance liquidity and manage cash fl ow.

The length of these leases are similar to that of loans, and more specialized ma- rine asset might have a residual closer to 50% after 8-10 years. Most leases in- clude an early buyout option at 3 and 5 years, or a fi xed price purchase option at the end of the lease.

Find a Strategic Ally

From a lender’s point of view, marine assets are very attractive for three rea- sons: they tend to hold or even increase in value over time; also, these deals in- volve large dollar amounts that can be fi nanced over a longer term than most other assets. That makes it easier for lenders to maintain a more stable portfo- lio of loans. But mid-size marine opera- tors should be cautious of the newcom- ers attracted to their industry.

Operators need to weigh the rela- tive strength of potential fi nancial allies very carefully. Deep domain expertise and knowledge of the collateral, length of time in the industry and familiarity with the business cycles and the ability to offer a wide breadth of loan and lease products may outweigh another lender’s willingness to shave a few basis points off a loan. Ideally, a specialty lender is more than just a lender; it’s also a stra- tegic ally to help build the business over the long term.

Marine Operators

How Specialty Lenders can Propel

BY ERIC DUSCH

The Author

Eric Dusch is Chief Commercial Offi - cer—Equipment at GE Capital, Corporate

Finance, specializing in providing com- mercial loans and equipment leases to mid-size companies. e: [email protected]

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