As Banks Step Down, Equipment Finance Companies Step Up

Thursday, April 04, 2002
Shipowners are known for having distinct differences of opinion, but the one thing that all agree on is the importance of having access to capital. In an industry in which assets are generally big-ticket items and operating margins can be thin, access to proper financing serves the dual purposes of fleet growing the generation of healthy operating returns.

Most shipowners would also agree that financing for maritime assets generally isn't easy to find. There are various reasons for this. One reason is that few lenders focus exclusively on marine finance and a result most lending institutions are not familiar enough with marine assets to feel comfortable financing them. In addition, unlike the aircraft market where planes are considered fungible commodities, most bankers are also uncomfortable with the reality that marine assets often fit a special niche. Their fear is that if the market dynamics in that niche change, the banker could be left with an asset that is very difficult to sell at anything but a fire-sale price. A good example of this is a ferry purpose built for a specific route. Although these fears sometimes exist in the international ship finance community, they are more pronounced in the Jones Act trades in which there are only a handful of American buyers for a particular asset and where relatively high values preclude sale in the international market.

While the trend has been for banks to retreat from U.S. marine finance, in the last several months we have noticed more and more U.S. equipment finance companies taking an interest in the sector. First off, the current low interest rate environment has caused the relatively high margins historically offered by finance companies to become manageable for shipowners. Second, finance companies like Boeing Capital, GATX and GE Capital that are heavily invested in aircraft view ships as another high value asset class through which they can diversify sector risk while still capitalizing on their structuring and equipment expertise. U.S. Flag vessels can also offer very attractive depreciation benefits that can be enjoyed by the finance companies if a lease structure is used.

Another bit of good news for the U.S. shipping community is that finance companies are not necessarily well-suited for financing in the international shipping markets. We say this because the pricing offered by specialized international banks is low and because opportunities for capitalizing on depreciation will not be available due to the fact that most international shipowners are registered in offshore tax domiciles.

One of the specialties of these U.S. finance companies is known as a sale/lease back. Through these transactions, shipowners sell their assets to the finance companies and agree to charter them back for a period of years. Shipowners can also negotiate options to purchase the ship at various times through the term of the lease. It should be noted that sale/lease backs are more challenging with tank vessels where finance companies are often not willing to accept the unlimited liability associated with the Oil Pollution Act of 1990. While oil majors have been known to offer OPA indemnification, smaller tanker owners generally don't. That said, these alternative lender/lessors are capable of creating structures that can balance risk and reward more equitably than traditional bank debt.

In addition to providing secured financing through senior loans and leases, U.S. finance companies have the potential to excel by offering higher advance rates than banks.

Some background is provided (in the paragraphs below) on a few of the finance companies (presented alphabetically) that are active in the marine sector. Also provided is some insight into the size and types of deals that these lenders are looking for. What you will find in reading through these brief profiles is that each of these lenders is taking a different approach to marine finance and that not every deal is right for every finance company.

It is also important to realize that not every finance company that is active in marine finance in represented in this brief article. If you would like to receive more information, please do not hesitate to contact us.

Boeing Capital

Until recently, the name "Boeing" was only uttered in shipping finance circles in relation to its involvement with the legendary Sea Launch program. In early 2001, though, Boeing Capital Corp. (BCC), which was formed from the finance arm of McDonnell Douglas, appeared on the shipping finance scene and promptly closed a $97 million transaction with International Shipholding.

Using the model of marrying financial services with manufacturing (pioneered by GE Capital) BCC's role within the larger organization is two-fold: to support the airplane manufacturing business and diversify the company's sources of revenue. If BCC's model is similar to GE Capital's, its scale is not: Boeing's $7.5 billion portfolio is dwarfed by GE Capital's $750 billion portfolio. BCC's move into shipping finance makes sense. First, the BCC's strategy of having a small number of people manage a large pool of assets means that they prefer to finance big-ticket assets that can be put away from long periods — shipping fits the bill. Second, shipping represents a way for BCC to diversify its exposure to the aircraft sector. Third, financing ships allows BCC to put capital to work without competing with the aircraft leasing companies that are clients of the Boeing Corporation.

From our perspective, Boeing appears to be most interested in working with corporate credits, but would consider doing deals with independent shipowners that possess the ubiquitous "Three Cs" — Character, Credit and Collateral.

