Features: - Tanker Operator

INDUSTRY - MARKETS
04
Sale & leaseback as a
financial tool in freight &
credit markets - part 1
By Basil M Karatzas*
As anybody in the shipping industry can attest, prices for shipping assets
have been experiencing their highest levels in recent memory.
Asset appreciation has been more
accentuated in the last four years,
as Graph 1 depicts for five-yearold
tankers - VLCCs, Aframaxes
and MRs. The data is provided by the Baltic
Exchange Sale & Purchase Assessment Index
(BSPA) for which Compass Maritime Services
is a panel member.
Although the asset appreciation is welcome
by shipowners who have had the good fortune
and perspicacity to acquire assets in time, there
is always the strategic consideration of how the
shipowner should be utilising the current state
of the markets by unlocking and deploying the
capital appreciation and optimally positioning
the company for the future.
The selective sale of assets (older vintage,
lower quality vessels, etc) is one obvious
answer. However, for tonnage built in the
early 1990's, the consideration is of
maintaining control of the (still modern) assets
in a strong freight market, and keeping access
to tonnage in order to serve strategic accounts
(charterers with their own cargoes) and
generate operating profits.
One such approach of unlocking capital
gains that has been successfully employed by
several shipowners is the sale & leaseback
transaction (SLB), whereas the shipowner
sells a vessel (a tanker for the purposes of this
article) at today's prevailing market rates and
simultaneously taking back the vessel on
employment for a certain period of the time.
In such transactions, the shipowner frees up
capital which can deployed in any way the
owner sees suitable, optimally by placing
orders to renew and replace the fleet, while at
the same time retaining commercial and
operational control of the tanker for a period
of time in a robust freight market.
In order for such a transaction to become
feasible, several parameters are important and
negotiable between the shipowner and the
lessee, terms such as the period (short term
versus long term) and type of employment
(bareboat versus timecharter employment),
purchase options, if any, and of course the
daily rate that the shipowner will be paying to
the new owner and lessor. Several other
parameters indirectly affect the transaction
such as the credit markets and cost of finance
(for leveraged leases), type of asset class and
assessment of residual risk of the vessel at end
of lease, and finally the credit rating of the
shipowner (an ex-owner and charterer of the
vessel once the transaction has been
consummated).
What type of financial concerns would be
interested in acquiring vessels on such terms?
Leasing companies and investment funds that
specialise in leases due to tax reasons (they
can use depreciation for accounting purposes
versus a tax-free shipowner in most cases), for
residual value reasons (in a market moving
higher vessels can have a market value above
book value and thus offer to the financial
owner an attractive return on investment),
fixed income reasons (low risk, low reward
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return) above cost of finance for a credit
worthy lessor.
From a financial and tax point of view in
the US, leases are categorised as either -
a) Capital or finance leases - long-term
leases covering more that 75% of the
vessel's economic life, with the present
value of the lease rental payments
constituting 90% of the vessel's fair
market value, and whereas the lessee
automatically acquires the asset or has the
option to acquire the asset at a bargain price.
b) Operating leases - which are all noncapital
leases (usually short-term leases
where the lessee does not have an interest
in the vessel after the termination of the
lease).
There is also the distinction of 'wet lease'
versus 'dry lease' [in the former, the lessor
provides crewing (timecharter in shipping
terms), in the latter the lessor provides the
vessel alone (bareboat charter)]. A couple
more leasing terms to keep in mind are the
'net lease' where all costs associated with
insurance, taxes, maintenance are paid by the
lessee/charterer, and the 'leveraged lease'
where the lessor arranges financing through a
long-term creditor.
Commercial applications
Having covered the basic terminology, it's
time to turn to the commercial applications of
leasing in shipping.
When negotiating the terms of a sale &
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environment and
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TANKEROperator � August/September 2008