Yacht financing is a great way to offset the longevity and risk associated with any superyacht project. However, securing the right terms and conditions is not easy. Superyacht Report editor Will Mathieson talks to the experts for their insights on what any potential buyer should be considering.
Traditionally, the exposure to the longevity and risk associated with buying a superyacht has been offset by the procurement of a loan to purchase the vessel. In the 'boom years', from 2003-2008, it is no exaggeration to say that finance for such purchases was readily available. Prominent consumer banks were lending on yachts through their corporate arms, while repayment rates and loan-to-value (LTV) ratios were competitive and in favour of the loanee.
However, the crash in 2008 changed the superyacht finance landscape significantly, as it did many others. For many of the aforementioned lenders, lost fortunes and books of half-finished yachts made the prospect of future lending politically suicidal. In the subsequent years therefore, there has been a degree of yacht mortgage market retrenchment, with many lenders dropping out of the market.
"There is no doubt that the landscape for superyacht finance has changed since the global financial crisis," admits Leon Batchelor, MD of luxury asset finance procurement firm Arc & Co. Marine and Aviation. "Long gone are the days of achieving loan-to-values of 90 per cent at margins of 150 basis points over three months. Pressure from banking regulation and significant drops in valuations have led to far more conservative lending mandates being approved by the banks."
For Batchelor the loanee-driven market of previous years has given way to a more stringent mortgage structure, characterised by higher LTV ratios. "Today's superyacht finance options are split into two camps: yacht loans, taking only the yacht as security, and yacht loans taking the yacht as security and an investment portfolio. In the case of the former, a few LTVs can go up to 70 per cent but most go to a maximum of 50 per cent. The latter can be structured to provide 100 per cent financing but retaining 40 per cent of the loan to invest with the bank, resulting in a net exposure of 60 per cent."
However, as B Capital's Bob Atkinson explains, despite the growing list of parameters the belief that superyacht finance is no longer available at all is a popular misconception - it continues to be available to the 'right' client. But they "will need to be flexible and transparent in today's market, as the banks have changed considerably over recent years. Only a few banks will entertain financing a yacht, the options are therefore restricted and the client should be well prepared and organised." Clients must also accept that, in all but exceptional circumstances, a superyacht loan serves as an incentive for a longstanding portfolio management relationship. It is, in effect, a 'sweetener', used to entice prospective clients into the arms of private banks.
"There are more finance options available to those clients that are buying second-hand yachts", says Batchelor's colleague at Arc & Co., Andrew Bond. "Most banks are only comfortable financing yachts that are completed, rather than taking the risk that both the client and the shipyard remain financially sound over the three- to five-year build period."
"The lenders that are comfortable financing during construction require refund guarantees from the shipyards and the right to register their mortgage once the hull is laid," continues Bond, who is head of private clients. "The strength of the refund guarantee issued by the shipyard plays a big part in a lender deciding whether or not to provide construction finance. The top-tier shipyards that have stronger financials can provide stronger guarantees, which in turn provide more comfort to lenders."
Furthermore, the profile of the lenders themselves has changed, as Atkinson can attest. He used to head Barclays Private Clients' superyacht operation. But what was once one of the market's most prominent players has lost its appetite for such activities, and nowadays the market, "is dominated by a small number of private banks who use the yacht purchase as an opportunity to expand or to establish a relationship with a UHNWI [ultra high net worth individuals] who would need to undertake further business with the bank from the outset."
According to the providers then, it appears the means of purchasing a superyacht are there. And what all of the aforementioned experts agree on is the importance of formulating a purchase or build contract that is built around the mortgage.
"The bank needs to be happy with the contract that they may have to take over as owner, and complete the project or sell on," John Leonida, who is a partner at Clyde & Co., explains. "From a banker's perspective, the contract has to be fair, and it has to be marketable and not a basket case. I have acted for both banks and builders, where the bank has forced a contract renegotiation because it would not finance the build on the terms that the borrower had originally negotiated with the builder."
Andrew Charlier, who is global head of yachts and superyachts at Ince & Co., says that, in the case of second-hand purchases, the MYBA memorandum of agreement is so ubiquitous that it facilitates the most efficient transactions, but he caveats the need to enact the right to sea trials, as the MYBA memorandum surrenders the buyer's rights to any warranty claims.
Of new builds, Charlier advises pragmatism, as there is no template for such a bespoke project. In addition to meeting certain criteria, he explains, "banks will have a list of approved flags, for enforceability of the bank's mortgage in the event of borrower default, and yacht managers, and will require legal and tax opinions in respect of the borrower, guarator/s, enforceability of security and the VAT and customs status of the yacht."
In the case of a new build, with the contract signed, it is imperative that the client be vigilant with regard to all payment milestones. "The fundamental issue behind instalment milestones is to balance the need of the builder to fund the construction and the need of the buyer to ensure his security in the yacht covers his instalments," explains Duncan Bateson of TLT Solicitors. "Upfront instalments are preferred by the builder, while buyers prefer to backload them."
But regardless of whether the purchase is of a new or a second-hand vessel, two documents are of primary importance - a bill of sale and the protocol of delivery, which will identify the place the yacht was delivered to, and as such, could well have tax implications. Whatever happens, "don't go into a transaction blind," Leonida warns. "Never buy a superyacht as a private individual. Ring-fence any liability by putting a company betwixt you and the yacht. If the yacht gets into an accident, the liability is generally limited to the yacht-owning company."
To reduce one's exposure through this process, and in the opinion of Abacus' Paul Swindale, the most important facet of any superyacht transaction is the assembly of an exemplary deal team, which "will help to mitigate the risk of an fiscal errors to the underlying owner". Swindale believes a good team of representatives should increase their level of scrutiny of the yard team to near-constant level as the delivery nears.
When taking delivery of the yacht, history may suggest that ownership is an exercise in reducing the bottom-line cost. But this is no longer the case, and superyacht ownership would be treated like any other corporate entity.
"Contrary to much historic thinking on yacht ownership, the starting point should be that European VAT is ordinarily payable on yachts sailing in EU waters", warns Alex McBarnet of Rhone Trust and Fiduciary Services. "There may be ways to minimise the tax burden of ownership, and for some, VAT may not be liable on the yacht itself at all. But there will always be conditions and restrictions in any structure that reduces the VAT liability. It is essential that a buyer understands and accepts these conditions and restrictions before proceeding."
Equiom's Ayuk Ntuiabane echoes this sentiment, saying it is no longer about "making raids on the revenue", and forward planning is necessary, and distinct, for the status of one's vessel. For a new build of course, the key choice is whether to 'go private or commercial', which will dictate whether VAT is applied to the purchase.
But Ntuiabane says buying a half-built project is much more of a minefield, triggering plenty of questions, such as: "What is the tax impact of cancelling the contract? What is the impact of moving the yacht to [another] shipyard? How does one deal with accompanying items already received or still to be received?"
And when it comes to purchasing a luxury superyacht, it is imperative, he adds, that the buyer knows the tax history of the vessel implicitly so that any changes in usage can be verified as tax-compliant.
Superyachts are transient entities governed by the rules of multiple jurisdictions, and it would be naïve for potential owners to treat them any differently from their commercial activities. However, with the right advisory team in place and the use of a sensible vehicle to finance the purchase, there is no reason that this new-found professionalism should hinder this uniquely special experience.