GATX

Unlike many financiers, GATX isn't afraid to own ships; they are, in fact, so unafraid that GATX Marine encompasses the single largest asset concentration within GATX Specialty Finance. GATX owns covered-hopper grain barges, tank barges and towboats that operate on the U. S. inland waterways and offshore supply vessels and drilling rigs that work in the Gulf of Mexico. GATX Marine also includes the self-unloading bulk cargo carriers that American Steamship Company operates on the Great Lakes. On the blue water side, GATX's fleet includes factory/freezer fishing vessels, ocean-going tugs, log carriers, container ships, oil tankers, and gas and chemical carriers.

GATX Marine's confidence in their credit and equipment judgment has evolved into something very unique in ship finance — a willingness to partner with shipowners on an equity basis. In our view, this is where GATX really distinguishes itself — through their joint ventures with shipowners, such as IMC Holdings of Hong Kong and I.M. Skaugen of Norway. In both cases, GATX Specialty Finance invested in specialized gas and chemical carrier newbuildings, the first of which was delivered from China on July 3, 2001.

Another piece in the GATX puzzle is their involvement with AMA Shipping Funds I and II — equity funds managed by New York-based American Marine Advisors. The combination of debt and equity allows GATX to capture fees and benefits from all aspects of transactions with the select shipowners they believe in.

GE Capital

GE Capital is unique to ship finance in that they will do deals for companies with a weak credit profile, so long as they like the underlying business/transaction. GE's 9 to 1 leveraging of its AAA balance sheet allows the company to assume risk where they feel the premiums will fairly compensate them for doing so. There are several results of this business strategy.

For one thing, GE often acts as more than just a lender. Like GATX, GE is willing and able to take a view on a market sector and provide financing that makes sense, irrespective of leverage or borrower credit standing. In order to be compensated for risk, GE uses a quiver packed with specialized products not seen at other ship finance shops.

From equity to senior and junior debt, from structured finance investments to sophisticated leasing and other tax-advantaged products, GE has loads of mechanisms by which to exact their fee — which can be dear.

Despite GE Capital's overall size, the shipping desk doesn't do a tremendous amount of business. In the last four years, GE has only underwritten about $350 million in financings — some of which, like Essar's suezmax facility, they syndicated.

It's worth noting that while other finance companies move in and out of shipping, GE has maintained a permanent presence in our industry for more than two decades. Even when the company isn't originating loads of loans, GE has made the decision to keep a relationship manager "on-duty" in the marine finance market. One of bi-products of this permanent presence is that the company has spawned lots of ship financiers, including Great Circle Maritime's dynamic duo Kevin Kennedy and Bob Burke. During 2001, the baton was passed to veteran shipping financier Ron Dal Bello, formerly of FleetBoston. At press time, Arvid Bergvall, formerly of OneSea.com, is sitting on the GE marine desk. He is employed by V Ships and is on a rotation with partner GE.

Conclusion

While historically finance companies have not been competitive lenders, changes in the shipping and banking industries may allow them to be in the future. We think finance companies have the potential to become very important members of the U.S. shipping community.

Cummins Inc. And CitiCapital Launch Alliance

Cummins Inc. and CitiCapital have reached an agreement to promote a co-sponsored marine finance program. Under the agreement, customers who purchase Cummins engines for various commercial vessels will receive exclusive finance products provided by CitiCapital.

This agreement demonstrates the cooperative efforts of both companies by bringing together the premier manufacturer of marine engines and the world's largest financial services conglomerate. The agreement will initially cover the U.S. and Canada with expectations to rollout worldwide.

"Financing solutions are critical with any marine projects, whether it's a new vessel or a major repower. Cummins Marine customers deserve the very best in products and services. We are very pleased to now offer CitiCapital's considerable strength and marine experience to Cummins Marine customers," said Dennis Spriggs, Financing marketing manager for Cummins, Inc.

"By bundling power and financial solutions, the end user customer gets better overall service than they would if they sourced the separate parts of the transaction individually.

The alliance between Cummins and CitiCapital will save customers time, provide a high level of quality and service and potentially money by taking advantage of this powerful alliance," said Joe Pitch, vice president of CitiCapital's marine operation.

CitiCapital will provide dedicated marketing and sales support to Cummins Marine distributors located in the United States and Canada. The goal of the program is to provide marine financing solutions to customers who select Cummins marine engines to power their commercial vessels.

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