A Guide To Yacht Finance

Introduction

The market for yachts and superyachts has greatly expanded over the past decade and as confidence has been returning to the market the builders of the most exclusive (and expensive) yachts have back-logs on their order books. Over the past few years we have advised lenders and borrowers (i.e. owners) on a significant number of financings of yachts valued at between US$3,000,000 and US$130,000,000.

There is no legal definition of the term "superyacht" however it is generally accepted to refer to yachts of 40 - 50 metres or over which are crewed by a full time professional crew and used for pleasure or commercially operated under the Code of Practice for the Safety of Large Commercial Sailing Motor Yachts 1997 (known as "LY2"). The general principles which apply to the financing of an oil supertanker or passenger ferry will also apply to the financing of a superyacht and the structures of the financing and the documentation are very similar. Yacht financing is specific, however, in that where the financing is dependent on charter income, this is generally seasonal and intermittent whereas for commercial ships (save for during general downturns in the shipping market) charter income tends to be more steady and dependable. A further reason why yacht financing is distinct is that superyachts are often designed and equipped to suit individual tastes and so the advice of professional valuers must be sought to ensure that the yacht being offered as security will be readily marketable by the lender on any default by the borrower.

As with commercial ship finance, a yacht financing will almost inevitably have an international element. The home jurisdictions of the lender, owner / borrower, personal guarantor and yacht itself will typically all be different and the yacht could be positioned in any maritime jurisdiction on an enforcement of the lender's security. The international element means that a lender will require advice and legal opinions from each relevant jurisdiction and consideration will also need to be given to any cross-border tax implications of the financing structure.

Initial Issues to consider

Yacht-building contract

Although it is common in the commercial shipping world for industry standard form ship-building contracts to be used and amended as necessary, it is rare for such forms to be used in connection with yachts. Yachts are, by their nature, more likely to be made bespoke and tailored to the purchaser's individual requirements and by a smaller yard. Consequently the standard form contracts will often not be appropriate and the yard (or sometimes the purchaser's lawyers) will produce their own draft forms of contract, which may be the subject of negotiation between the contracting parties and their legal advisers.

As far as the structure of a yacht-building contract is concerned, the main terms will relate to the key obligations of the yard / seller and the purchaser / owner. The yard will deliver the yacht as described in the contract to the purchaser who will receive unconditional title upon payment of the agreed purchase price. The contract is also likely to include detailed provisions concerning the title transfer and warranties against defects. There may be specifically tailored tax provisions, particularly as the transaction will almost invariably be cross border with significant potential tax liabilities. There may also be clauses dealing with confidentiality (often of great importance for ultra high net worth individuals) and may stipulate whether and the extent to which the yard is permitted to use the yacht for publicity purposes either prior to or after its construction.

In respect of the payment terms, the contract will usually require the purchaser to pay a deposit upon entry into the contract and various instalments of the purchase price culminating with a final sum to be paid upon delivery of the yacht to the purchaser. The instalments will become due at various stages during the construction of the yacht in accordance with a payment schedule and upon the issuance by the yard of a "Stage Certificate". If a lender is financing these instalments it should insist on receiving certified copies of these Stage Certificates (counter-signed by an independent surveyor) and invoices from the yard as evidence that the construction of the yacht is on track and that the next payment is due.

The main risk for a purchaser of a yacht and a lender when financing the construction of a yacht is the risk of the yard becoming insolvent prior to the delivery of the yacht. See the section "Pre-delivery Security" below for more detail on how a lender (and a purchaser) may be able to protect itself in this situation. On the other side, because superyachts are often purchased by special purpose vehicles ("SPV's"), in some circumstances a yard may request a performance guarantee in order to avoid the risk of a financial default by the purchaser.

Yacht Registration

Each country's shipping registry will have its own eligibility criteria stipulating whether an owner qualifies to be able to register their vessel on that country's shipping register and it will also have a number of requirements for the owner or the yacht to satisfy prior to registration being effected. Traditionally, ships were registered in the country where the owner was a national and were crewed by nationals of that country. Over the last 60 years or so, countries have opened up their shipping registries to anyone provided that the ship being registered can satisfy certain minimum standards set by the registry as to, for example, age and technical standards. Panama and Liberia have been exceptionally successful as countries with "open registers" and their registries boast two of the largest fleets measured by registered tonnage. Cyprus and the Bahamas are also important open register countries.

As well as open registers, there are also "offshore" registers. These registers are generally established in a colony or dependency of a country, with the aim of attracting the registration of ships from that country which might otherwise go to the open registries. Examples are the Cayman Islands, the Isle of Man and Netherlands Antilles where the ownership eligibility criteria are fairly very relaxed. There is therefore very little practical distinction between open and offshore registries.

It is also worth noting that some shipping registries, for example the Virgin Islands Shipping Registry, impose strict upper limits on tonnage which may be registered, which may make these registers unsuitable. Some registries - such as the Cayman Islands Shipping Registry - have a London presence facilitating registration and closing procedures here.

The United Kingdom Register: In the UK, the Merchant Shipping Act 1995 and the Merchant Shipping (Registration of Ships) Regulations 1993 set out the eligibility criteria for ships to be registered on the UK Register. Commercially operated yachts must also satisfy the safety requirements of the LY2 or the equivalent codes for smaller vessels, and the proposed crew must hold the required qualifications. Other requirements for British registration (which will apply in similar guises to yachts to be registered in a number of countries and not just on the UK Register) include the following:

a. Certificate of survey and tonnage measurement: the owner of the yacht, or its representative, must employ a surveyor of ships to survey the yacht and ascertain her tonnage in accordance with the tonnage regulations of the relevant country (The Merchant Shipping (Registration of Ships, and Tonnage) Regulations 1999 in the UK). The surveyor will then issue a certificate of survey stating the vessel's tonnage, build and other particulars setting out the identity of the yacht. In the UK, if the yacht is over 24 metres long, the survey must be completed by a surveyor from an approved classification society and an International Tonnage Certificate will be issued.

b. Name of vessel and home port: every application for British registration must specify the proposed name of the yacht and the name of the home port of the yacht, which will be marked on the stern of the yacht following step (c) below.

c. Carving and Marking: Once the Registrar has confirmed that the eligibility criteria have been met and he/she has received the application for registration and the certificate of survey relating to the yacht, he/she will then issue a "carving and marking note" which specifies the official number allocated to the yacht. The note will be stamped following an inspection confirming that the official number and registered tonnage have been carved onto the main beam and the name and port of the yacht have been marked on the stern of the yacht.

Local counsel's advice and assistance would of course need to...