Superyachts, risk and reward for financial institutions
It is becoming increasingly popular for the world's ultra rich to borrow against their luxury assets. However, more so than other assets, superyachts pose a unique set of problems. We explore the risk and reward for financial institutions of owners borrowing against superyachts.…
It has, it recent years, become increasingly popular for ultra-high-net-worth individuals to turn to luxury asset lending to raise funds quickly. Need to free up some cash for your fourth holiday home; why not finance the investment by borrowing against your Picasso or superyacht? To borrow against a luxury asset can be both beneficial and hazardous for financial institutions and borrowers alike and few assets, if any, pose a greater risk to financial institutions than superyachts.
“When it comes to the financing of superyachts, one of the standout concerns for financial institutions is valuations,” starts Leon Batchelor, managing director of Arc&Co. Marine & Aviation. “There has been a reluctance on the part of the superyacht industry to create any form of blue book or red book, reference standards for the aircraft markets and British real estate market respectively. While valuations still vary, the valuations on these databases provide banks, and, therefore, risk and credit officers within the banks, with a degree of comfort.”
The issue, Batchelor explains, is not so much the issue of initial valuations. With qualified and accredited maritime appraisers available, accurate and objective valuations are perfectly attainable. However, such valuations do little to convince financiers or residual value. Unlike the aviation industry where there are a limited number of serious players, maintenance schedules and more stringent regulations and standards, the superyacht market is exposed to a far greater set of variables and very little by way of available data. While variety may be the spice of life, it does little to encourage financiers to part with their capital.
“We have personally attempted a couple of times to raise funding for a yacht lending credit fund and the constant objection that we have received is the issue of residual value. What will the yacht be worth in five years’ time and what is the annual depreciation? Unfortunately, no one, understandably, has been able to provide concrete answers due to the sheer number of variables that need considering,’ continues Batchelor.
The variables, to which Batchelor alludes, are well known within yachting circles. How often will the yacht be used yearly? Will the yacht be chartered or kept private? Is there high crew turnover? How experienced are the crew on board the vessel? Frequency and level of maintenance? Where will the yacht be kept and used? How old is the yacht? The list goes on. However, this is not to say that banks and other financial institutions will not engage with superyachts, because clearly, they do, it just means that the parameters they set may be more restrictive than they might otherwise be when lending against a less volatile asset.
“The banks need to be able to ensure that the amortisation of the loan will be quick enough to keep pace with depreciation. For this reason, some banks will only lend against superyachts that they feel, or have been advised, retain better value. Primarily these vessels tend to come from northern European yards,” Batchelor says. “Equally, there is the risk that, should the client default on their loan, whilst in a tricky jurisdiction, the bank may not be able to reclaim the vessel.”
If an owner wishes to finance against his superyacht, it is more than likely that the loan will come with a set of covenants that will set restrictions on how the yacht can be used, as well as creating criteria by which the bank is able to keep tabs on the asset. These may include the financial institution demanding that the yacht be put under independent management, restricting where the yacht may be used, annual valuations at the cost of the owner, regular wealth checks against the value of the yacht and the loan, insurance coverage and a host of other requirements. It is also common place for the financial institution to require the borrower to move assets, ordinarily worth 50 per cent of the loan value, into the management of the institution.
“However, superyachts also provide a real opportunity for banks. Because of the volatile nature of the asset, banks are able to benefit from some rather healthy margins on their loans,” explains Batchelor. “Equally, luxury asset lending provides a wonderful opportunity to build a relationship with exactly the type of clients that banks value.”
While the volatile superyacht market quite rightly poses challenges for financial institutions, it also provides opportunity and, as the market continues to progress and professionalise, the degree of the variety should, in theory, begin to shrink. For lack of a book of any colour, the responsibility falls on the superyacht market itself to provide sufficient data to financial institutions in order for it to be perceived as more liquid than lay opinion would suggest.
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