Tightfisted

The financial landscape of the workboat industry increasingly reflects a more corporate America, and traditional mom and pop operators now must compete for funds against industry giants, many formed through acquisitions and mergers.

The industry’s consolidation trend has affected lenders as well. 

Consolidation on the funding side has brought about a “flight to loan quality by the banks,” said Steve Isaacson, national marine sales leader at GE Commercial Equipment Financing in Bellevue, Wash. Isaacson has experienced consolidation first hand, having come to industry stalwart GE two years ago after it acquired the marine business at his former employer, Safeco Credit. 

With names like Debis, Soris Financial and TransAmerica exiting the marine financing business, the number of funding sources has been pared. “The smaller, less well capitalized [marine]companies are struggling to obtain financing, or are facing tighter credit standards with much less attractive terms than in the past,” Isaacson said. To help fill the void, “GE has responded with a new marine industry initiative and a commitment of resources to provide more financing solutions to marine operators.”

 

FUNDING SOURCES 

Meanwhile, the workboat marketplace remains fragmented and small companies can still thrive based on relationships with long-time customers, according to Bob O’Connor, Houston-based sales manager with CIT Group Inc.’s marine finance division. However, he wonders whether rising costs and regulatory burdens could change that.

GE and CIT aren’t the only ones trying to serve small and mid-sized companies. 

 “In addition to larger and mid-sized companies, we’ll finance newbuilds and repowers for smaller companies and some startups,” said Bill Luetzow, a general manager with Caterpillar Financial Services Corp.’s Marine Division.

He said the criteria Cat uses for a new player includes “successful experience, a strong and solid business plan, letters of intent for putting the boat to work, owner standing behind the loan (through a personal guarantee), as well as a good loan-to-collateral ratio.” Cat Financial also works closely to meet established customers’ needs with typical lending terms of up to 80 percent over a 10-year term, and amortization based on a schedule up to 10 to 15 years.  

At Hibernia Bank in New Orleans, a strong regional player, much of the bank’s work is at “a corporate or fleet-wide basis,” with about half of its marine activity providing secured lending to its middle market customer base, said John Castellano, manager, energy services and maritime. Hibernia also does some business with public companies such as Tidewater.

Secured lenders much smaller than mid-sized Hibernia ($17.6 billion balance sheet) are still important to the boat finance business.

“Especially in the South, local community banks are still playing an important role in financing family-owned companies,” said Isaacson.

Memphis, Tenn.-based Union Planters Bank, however, is usually part of larger credit syndicates and works with a niche customer base including large operators of big OSVs. Union Planters is one of the 30 largest bank holding companies in the U.S.

Typically, UPB will provide construction financing to a vessel owner and will then participate in a term loan that pays off the construction loan “with lease timing and length of the term loan matching, or nearly matching,” said Bud Smack, the bank’s Baton Rouge, La.-based senior vice president.

For operators, the financial landscape is competitive.

“Banks have been more aggressive lately, and the finance companies have also become more creative in their structures,” said  John Charpentier, vice president at Gretna, La.-based Dawn Services LLC, which operates a handful of boats in the coastal and offshore trade.

 

LEASING OPTION  

Leasing is another equipment acquisition financing strategy that can effectively free up cash for both large and small players. But leasing is risky for financiers.

Castellano cited numerous “liabilities involved under the Jones Act” in explaining why Hibernia does not participate in marine equipment lease financing.

CIT’s O’Connor, a former mariner, said his company’s marine finance offerings include leasing (as well as conventional asset finance debt), with CIT able to provide longer terms and longer amortization than banks. CIT’s typical deal ranges from $1 million to $25 million. 

In a well-publicized $11.4 million sale and leaseback deal concluded in late 2002, GE entered into a master lease arrangement with Trico Marine Services. Three crewboats were leased for 10-year terms to Trico under separate operating leases, with purchase options after eight and 10 years. These structures were classified as operating leases—which kept them off Trico’s balance sheet—with the approximately $30,000 per vessel monthly lease payment classified as an expense. 

Isaacson said that a handful of institutions offer leasing. A typical transaction, he said, would have a 100 percent advance (the lessor buying the equipment), a term of five to 15 years, and payments structured so that the lessor’s residual value is 30 percent or more of the asset’s original price.

Leasing also plays a significant role at Seacor Smit Inc., another OSV operator. Its latest SEC filing indicates that Houston-based Seacor has leased back some 34 vessels, all under bareboat charter arrangements that are accounted for as operating leases. Seacor defers recognition of financial gains on selling equipment and amortizes the gain over the term of the charter, resulting in tax deferrals. Seacor’s leasing expense totaled $11.2 million for the first nine months of 2003. Presented from a different angle, Seacor’s contractual obligations under operating leases that were on the books as of Sept. 30 are over $107 million. Seacor has an asset base of nearly $1.4 billion.

 

OTHER SOURCES  

With the Maritime Administration’s Title XI program, MARAD guarantees payment with lengthy terms (out to 25 years). Historically, it has been a corporate funding vehicle for workboats. But with low interest rates and alternative finance options, Title XI support has been less prevalent lately.

Isaacson noted that the Title XI application process requires a good deal of “time, resources and expenses,” and suggested that the commercial market has been competitive. 

Cat Financial’s Luetzow said that Title XI might still make sense for larger customers already familiar with the program, but small entities may find it “faster and easier working with private lenders.”

MARAD has other programs available. Tax deferrals are a valuable funding source. Seacor’s most recent balance sheet reveals $180 million in tax deferrals. Seacor deposits proceeds from vessel sales into accounts earmarked for acquiring newly constructed U.S.-flag assets under the Capital Construction Fund program. 

A final financing source worth noting is the private and the public equity markets.

The industry is watching Hornbeck Offshore closely, which shelved a public equity offering in 2002 then raised $30 million of private equity in mid-2003 as it was digesting its acquisition of Candy Fleet’s OSVs. Covington, La.-based Hornbeck recently announced its intention to raise up to $86 million through an initial public offering.  

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