Interview with Olivier Blanchet, Head of Jet
& Yacht Finance at BNP Paribas.
Points to be considered by a client to ensure the best re-sale value. First of all, the essence of a construction project is
the passion of the future Owner for his or her yacht (the “Yacht”), and we’ve not seen re-sale value or charter revenues being a main driver on this kind of project. That being said, when the time comes to consider the financial aspects of the Yacht during its life, several factors can be considered to enhance its marketability. Pedigree is an important element, as a future buyer may place value on the name of the builder or interior designer. Registration of the Yacht is
also important, as stronger regulations apply to commercial yachts than to private yachts. It does not mean that you cannot change from one to the other, but generally changing a private yacht to a commercial register will require some technical adaptations and security upgrades. On the contrary, a commercially-built Yacht can be registered and
used fully privately. In our opinion communication is also a key factor to enhance re-sale value and potential
charter revenues. Letting press come on-board the construction will raise interest and ensure cheap advertising for the Yacht, and most of the builders are keen on showing their skills and techniques. On the same idea, award-winning yachts are more likely to attract attention towards their stern. From a BNP Paribas perspective, when we structure a new financing, we will be careful in assessing the future market value of the Yacht from its delivery date and throughout the tenor of the financing up until the final maturity date. All factors here above mentioned are critical
to assess the forward value of the Yacht. On top of them, a few other also include:
i. The project management team on the Owner’s side;
ii. The selected shipyard (the “Shipyard”);
iii. The Crew; and
iv. The Technical Manager.
All the stakeholders will bring value to the project and this will be decisive to offer our clients a competitive and attractive financing ratio. The bank offers financing against a mortgage over the Yacht. In other words, the Yacht is the
primary security of the financing. In simple terms, the more the Bank will be comfortable in the Yacht, the more it will be inclined to raise the amount of the financing. A dedicated and independent project management company comprising experienced projects managers, naval architects and engineers may be less shy to challenge the progress of the shipbuilding process than an inexperienced Owner Representative or a lonely Project Manager The best price is not necessarily the best deal! Conduct your due diligence about the Shipyard; assess the underlying quality of the materials, the suppliers, the processes, the team, the track-record of the Shipyard, and its history (see below).
Crew is important: the Chief Engineer and Captain can work hand-in-hand up to 12 months before delivery of the Yacht at the Shipyard to make them familiar with the Yacht under construction and customize the Yacht according to their needs. Good crew can enhance the Owner and Charterers’ experience on board. Bad crews can literally ruin a
Yacht. Technical Manager: provide a 24/7 service with world-wide coverage. Having a Designated Person Ashore (DPA) is essential. Ensuring planned maintenance is key.
What is the financial impact of a delayed delivery?
Most shipbuilding contracts do include a clause dealing with Permissible Delays and extension of the Delivery Date. This clause should treat serious events, such as force majeure or right of termination for excessive delays, but also minor delays due to variations to the contract. Most of the common cases of delay can be solved through a commercial discussion with the Shipyard. For example when an Owner asks for a modification of the project during the building, the Shipyard will present a Variation to Contract notice, stating two items: 1) cost of the variation and 2)
additional delay to the delivery. When the delay is asked by the Shipyard, the situation is usually solved with additional equipment or reduction of the contract price. From an Owner’s perspective, what’s worse than a delayed delivery is a rushed delivery. It is important to allow time for the Shipyard and the construction team to deliver a properly and fully finished Yacht, with extensive equipment testing and after sea trials have been completed. It is important to have the Yacht ready for the next vacation, but you don’t want to take delivery of a 90% finished Yacht, because the Shipyard
needs the berth for its next project, or because the Shipyard will incur financial penalties right after the contractual delivery date. The exact Delivery date of the Yacht is always an on-going discussion between the Owner and the
Shipyard during the construction process. The most frustrating “delayed delivery” would be related to the bankruptcy or the receivership of the Shipyard or its main subcontractors and/or suppliers. This could trigger unpleasant financial
consequences for the Owner, hence the importance of the choice of the Shipyard and the negotiation of the shipbuilding contract (“SBC”) are key. A bank can facilitate the discussion to find a balanced agreement between the parties as well as consider the possibility of risk mitigation such as requesting refund guarantees from the Shipyard.
Where do the financial risks lie for the client?
