Adina Bates, head of yacht finance, and Nicolas Feit, CEO of Société Générale Private Banking Monaco, on how well-structured lending can be part of a pragmatic ownership strategy.
The global fleet of superyachts in operation has consistently expanded. There are encouraging signs for sustainable development and evolution of our industry, fuelled by the exponentially growing number of UHNWIs in the world. The yachting world is a wonderful laboratory for change, innovation and promotion of craftmanship.
With about 3,700 owners for the 5,500- plus yachts in operation, many of the owners have more than one vessel and they are often repeat owners. The market is therefore made up, to a lesser part, of new buyers.
But that said, we can question why many UHNWIs with the capacity to build or buy yachts are simply not tempted by the allure of adventure on the seas.
Environmental/climate-change concerns, perceived image or reputation linked to owning such assets in some parts of the world, little knowledge of the industry and of the innovation effort that lies behind it are some of the explanations.
A more pragmatic reason that is often repeated is that a yacht is not seen as a traditional investment. Buyers are either passionate about the sea, the maritime ecosystem and accept the associated cost thereof, or it needs to be demonstrated to them that there are possibilities to efficiently structure their yachting experience. With a low use rate by the owner or their family, and high maintenance costs, astute entrepreneurs are keen to explore all possibilities to lessen the costs, including the cost of depreciation. New ownership models are being explored to address some of the reasons for this hesitation, such as fractional ownership among others.
Another possibility to optimise the cost is to structure the funding of the acquisition in such a way that part of the equity, initially budgeted towards the transaction, is invested in value- creating projects instead. Borrowing is used as a cash-flow-optimisation tool. Yacht loans are generally guaranteed part by a marine mortgage and part by financial assets. The latter are invested according to a strategy agreed between the client and the bank, according to the risk appetite of the client and general market conditions.
Under this structure, the bank can finance up to 100 per cent of the fair market value of a yacht, with a major portion of the loan secured against the asset itself. Repayment is scheduled quarterly or annually in arrears and includes a balloon payment at the loan term. The mechanism allows the borrower to adjust the timing of repayments to match their future cash events. The overall financial position of the client remains more liquid over time and part of the cost of the loan is covered by the return on the invested portfolio. As a result, more than half of the market value of the yacht can be reallocated by the client to their own projects, which usually generate returns in excess of the marginal loan cost.
