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Director of SPS Technology on vessel crack repair Ship repair a fnancial balancing act
Ship repair – a fnancial balancing act
SHIPOWNERS HAVE LIMITED OPTIONS TO ACCESS FINANCING FOR SHIP REPAIR, GIVEN THE CAPITAL-INTENSIVE NATURE OF VESSEL REPAIRS ALSO REPRESENTS A FINANCIAL RISK FOR SHIPYARDS, ACCORDING TO SHIP FINANCE EXPERT INGMAR LOGES OF UK-BASED SHIP REPAIR GROUP NEWPORT SHIPPING.
Mr Loges, who joined Newport in early 2020 as Managing Director for the Hamburg ofce, has a 25-year track record in ship fnance having served as global head of shipping and ofshore fnance with leading fnancial insttutons.
Money tight
“Typically, shipowners must fund the entre capital cost for a vessel repair from their own cash resources, although they may in exceptonal cases be able to source a short-term loan from a bank or other fnancial insttuton to ensure repairs are carried out”, says Mr Loges. “If a bank grants a loan, it is because it is already in possession of the frst mortgage collateral of the vessel and it wants to make sure that the vessel stays operatonal, also for value preservaton”, he explains.
Shipowners are usually able to secure a discount on the total price of repairs in inital contract negotatons with the ship repair yard to reduce their fnancial exposure, however this is usually only possible if 100% of the cost is due upon redelivery of the vessel. >>
Ingmar Loges, Managing Director of Newport Shipping Germany.
Cash fow is as important for the shipyard as for the shipowner.
Mr Loges believes key consideratons in the compettve bidding process are what the shipyard can ofer in respect of payment terms and price compettveness, as well as a reputaton for quality work and getng the job done on tme. Shipyards have been willing to ofer more favourable payment terms for returning clients whom they have a close relatonship with, typically with 40% to 50% of the fnal invoice to be paid on redelivery and the remainder due within a maximum of six months afer departure of the vessel from the shipyard.
Risk versus reward
“When shipowners always go to more or less the same shipyard or shipyard group and have a good track record, they might receive a higher overall discount on the fnal invoice and beter payment terms”, Mr Loges says.
“While such a payment deferral scheme can be seen as a marketng tool to atract the right client amid ferce competton among shipyards, the shipyard also runs a risk of not getng paid in full and on tme, and therefore risk can outweigh the reward”, Mr Loges points out. “It’s quite simple: the shipyard is fnancing the owner over a certain period. In order to do this properly, the shipyard needs a risk strategy. I have my doubts that this is the case with most of the repair yards taking into account the short-term outlook of most of the contracts”, he says. “Cash fow is as important for the shipyard as for the shipowner. In a normal situaton, shipyards only give very short payment terms, if they give any at all, and you need to be a strong shipowner to get such treatment.”
Protecting cash fow
Based on a clear need for more fexible fnancing terms for ship repair work, Newport has implemented a deferred payment scheme that enables clients to defer up to 60% of the total fnal invoice over a period of up to 24 months afer redelivery. This so-called ‘pay-as-you-earn’ scheme, which requires no collateral, leters of credit, or other bank guarantees, also includes ‘all-in-one’ invoicing to Newport as single contractng party that covers all costs of equipment, spare parts, paint, and other items. At the same tme, Newport has a credit ratng system in place to assess counterparty, asset, and market risk that enables it to determine payment terms based on the client’s credit profle, as well as legal safeguards to ensure fnal payment.
Mr Loges says payments can be deferred for 24 months, provided the project is ‘rock solid with a frst-class project ratng’. In most of its transactons over the past twelve months, Newport has ofered a deferred payment of 50% to 60% of the total cost over a period of twelve to eighteen months. “Within our deferred structure, there is no need for collateral or mortgage on the vessel, which frees up working capital for shipowners”, Mr Loges explains. “By minimising cash outlay, shipowners’ earnings are uplifed from vessel operatons post-redelivery to protect cash fow and their botom line.”
