Financing capital-intensive shiprepair projects can be problematic for both the shipowner and shipyard, but a deferred payment plan may alleviate the headache for both parties
When it comes to putting together shipping deals, ship and offshore finance veteran Ingmar Loges knows financial strategy. With over three decades of shipping finance experience, Mr Loges now serves as the managing director, Germany, for Newport Shipping. The UK-based shiprepair group acts as a turnkey solution provider for refitting ‘green’ solutions, such as ballast water technology, exhaust gas cleaning systems and LNG engine and fuel gas supply system conversions. Newport Shipping has also created a digital platform that allows shipowners to get quotes for routine maintenance and check for drydock availability.
Mr Loges says shipowners typically fund the capital cost of vessel repairs from their own cash resources. There are exceptions however and in some cases they may source a short-term loan from a bank or other financial institution to ensure repairs are carried out.
“If banks grant a loan, it is because they are already in possession of the first mortgage collateral of the vessel and they want to make sure that the vessel stays operational, as well as for value preservation,” he explains.
He says shipowners may be able to secure a discount on the total price of repairs in initial contract negotiations with the shiprepair yard to reduce their financial exposure, though this is usually with 100% of the cost falling due on redelivery of the vessel.
When competitively bidding work at a shipyard, Mr Loges believes shipowners need to consider four key factors: payment terms; price competitiveness; reputation for quality work; and on-time delivery.
Shipyards have been willing to offer more favourable payment terms for repeat clients, typically with 40% to 50% of the final invoice to be paid on redelivery and the remainder due within a maximum of six months after departure of the vessel from the shipyard.
“Shipowners should consider four factors: payment terms; price competitiveness; reputation; and on-time delivery”
“In the case where an owner always goes to more or less the same shipyard or shipyard group and has a good track record, then it might gain a higher overall discount on the final invoice and better payment terms,” Mr Loges says.
While such a payment deferral scheme can be seen as a marketing tool to attract the right client amid fierce competition among shipyards, Mr Loges points out “the shipyard also runs a risk of not getting paid in full and on time,” meaning “risk can outweigh the reward”.
Based on a clear need for more flexible financing for ship repair, Newport has implemented a payment scheme that enables clients to defer up to 60% of the total final invoice over a period of up to 24 months after redelivery.
This so-called ‘pay-as-you-earn’ scheme – which requires no collateral, letters of credit or other bank guarantees – also includes ‘all-in-one’ invoicing to Newport as the single contracting party that covers all costs of equipment, spare parts, paint and other items.
At the same time, Newport has in place a credit rating system to assess counterparty, asset and market risk, which enables it to determine payment terms based on the client’s credit profile, with legal safeguards to ensure final payment.
Mr Loges says payments can be deferred for 24 months, provided the project is “rock solid with a first-class project rating”.
For most of its transactions over the past 12 months, Newport has offered a deferred payment of 50% to 60% of the total cost over a period of 12 to 18 months, says Mr Loges.
“Within our deferred structure, there is no need for collateral or mortgage on the vessel, which frees up working capital for shipowners,” he explains.
“And, by minimising cash outlay, this gives shipowners earnings uplift from vessel operations post-redelivery to protect cash flow and their bottom line.”