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Fifth Third Bank | All Rights Reserved Vessel Financing Choices for Ferry Operators
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2 Fifth Third Bank | All Rights Reserved Sample of vessel financing products available in the market today: For passenger vessel businesses: Debt Products Conventional vessel financing provided by a term or revolver loan; Lease Products (bareboat charters) Operating Leases – vessel owner (Lessor) retains tax ownership and benefits Passenger vessels owned by government agencies: Tax Exempt Municipal Leases Lease purchase financing using annual tax revenue streams to acquire essential use equipment at lower interest rates (tax exempt to the Lessor)
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3 Fifth Third Bank | All Rights Reserved Characteristics of Debt Financing Owner/Operator guarantees entire debt An equity investment may be required to provide collateral coverage to a lender; however, amount of equity depends on financial strength and credit quality of the borrower. Loan amortization and term will vary depending on the age of the asset and financial strength of the borrower. Interest rate is either fixed or floating, or a combination, tied to a specific market index as such as interest rate SWAPS based on the length of the loan term and amortization. Most banks are cash flow lenders and usually require some type of loan covenants while commercial finance companies may not, focusing more on the collateral.
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4 Fifth Third Bank | All Rights Reserved Basic components of an operating lease: Vessel Owner (financial institution) buys the asset at its FMV and takes a residual position in the vessel, expecting to recoup the residual when the asset is sold. Charterer (operator) has no equity interest in the vessel. Charterer leases the asset from the owner. The rent payments cover only a percentage of the owner’s investment. Use and return conditions are required (operator has responsibility for all maintenance and repairs). Owner (Lessor) must fund any additional capital improvements. Basic components of Lease include: a fixed lease term, predetermined number of lease payments, and purchase options during and at end of lease.
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5 Fifth Third Bank | All Rights Reserved Tax Exempt Leasing for Government Agencies A lease purchase agreement using a sales installment contract with an end of term $1 purchase option. Lessee (buyer) takes title to the vessel and grants the financial institution a security interest in the asset. Each lease payment has a principal and interest component, however, the interest paid is exempt from Federal Income Taxes. The vessel must qualify as “essential use” equipment. Lease obligations generally are not classified as debt. Lease may be terminated and equipment is returned in event funding is not available in subsequent fiscal years. Lessor bears the risk of the lease being terminated and taking vessel back. Other passenger vessel financing instruments include general obligation bonds, revenue lease bonds and abatement leases. Lease purchase financing (municipal leases with nonappropriation clauses)
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6 Fifth Third Bank | All Rights Reserved Basic Vessel Financing Prerequisites Need to understand your business and your niche in the market Predictability of the business to generate revenues and service the proposed debt; use historical information and projections supported by solid data Capitalization- how will the operator be able to manage through a downturn in business? Credit history with comparable debt (most municipalities have publicly rated debt by a rating agency) Operating history, safety record, summary of insurance coverages carried What is the collateral coverage in the transaction? How financing requests are typically analyzed:
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7 Fifth Third Bank | All Rights Reserved A Lender/Lessor’s perspective on collateral coverage and residual values Collateral coverage is determined using an estimated orderly liquidated value (OLV), i.e., what the vessel will sell for using a 6 -12 months time frame. Collateral coverage is also impacted by estimated repossession, custodial and selling costs. The asset’s remaining useful life at lease end- determined by fresh or salt water usage, engine life and type of repairs required to renew Coast Guard certificates at end of the lease. Future value is based on a variety of factors: market conditions, depreciation, replacement cost, regulatory matters, and obsolescence brought on by new designs and technology. Debt Financing Transactions : Bareboat Charters and key considerations in determining residual values
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8 Fifth Third Bank | All Rights Reserved Comparing the relative advantages of one form of financing over another depends on the operator’s needs. Obtaining the lowest financing cost 100% financing for the full cost of the project Structuring a transaction to match debt service with the vessel’s income stream Refinance to manage the balance sheet Reduce depreciation and exposure to AMT One stop financing source to handle construction and take out financing What are the priorities?
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Fifth Third Bank | All Rights Reserved Steve Isaacson Vice President Equipment Finance Group Fifth Third Bank www.53.com Steve.isaacson@53.com 425-605-6381 www.53.com Steve.isaacson@53.com
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