Why is there so much interest in scrubber finance?

Delegates at this year’s Americas Sulphur Cap 2020 Conference in Houston heard that scrubber refinancing offers better interest rates and is likely to be easier to secure than borrowing against an initial scrubber installation.

Paradoxically some of the factors that make scrubbers an attractive investment for the shipowner are actually a disincentive for financiers according to Avantis Marine chief executive Barry Bednar.

“We can talk a lot about scrubber payback periods, and the differential between high and low sulphur… I firmly believe [scrubber technology] is a valid investment,” said Mr Bednar.

“What would be palatable for most people [looking to fund a scrubber purchase] would be an interest rate between 5 and 8% over a three to five-year term, repaid in stages… in practice there are a number of roadblocks for financiers to agreeing such terms which means they are typically looking for annual returns of 10–15%.”

One of the key reasons for the higher rate is that lenders believe they can only offer the financing as an unsecured loan.

“Scrubbers are especially suited to installation on newbuilding vessels. However, newbuilds typically have a high debt ratio. In the event the owner breaches one of the covenants, lenders see their prospects of recovering anything against a scrubber as very remote.”

When it comes to payback periods no finance company wants to lend over a short period of time. The returns don’t justify the work involved in pulling the deal together. Any early repayments would incur “some serious penalty charges”.

There was also trepidation when it comes to prospects for financial recovery in the event an owner defaults. “How do you repossess a scrubber? It’s going to be nearly impossible once installed on a vessel.” And this in turn raises the unresolved legal question of whether a scrubber unit is an integral part of the vessel. Unlike radars, lifeboats and maybe even ballast water treatment systems financiers are unclear of the extent they can threaten to remove systems in the event of non-payment.”

Mr Bednar also shared that financiers are not agnostic when it comes to scrubber manufacturers, “they read the press just like anybody else”, and there was a sensitivity when it comes to financing scrubbers given the present conversations in the media around open and closed-loop systems. Part of this sensitivity is informed by their ‘conversion risk’. This applies where a scrubber is incorrectly installed, or the scrubber does not work. Where this happens, the financier is left exposed.”

Surveying the different financing options available, Mr Bednar said leasing arrangements were of limited value. “Most leasing companies won’t cover soft costs. They will only cover the installation of the scrubber itself. Some sort of prefinancing agreement will need to be arranged to cover training, design, modelling and so on.”

An initially more promising variant would see the shipowner pay a monthly hire charge to a third party who has bought the scrubber outright and also paid the associated costs. Such schemes are common in construction and are also attractive because the cost of the equipment is off the balance sheet.

“This sounds great in principle until you talk to a finance person sitting in New York or sitting in Chicago and they consider the implications of financing a piece of equipment on a moveable asset with international ownership and registration.”

He acknowledged that some major trading companies and oil companies have touted the idea of financing an owner’s full installation costs in exchange for entering into an agreement to buy high sulphur fuel at a premium. “Uptake on that has not been very good as shipowners are loathe to give away their bunker choices to one client, or even a consortium of clients.”

There have also been discussions around ‘pay as you save schemes’ famously championed by Richard Branson where repayment would be linked to the price differential between high and low sulphur fuel and the savings the owner is expected to enjoy through continued use of high sulphur fuel. “Monitoring that is difficult and owners are likely to feel they are surrendering their competitive edge if they have to hand over all the savings being made straight away.”

Export finance arrangements were also seen as constrained primarily because of their local content requirements. “There is a scrubber manufacturer based in France that is trying to work with the French Government and French banks on this. But we’ve had a lot of road blocks and just haven’t been able to put it together.”

Governmental green finance initiatives were also considered. Last month ING and the European Investment Bank signed a €110M (US$125M) loan agreement to finance retrofitting 42 Spliethoff vessels with scrubbers and ballast water management systems.

“The upside is the rates can be favourable. The downside is that these agreements are slow burning processes, the lenders are very conservative and often driven by local content requirements. Most scrubbers will be manufactured in the Far East. With nine months until the implementation date this will limit uptake.”

Mr Bednar’s company is working on approaches that will reduce the perceived risk for lenders which in turn could reduce the interest rate. These include linking repayment with time charter income or other interests or assets the shipowner might have such as hotels or property.

“Another thing we’ve tried to do – and had some traction – is around portfolio financing or in other words creating financing around 200 scrubbers for a range of owners.” Another initiative would see lenders being able to attach a lien against a vessel in the event of non-payment. Under the terms an owner that had defaulted on the scrubber financing would not be able to dispose of the vessel until the outstanding scrubber debt is repaid. “It’s a nascent idea and we’re looking primarily at options in English law, but it is something to consider.”

He also stressed the value of owners presenting a scrubber implementation plan when looking for financing. This is a plan where a shipowner in the run up the IMO 2020 implementation date documents how they will deploy the scrubber, including on which routes, and for what durations, and when using which fuels. “Financiers will feel more comfortable that an owner has their act together with the added benefit for the owner that it codifies their intentions as well.”

Mr Bednar was also clear the outlook shifts when it comes to refinancing scrubbers once installed. “At that point you can demonstrate to a lender you have a working system and operational experience.”