2020: A game of two halves
Even if you are not a soccer fan, the 2005 Champions League may still linger on in the mind. Despite being a Manchester United supporter. I remember it clearly. Liverpool 3-0 down at halftime, went on to beat AC Milan 4-3 in a penalty shootout after 120 minutes. Thanks going largely to the Reds captain Steven Gerrard. A game of two halves? Never truer has the saying been.
Banks and lenders looking back on the yachting world in 2020 will agree. Andrew Charlier, co-head, Superyachts, HFW told Superyacht Investor: “It has been a year of two halves. From around March and the first European lockdowns to around August, the market was very quiet for sale and purchase transactions, chartering and new construction projects. With the latter, yards were often scrambling to make up for delays on existing projects due to lockdowns and restrictions on movement.”
In March 2020 the financial markets tumbled and most of the main financial indices collapsed “with a magnitude unseen before, going to unchartered territories”, Oliver Blanchet, head of Jet and Yacht Finance, BNP Paribas told Superyacht Investor.
While the markets were in disarray, banks’ credit default swaps (CDS) were shooting up. A CDS is a financial derivative or contract that allows an investor to hedge their credit risk. This meant higher funding costs for banks. At the same time, many corporate clients preparing for the worst, decided to tap their undrawn credit lines, said Blanchet.
“For banks, the end of first quarter 2020 [Q1] 2020 was unique. Internal costs of funding went up and the cost of lending to the clients mechanically followed the same direction. To some extent, you could say that the pandemic dried up the liquidity,” said Blanchet.
Thanks to liquidity injections from central banks and state actions, such as the congressional passage of $2.3trn of coronavirus aid relief and the Economic Security (CARES) Act, the US and other major economies did not suffer as greatly as was feared. Arguably that’s surprising given it was the swiftest and most severe economic contraction in history.
Charlier added: “August onwards saw a big uptick in sale and purchase transactions, and also a flurry of newbuild orders before the end of the year.”
‘August onwards saw big uptick’
Andrew Blundell, MD, Close Brothers Aviation and Marine Finance, told Superyacht Investor business levels for marine finance were very encouraging in 2020. “In addition to purchases, we saw several enquiries from owners who had previously paid cash and were looking for equity release to bolster overall liquidity.”
So, while during the end of the first quarter in 2020, it would have been more difficult for owners to find finance for their yacht, the situation soon returned to normal during the second quarter and finance has never been as attractive, said Blanchet. Now in February 2021, there is “ample and abundant liquidity” on the markets he says.
This translated into record sales last year for the industry worldwide. In 2020, more yachts above 24m were bought and sold than in any other year since industry records began back in 2009. While prices have remained relatively stable, added Blanchet.
The question is: what turned it around? We know the superyacht market is exclusive and that many UNHW clients had good years in 2020. Thomas Willan, senior associate, HFW told Superyacht Investor: “The yacht finance market is a well-established one and to some extent immune from the general economic shock caused by Covid, as it serves a clientele which is financially more insulated than most against sudden downturns.”
HFW has seen some lenders appear to be more cautious about the type of yacht they will agree to finance. For example, there’s been a greater focus on vessel value and age (the newer the better, generally speaking) as well as length, with a “bankability sweet-spot” in the 30-60m range, according to Willian.
Bob Atkinson, partner, BCapital also told Superyacht Investor he had seen strong demand for pre-owned yachts especially in the 35-60m range. “The brokerage market seems to be very active, I sense that many clients have the resources/access to finance and the pandemic reminds everyone that life is precious, if you can afford to, why wait… get on and enjoy it before its too late!”
Competition to build the largest yacht may be losing its edge. That being said, REV Ocean, the largest superyacht ever built at 183m, is due for delivery in 2022. The 30-60m range and up is growing in popularity as the value proposition of the builder changes. Yachts built with scientific and exploration capabilities now have a beneficial purpose in areas such as marine conservation and polar research. This in turn is attracting a new type of client into the market attracted to the philanthropic side of superyachting.
‘Value must provide meaning’
Take Amels and Damen Yachting. It is building yachts of 50-60m on proven platforms on speculation. This week the yard confirmed sale of 55m yacht support Gene Chaser to Dr Jonathan Rothberg. The vessel will support superyacht Gene Machine as it continues its scientific research.
“This is a big statement and a genuine value proposition for many customers all around the world,” said Blanchet. “Value proposition must provide a meaning to the superyacht’s ownership by building a sustainable, more friendly environmental asset.”
Banks like BNP encourage owners through the use of incentives to build and buy more sustainably.
Sustainability is increasingly driving the evolution of yachts – from engineering and craftsmanship to propulsion and emissions. So, the more eco-friendly a yacht, the more attractive it is to finance?
Charlier said: “We might not have reached that position just yet, but it’s certainly the way things are going. On the financing side, the yacht industry is taking inspiration from the Poseidon Principles. September last year saw the launch of the Superyacht Eco Association (SEA) Index. We will watch with interest how that beds down.”
Blanchet said, “When it comes to financing environmentally-friendly yachts, fuel-efficient diesel-electric yachts, or explorer vessels having a scientific and educational purpose, BNP Paribas is willing to go the extra mile.”
Yachts are also now seen as safe havens from the global pandemic. As travel restrictions limit travel, domestic tourism has boomed in turn increasing yacht sales. Superyacht Investor has explored this trend in the US and Russia, Blanchet said the same was true in Hong Kong.
More brokerage than new builds
According to Fraser, there have been more people acquiring a brokerage yacht than new build projects. In 2020, there were a record 494 transactions completed on the 24m plus second-hand market. Conversely, the total length overall (LOA) and the number of new projects is going down.
Yet on the finance side things remain stable. Willan said HFW saw little change in demand during 2020. “Between ongoing projects and new matters (construction financing and refinancing) we acted on, activity levels remained firm. However, every lender and advisor will have their own tale to tell.”
The same was true at BNP, on average new build projects account for 20% to 25% of new transactions and 2020 was no different. The bank finances yachts 40m plus so close each year with single digit transactions. While 2020 saw a small decrease, Blanchet said, “We are still working right now on the closing of some transactions started in 2020, and to that extent, 2021 is very promising.”
Blundell added: “Given the unparalleled circumstances of the past 12 months, I am encouraged by the activity we have seen and continue to see for 2021. The number of new entrant owners, whether for smaller production yachts or superyachts is particularly positive.”
Even with a resilient market, the curveball thrown last March was unavoidable, but from a financing perspective the industry survived. And with a second-half comeback fit to don the Liverpool jersey. However unlike Liverpool, the industry didn’t need to rely on solo heroics to bounce back. Retention of returning clients, an influx of new customers and the changing value proposition of yachts means this team looks solid for the season ahead.