Managing shipyard insolvencies

opinion

by Superyacht Investor Contributor

30 March 2023

Shipyard insolvency is “one of the great catastrophes that might befall your project”. That was the stark warning from Alex Sayegh, legal director, HFW who chaired the ‘Managing shipyard insolvencies’ panel at our Superyacht Investor London 2023 conference earlier this month. But there’s much investors can do to mitigate the risk.

There’s no shortage of well-known shipyards that have filed for bankruptcy. The list includes Nobiskrug, Perini Navi, Oyster Yachts and Moonen Yachts. Jay Tooker, partner HFW and Bob Allen, founding partner, Robert Allen Law, set out the best ways to protect client’s assets from the threat of a shipyard’s liquidation.

Typically, shipyards file for insolvency towards the end of a project when their cash flow is stretched to the limit. “It’s only when the tide goes out, that you see who is swimming naked,” said Tooker, quoting billionaire investor Warren Buffett.

To avoid the problems that bankruptcy brings to investors, buyers should do their due diligence on the shipyard’s financial health before signing any contract. “People have different appetites for risk,” said Tooker, adding that some owners will do their research into a shipyard’s financial health before going into a project.

“Others deliberately close their eyes to the problem. These are the owners who will say ‘find me a shipyard that is teetering on the edge [of bankruptcy] and I’ll get a really keen price and if something goes wrong, I’ll manage it’.” They often forget saying this once it happens, added Tooker.

Allen agreed. “It’s exactly the same [in the US]. The essence of the matter is if you have a customer looking for a very good deal on a new build, your file better be full of correspondence that warns them of the consequences that can come with looking for a good deal or being in love with a particular brand.”

To mitigate risk, you can look at a shipyard’s financials before you go into a deal. If you were to look today, you would get audited accounts for 2021 and possibly its 2022 accounts in draft. “But even if they are impressive looking on the day, there is no guarantee that the shipyard will survive the two or three years, potentially even five years, of construction,” said Tooker.

He added that shipyards’ profit margins don’t tend to be enormous, so it doesn’t take much to “tip it over the edge”. This is especially the case for shipyards with a small number of projects, as they have fewer assets to leverage. “One unexpected delay in completing a project and not getting paid can be enough to tip the balance,” said Tooker.

Clients often fund projects for tens of millions of dollars before seeing any tangible results, so it is incredibly important for there to be security options available for the buyer when the yacht is under construction. Tooker said in his experience, only two things really work. “That is a guarantee from a bank or some other credit worthy third party that guarantees a full refund of everything that has been paid.” Or it is property passing of the yacht during construction, so clients can take it elsewhere to finish the build if need be.

From left to right: Alex Sayegh, Bob Allen and Jay Tooker at Superyacht Investor London 2023.

For Allen, the only “foolproof” security (if you do it right) is the guarantee of a full refund. “Like so many things in yachting, much depends on the market,” he said. “If you do get a bank guarantee, there are some pitfalls because there are expiration periods and so you have to design it properly.” If you don’t manage the termination of the refund guarantee properly, you might find yourself without a guarantee at all.

Whilst it is not his preferred form of security option, Allen welcomed Tooker’s endorsement for his property passing services. “I really appreciate that because if property passes during construction and you actually have to go and get the boat, the legal fees are astounding,” he said.

Ensuring clients do their due diligence before a project is worth doing and so too is getting a full refund guarantee. But it does not give clients all the security they need to be fully protected.

So, how do lawyers really protect owners during construction? “The most important thing to recognise is that whatever the law your contract may be in, the law that governs the ownership of the yacht during construction is the local law,” said Tooker, adding that if the yacht is being built in Italy, it should be registered there too. “If you do that, the trustee in bankruptcy has to recognise it and you’re protected.”

Allen agreed: “You need a local lawyer. We work cross-nationally all the time, but when we need to get a perfected security interest or mortgage, we do it the way that is dictated by local law. And you need to spend the money there to do it right.”

Aside from protecting ownership, what should you do if a shipyard files for insolvency? “It’s not quite as bad as the client calling you up from a lifeboat saying that the yacht is on fire, but it’s up there. Your first instinct is to panic,” said Tooker. But it is never as bad as you first think if you have taken the precautions of protecting ownership during construction with bank guarantees and followed local law.

Ultimately, in this situation, building working relationships is key to saving the project. “If you have a good relationship with the trustee in bankruptcy, it can work to your benefit,” said Tooker. “In my experience if you do this, the trustee looks after you. And the legal system, if you have registered the yacht in the country, will protect you. And with a bit of extra cost and delay, we have been successful in getting yachts out.”

For Allen, dealing with insolvencies comes down to a simple philosophy and what he calls the first rule of law. “Every lawyer at our law firm is introduced on day one to the principle that you must cover your a**,” he said. The rule is twofold. One, it protects you. “And two, the most important, it serves as a roadmap for the customer of what needs to be done, what the expectations are and what the risks are.” Clients can make irrational decisions and it is up to lawyers to protect the project and themselves against them.

No one wants a shipyard to become insolvent. Some clients might want to get a good deal with a shipyard struggling for cash, but ultimately, they want their dream superyacht. So, it always pays to secure credible guarantees before signing new build contracts, follow local law and form good relationships with trustees.