Typically, prospect yachts owners will be facing numerous important organisational issues when arranging the acquisition of their yacht, typically in conjunction with the shipbuilding yard or the yacht dealer. Altogether, the decisions will have consequences on the yacht management cost and the ability and amount of financing that is made available by banks. The extent of financing granted depends on a multitude of factors, but principally on the ability to foresee the development of a yacht’s future value, income streams and quality of security given to the bank.
The classic means of securing yacht financing are mortgages, the pledging of the shares of the company that legally owns the vessel and possibly additional formal or informal guarantees granted to the bank by the beneficial owner. However, with regard to realising the asset, be it by the bank in case of a default or even in the case of a regular sale, a yacht will remain an illiquid asset and the transfer of ownership is cumbersome.
In recent years banks have increased their requirements in response to tightened capital adequacy rules and generally have a more conservative approach to risk. Also, banks tend to be much more critical with regard to the typically used yacht holding structures that involve legal entities, trusts and similar structures, often located in jurisdictions considered to be high risk by the bank.
In the commercial sector the capital markets have been used to provide a valuable alternative source of funding, since shipping companies can’t only rely on their bankers for funding. Therefore, the securitisation of whole fleets is common in commercial shipping.
In the private sector, in which we here include yacht chartering operations, the securitisation of a yacht is not frequently considered or even known by prospective yacht owners and charter fleet operators as an option to structure the ownership of a yacht. Yet, the securitisation of yachts is beneficial to the interests of both the financing bank as well as the owner, since it transforms the yacht into a tradeable security, as easily tradeable as any other security people may have on their bank deposit.
The concept explained
Securitisation is a structured finance transaction, whereby the original owner of an asset, the Originator (e.g. the shipyard, dealer or current owner), truly sells an asset (the yacht) to a Securitisation Special Purpose Vehicle (SSPV). In order to finance the acquisition the SSPV issues notes to investors (in case of a privately owned yacht the beneficial owner(s) of the yacht and in case of a charter fleet possibly third party investors). Hence, the asset is “repackaged” into debt securities and the securitised yacht is the asset backing the security.
These notes have an ISIN (Swiss or Maltese), are dematerialised and possibly even listed. As such, the notes can be booked into any securities account and also be pledged, e.g. in favour of the lending financial institution, which may even accept to grant the notes a lending value in the context of securities-backed loans. Subscription, sale and redemption of the notes is done in the same way as for any other security through the established clearing and settlement agencies (e.g. Clearstream, Euroclear). These eliminate the need and cost to have an escrow agent.
Why is securitisation ideal to own a yacht?
A securitised yacht is no longer represented by the materialised paper shares of a private company, but by electronic securities, just like shares in Amazon or Treasury Bills. The owner of the yacht is the SSPV, which holds the yacht as the asset to back the investors. The transfer of ownership of these notes that represent the yacht’s value is done in the same way as for any other dematerialised security through a settlement (typically in form of DVP Delivery versus Payment) by Clearstream, Euroclear or any other major settlement agency. No need to use a costly escrow agent, no need to send shares of a yacht holding company around the globe.
For a charter company, that often operates a investor program, securitisation is a way to professionalise the typical loan agreement of profit participating structure and therefore a way to increase its attractivity through the financial markets.