In today’s market, finance is not easily available. The biggest ship finance bank, HSH Nordbank, even announced early September that, given the market outlook, it will not finance any new acquisitions of ships. In the yachting market the situation is not much different. Banks are very reluctant to lend money.
At the same time in certain segments of the market prices are at an historic low; a good moment, one would say, to step in. But when money is not available, this becomes difficult.
Seller’s finance may be a solution. Seller’s finance is a form of finance where the seller lends to the buyer part of the sum the buyer needs for the purchase of the yacht. Part of the purchase price is being paid, and part financed. As concerns that financed part in fact no money passes between the seller and the buyer, as the payments are being set off.
The security which a seller will obtain for his loan will be the kind of security a bank would otherwise have: a first preferred mortgage on the yacht, assignment of insurance payments and, in case the yacht would be commercially operated, assignment of income. Finance documentation shall be drawn up to properly secure the interests of the seller.
A commercial interest should be charged, which could be a fixed rate or a rate based on for instance EURIBOR (for Euro loans) or LIBOR (for US Dollar loans). There should be an amortisation scheme according to which the loan shall be repaid. The simplest form would be linear repayment over a number of years. Other schemes may be agreed, e.g. a lower repayment over a number of years with a balloon payment at the end.
The part of the price which may so be financed can be anything between 0 and 100%, although something between 50 and 70% seems realistic. The part shall never exceed the amount that might realistically be recoverable in case the buyer would appear not to be able to repay the loan. What that amount is, will depend on a number of things, such as: what is the expectation that the market will do during the currency of the loan? Is the yacht a “commodity” in the sense that there will always be a market for such yacht? Where is the yacht expected to be sailing?
The buyer shall accept that the relation between the seller and the buyer, where the finance is involved, is an arm’s length, professional relation. The buyer shall promptly and correctly perform all obligations it has as against the seller. It shall advise the seller of any information and it shall provide any documentation required by the seller, as laid down in the loan documentation. Because usually SPV’s are used, this information and documentation shall also concern the beneficial owner.
But a seller is not a bank; it has no apparatus (and no appetite!) to monitor the performance of the buyer. The reason it will agree to seller’s finance will be that this facilitates the sale of the yacht, not to become a “bank”. An agent who takes care of these things may bring relief. The tasks of such agent should be (i) to monitor and manage the periodical (monthly or quarterly) payments of interest and principal, (ii) to monitor the movements of the yacht, (iii) to manage the securities provided by the buyer, and (iv) to take action in case of non (timely) payment of the buyer. In short, the agent should take away the whole management of the repayment of the loan.
Seller’s finance may be a way to bring some grease in the finance market. It may facilitate the selling of a yacht which otherwise would not be possible.
Carel J.H. van Lynden / AKD Advocates
Carel J.H. van Lynden is a partner at AKD advocates and civil law notaries in Rotterdam. AKD is a large law firm specialising in among other things shipping and finance. Together with Yachtnote it has developed finance documentation specifically for seller’s finance transactions.
SuperYacht Times - The State of Yachting 2020
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