Is ‘Yacht finance’ a dirty term?
Leon Batchelor, Arc & Co Marine & Aviation talks to us about the perception of yacht finance.
Where am I going with this question?…. I would imagine that for most, it’s not a question that would naturally spring to mind when thinking about yacht funding. Well… I have been working as a yacht finance professional for the past nine years and remain surprised by the negative reception to the suggestion that a yacht can and should be financed. Less commercially minded individuals look at me with such disdain that you could be forgiven for thinking that I’d just suggested they pawn the family silver. It is often followed by the statement ‘my clients don’t need the money!’ For these folks, the assumption is that you only borrow if you can’t really afford it. This could not be further from the truth and the irony is that to get approved for yacht finance, the client needs to demonstrate beyond any doubt that he/she can pay cash many times over.
Why wouldn’t you finance a yacht? For the doubters and those who think that financing a yacht is only for the desperate, here are some helpful insights.
Interest rates remain at historically low levels and Euribor (the reference rate that is used for EURO borrowing) is negative, so any EURO financing is essentially priced at the bank’s margin. The same certainly cannot be said for the US Libor rate, which is currently north of 200 bps (1 month Libor).
Those who are in a position to buy a yacht are making at least double digit returns on their money; a minimum of 15%. If you can borrow at 3%, why would you pay cash and lock away your capital that makes you a 15% return? I have gone through the exercise and thanks to the benefits of cheap leverage and compounding the return gains on the capital they would have spent mean that the owner can have the yacht paid for by the fourth year of the loan agreement.
Sadly, however, yachts do depreciate. This varies from shipyard to shipyard, but in the main the depreciation is between 5% and 10% per year. So, looking at the argument in a different way, if an owner uses leverage and the respective compounded returns on the available capital, he/she can counter the depreciation.
Personal finances are a sensitive and private matter, so I acknowledge that some owners would respond to this article and say they paid cash for their yacht. I am confident however, that those owners will use some form of leverage even if it is against an alternative asset class (investment portfolio) and if they’re not…. we should talk.
Leon Batchelor, Managing Director at Arc&Co.
+44 (0)20 3205 2128