Shipyard Credit

Another source of shipbuilding fi nance is shipyard credit, which is a way of competing for orders. Such fi nancing may be (1) buyer’s credit (the most usual

form of shipbuilding credit), where the loan is made directly to the buyer to permit him or her to pay for the vessel before delivery; or (2) builder’s or suppli-er’s credit , where the loan is made to the shipyard which agrees to defer repay-ments or a portion of the payrepay-ments by the buyer until some time after delivery of the vessel. Th e interest rate charged on yard credit is sometimes supported or subsidized by some governments as a method to attract orders to their yards. Governments also have provided shipbuilding credit to stimulate work in their country’s yards. Th is kind of credit is in fact disguised subsidy, though the OECD and national credit agencies, such as Export-import Bank of South Korea (KEXIM), Export-import Bank of U.S. (EXIM), CEXIM (China), Export Credit Guarantee Department (UK) (ECGD), Hermes (Germany) and Export-import Bank of China (EIBC), should ensure fair competition.

Th e OECD and the WTO also attempt to control fair trade principles.

4.1.20 Leasing

Leasing is a method of increasing assets without equity input from sharehold-ers. It is also a method for a shipping company to obtain lower fi nancing rates by giving up tax advantages that they may not be able to use. Th e lessor (owner) is able to deduct depreciation from taxes. In off shore companies that pay little or no corporate tax, the benefi ts may be nil. Lease fi nancing has been a major source of ship fi nancing for decades. Long-term charters may even be considered a form of lease fi nance. A fi nance lease (sometimes referred to as a

“dry lease”) is a full payout lease wherein the lessor structures the lease so as to provide the equity portion and recover the full cost of the vessel. Th e lessee is responsible for making the lease payments and to provide all operating costs of the vessel, including maintenance, repair, insurance, crew costs, stores and suppliers, and other operating costs. Th e lessor is the owner of the vessel and essentially “rents” the vessel to the shipping company. Th e lease is for a stated period of time, and payments are made at regular intervals such as monthly, quarterly or annually. Th e lessee may have an option to renew the lease at termination of the period and at a lower rate.

In a fi nance lease, the lessor owns the vessel and charters it to the ship-ping company. Th e lessor typically has other taxable income in other opera-tions, and as owner takes tax deductions for depreciation, interest expenses and investment incentives such as investment tax credits. Th e lessor, in taking advantage of these tax benefi ts, is able to pass along some of these to a ship-ping company. Th e lessor also gains, unless otherwise agreed to, by owning the residual value of the vessel at the end of the lease. Th e lessor can then

re- lease or sell the vessel. Th e operating lease is sometimes referred to as a “wet lease”, where the lessor is responsible for providing the operating costs and maintaining, insuring and crewing the vessel.

Most vessel leases are “leveraged leases”, where an investor provides a por-tion of the purchase price of the vessel, say 20–40%. Th e remainder of the vessel price is raised as debt and is secured by a mortgage and assignment of lease payments to the bank fi nancier. In a fi nance lease, the banks always insist on “hell or high water” terms (i.e. the lease payments are always paid regard-less of any diffi culties encountered). Th e investor, as owner, enjoys benefi ts, such as depreciation, interest and investment, tax credits and residual value.

Th e key issue in leasing is who retains the residual value and under what terms.

Off -balance sheet fi nancing is a technique in which neither the asset nor the indebtedness appears on the books of the lessee, who is able to incur an increased amount of debt. For many years, in the USA, the major tanker fl eets and the major oil companies engaged in chartering, particularly with the view that the charters would not appear on their balance sheet and encum-ber further borrowing. US laws and generally accepted accounting princi-ples (GAAP) now prohibit this practice, although it is to be found in many parts of the world. Nevertheless, sophisticated lenders, in doing due diligence searches, always enquire for details of any existing charter obligations.

International accounting standard setters have been trying for years to change lease accounting. Th ey want shipping companies to record lease obli-gations on their balance sheets. Th e shipping industry balks at these propos-als, arguing that a time charter is not a lease and that, while it does involve an asset (the ship), it is also a contract for services. Th is leads to complexity in dividing the balance sheet obligations. Until these issues are resolved, the ship fi nancier or investor should move cautiously and identify all the borrower’s obligations and assure that there is suffi cient equity in the transaction before lending.

In summary:

1. frequently, leasing provides a way of increasing assets without equity input from shareholders;

2. commitment often does not appear on the balance sheet;

3. as it is not always a long-term commitment, the company can increase debt;

4. the owner cannot take advantage of shifting asset values (i.e. buying and selling);

5. leasing provides tax benefi ts.