Typically, an Owner/Operator faces some tough choices, when trying to build a new vessel. Construction financing is a challenge for banks, as it is risky to provide capital for a project, that is secured by a stack of metal, engines, gears, props and other equipment, that hasn’t been assembled. There is also the risk that the vessel will not be completed, for many reasons. Therefore, new construction usually requires a large deposit, or additional collateral provided for security. It may also require a construction bond or Letter of Credit, to mitigate risk for the Lender. These are all significant costs, which increase the cost of the vessel, and make it prohibitive to build.
Option:
There is another option, that involves the use of a “Lender Risk Policy”, and it eliminates the need for a bond or LC, during construction and stays with the vessel through the life of the loan. It covers all lender credit risk, including principle and interest payments, bankruptcy and catastrophic loss. The policy also allows for a long term/amortization (up to 20 years), thereby keeping monthly payments low.
There is another option, that involves the use of a “Lender Risk Policy”, and it eliminates the need for a bond or LC, during construction and stays with the vessel through the life of the loan. It covers all lender credit risk, including principle and interest payments, bankruptcy and catastrophic loss. The policy also allows for a long term/amortization (up to 20 years), thereby keeping monthly payments low.
Interest Rate:
The Owner/Operator benefits because the interest rate is below market, and the total “blended rate” for construction and term is below market rate. The interest rate will be tied to a 5-year index (Libor or Treasuries) and will be reset at the end of every 5-year period, depending on the contract. The Interest Rate is based on the current market and will be fixed when underwriting and documentation are complete.
The Owner/Operator benefits because the interest rate is below market, and the total “blended rate” for construction and term is below market rate. The interest rate will be tied to a 5-year index (Libor or Treasuries) and will be reset at the end of every 5-year period, depending on the contract. The Interest Rate is based on the current market and will be fixed when underwriting and documentation are complete.
Construction Period – deferred payments:
The builder contract will require a 7% deposit, when it is executed, to be paid by Borrower. The Lender will then make the progress payments, based upon a predetermined milestone payment schedule. The cost for construction financing is currently 5.25% (August 2017), and interest on the loan, will accrue until the end of construction. The interest is due upon completion of the vessel, and the Lender may allow it to be rolled into the term loan.
The builder contract will require a 7% deposit, when it is executed, to be paid by Borrower. The Lender will then make the progress payments, based upon a predetermined milestone payment schedule. The cost for construction financing is currently 5.25% (August 2017), and interest on the loan, will accrue until the end of construction. The interest is due upon completion of the vessel, and the Lender may allow it to be rolled into the term loan.
Step Down Payments:
The term loan has been designed with “step-down” payments, at the end of five-years. The monthly rate will decrease, at that time, because the loan costs are front-loaded. The Owner will also have an option to pay off the loan, after seventy-two months (Early Buyout Option), with no prepayment penalties.
The term loan has been designed with “step-down” payments, at the end of five-years. The monthly rate will decrease, at that time, because the loan costs are front-loaded. The Owner will also have an option to pay off the loan, after seventy-two months (Early Buyout Option), with no prepayment penalties.
Capital Investment Funding, Inc (“CIF”)., is the company that developed this loan structure, including insurance, legal and capital acquisition. They are paid a syndication fee, by the Lender, and the amount is included in the in the total blended rate that is offered to the Owner. They also ensure that there is a direct connection between the Borrower and Lender, and that both receive the maximum benefits from the insurance policy, and resulting loan. Since the Insurance policy stays in place for the life of the loan, it may help reduce premiums for other insurance that the Owner has on the vessel.
Summary:
Overall Interest rate: = below market
1. Blended rate (includes construction financing, term payments and all loan fees)
i. Tied to index (Libor / Treasuries)
ii. Rate reset every five or ten years
Term: 20-years
1. Increases cash flow
2. Eliminates residual risk
Early Buy Out Option: After 72-months, with no prepayment penalties
Payment When Construction Begins: 7% of Total Construction Contract
Step Down payment: Monthly payments decrease after first five-years.
Construction Loan: “Interest only” - to be paid at the end of construction
Lenders Risk Insurance:
1. Eliminates need for Line of Credit or Bond during construction
2. Allows for extended term (20-years)
3. Covers all lender credit risk: Principle and Interest Payments, Bankruptcy and Catastrophic Loss
4. May reduce or replace insurance for Borrower
1. Blended rate (includes construction financing, term payments and all loan fees)
i. Tied to index (Libor / Treasuries)
ii. Rate reset every five or ten years
Term: 20-years
1. Increases cash flow
2. Eliminates residual risk
Early Buy Out Option: After 72-months, with no prepayment penalties
Payment When Construction Begins: 7% of Total Construction Contract
Step Down payment: Monthly payments decrease after first five-years.
Construction Loan: “Interest only” - to be paid at the end of construction
Lenders Risk Insurance:
1. Eliminates need for Line of Credit or Bond during construction
2. Allows for extended term (20-years)
3. Covers all lender credit risk: Principle and Interest Payments, Bankruptcy and Catastrophic Loss
4. May reduce or replace insurance for Borrower