Financial risks are numerous and the amounts of money involved are significant. Fortunately, our clients are risk-takers and familiar with risk assessment and mitigation. The higher financial risk stands with the financial situation of the Shipyard. Owners shall ask themselves: “OK, I will give tens of millions to this Shipyard. What are their abilities to deliver what I am paying for?”. It is crucial that the client performs an in-depth due diligence of the Shipyard.
Financial risk: intimate knowledge of the Shipyard, its financials, its management team, shareholders, subcontractors and order book is necessary to obtain a clear idea of the various risks factors of the construction. Certain shipyards stand on one key manager or shareholder. Building a yacht requires the input of several sub-contractors.
Some of them are essential and if one of them defaults, this can jeopardize some aspects of the shipbuilding process.
Building a yacht is also an infinitely complex process. Signing an eight or nine digit contract,you may want to obtain some comfort about the financial soundness and managerial stability in the Shipyard you contract with. You may wish to shake the hand of the Owner of the Shipyard to support your confidence in the ability of the latter to deliver.
The last thing you want is the bankruptcy of the Shipyard. The yacht building industry is changing fast. The
common standards are changing. What was true yesterday is no longer a promise or a commitment to deliver in the future. It is key to understand and to factor these changes. Today for instance, the prominent builders take the lion’s share; some smaller shipyards face financial difficulties, other grow-up rapidly. And every year sees its share of restructuring, merger and acquisition, bankruptcy, receivership, and layoffs. Family owned, long lasting shipyards are now acquired by large industrial groups or private equity funds. Another way to mitigate the financial risk
against the Shipyard is to obtain a refund guarantee from the Shipyard’s bank covering the installments paid by the Owner to the Shipyard in case of bankruptcy or inability of the latter to deliver the Yacht as per the terms and conditions of the SBC. Refund guarantees would usually expire upon the keel laying of the Yacht under construction.
Upon keel laying, the yacht becomes your Yacht! It is no longer a pile of steel and this becomes possible to register it under construction into a special registry in the name of its Owner: the owning entity of the vessel, as opposed to the Shipyard. Instead of the refund guarantees, the first installments paid by the Owner to the Shipyard will be secured by an actual Yacht, duly registered and under construction. Insurance risk: many things can happen during construction leading to a total loss of the Yacht: fire, flood, war, and even Acts of God. Insurances during construction are also an important risk mitigating factor. It goes without saying that the basic due diligence will consider the insurance covering both the Shipyard in itself and also the Yacht under construction. Performance risk: the Owner also takes a performance risk on the Shipyard i.e. the ability of the Shipyard to deliver a Yacht that complies with the technical specifications of the SBC i.e. to obtain what you signed for. Paying regular visits to the Shipyard and reviewing the progress of the construction is clearly something every Owner or representative should do. And this is not only to control the quality of the process but above all, to motivate and empower the builders. This is highly rewarding for the
Shipyard and its employees to receive the visit of the Beneficial Owner. Having BNP Paribas alongside as a financing
bank will also reduce your risks. In a new-build project our job is to finance the construction of the Yacht. In that sense, the Owner and Bank become partners. At the same time, on the Shipyard’s perspective, having a bank on board dilutes the counter party risk, which is also a good point when both parties are engaged for the next 24/36 months. As maritime bankers, we take the pain and support the Owner’s team in the follow-up while you enjoy your new asset!
What are the key elements in negotiating a fair contract?
From a financial perspective, the key elements of a fair SBC will revolve around the transfer of ownership and schedule of payments. It is quite important for the Owner to understand at which stage he or she effectively becomes Owner of the Yacht. The common options are either during the construction (in most case at the keel laying stage), or at effective delivery of the Yacht. Depending of the case, the Owner might choose different options to guarantee the payments
made to the Shipyard. Usually, payment of the contract price is made through several installments during the construction upon different milestone. It is crucial to have these milestone certified by an independent surveyor to ensure that the Owner is paying for works effectively performed, and not to finance the future capital expenditure of the yard. As a general rule, it is recommended to try to negotiate the biggest possible down-payment upon
delivery, as is the practice in the private jet industry. However, it will be part of a larger discussion on other items with the yard. It is also important to remember that the protocol of delivery in itself is a key document for the life of the Yacht, as the starting point of the warranty period, and must be carefully negotiated. Additionally, certain warranty extension (on, say, the engines) can be requested. To avoid never-ending discussions upon signing the Protocol of Delivery highly technical points (such as paint and paint defects for instance) should be well covered in the initial SBC.
BNP Paribas has proven experience and successful track-record for the pre-delivery financing of large Yachts built by recognised shipyards.