An introduction to marine finance

What is Marine Finance?

Marine Finance focuses on financing vessel acquisitions for the spot market, time charters or bareboat charters, as well as the construction of work boats, and to finance the acquisition of vessels for scrapping.

Industry Overview

According to the International Marine Organization, over 90% of everything we consume comes and goes on a ship, by sea. The seaborne trade industry was valued at $12 trillion USD in 2017. The maritime industry underpins the global economy as almost all goods and products we touch and feel everyday are transported across the oceans.

Different Types of Marine Finance

We believe this is the first time retail investors will be able to invest in Marine Finance on Yieldstreet. Yieldstreet investors will be able to participate in three main areas of Marine Finance: Vessel Acquisition, Vessel Construction and Vessel Deconstruction.

• Vessel Acquisition: Traders of commodities, like corn and wheat, charter ships for specific voyages (spot charters) or charter vessels for periods of time (time charters), or lease vessels (bareboat charter) instead of buying and owning a fleet themselves. Funds raised on Yieldstreet during a Vessel Acquisition offering go to an owner/operator looking to buy vessels to charter out to companies shipping various commodities. A time charter, typically 1-5 years, essentially means that a charterer enters a long-term contract with the ship owner/operator to transport their goods on voyages they dictate. Yieldstreet will initially be offering investment opportunities for vessels classified as Dry Bulk, which are designed to carry dry goods such as grains, coal, metal ores and forest products.
• Vessel Construction: Building a cargo ship can be a multi-year undertaking that costs tens of millions of dollars. Keep in mind that some vessels can be as long as the Empire State Building is tall and can move up to 400,000 tonnes of cargo! Marine borrowers need funds to finance the acquisition of these larger-than-life ships.
• Vessel Deconstruction: After setting sail for the last time, vessels are carefully deconstructed and parts, from engines to steel beams, are sold or auctioned. Vessel deconstruction is a massive undertaking that requires a large amount of up-front costs to acquire and deliver vessels for deconstruction.

Factors that Impact the Marine Industry

The Marine Shipping industry is tied to the health of global trade and the wider economy in general. In addition, the industry is impacted by the global supply of available vessels. To gauge the state of the dry cargo industry, many use the Baltic Dry Index, or BDI, which measures the amount of business activity in the shipping industry by calculating daily shipping rates for specific global shipping routes.

The index helps measure demand for shipping capacity vs. the supply of available ships through daily freight market prices and shipping costs. It is calculated through the input of a panel of shipbrokers, who submit their assessment of the freight cost of twenty international shipping routes on a daily basis. The index helps shipbrokers, commodity producers and traders on Wall Street and elsewhere globally to gauge the level of business activity in the shipping industry.

Unlike a car or an airplane, the value of a vessel can actually increase as the BDI strengthens because its worth is derived not only from the value of its parts and infrastructure, but also its future earnings power as well. If there is a healthy supply/demand balance in the available vessel fleet and the global economy is projected to grow, the BDI should increase, as should a ship’s value and the cost of transporting goods.

Important Aspects of Marine Finance

There are a few factors that are useful to understand when investing in a Marine Finance offering:

• Residual Value Insurance (RVI): In deals involving Vessel Acquisition, downside protection is sometimes secured partly by the addition of Residual Value Insurance, or RVI. Typically used in the airline industry, this is the first time ever RVI will be used in a Marine transaction. By adding RVI, the lessor is protected against a loss if the sale proceeds of the ship at the end of the lease are less than the insured residual value determined in the original offering terms. If the BDI, and thus a ship’s value, were to dramatically decline, RVI helps bridge the gap between the original purchase price and final sale price. The insurer would be responsible for purchasing the ship if a reliable buyer could not be located.
• Originator Experience: For Marine investments, Yieldstreet looks for originators that have significant experience given the cyclical nature of the shipping industry, particularly those that have been in the business for multiple up and down cycles.
• Correlation: Marine Finance is more correlated to external market factors than typical Yieldstreet investments. Dry bulk shippers look to the BDI as a barometer of the industry’s current strength. Over the last three years, shipping rates started to rise and the current economic outlook indicates that the trend should continue for the foreseeable future.
• Risks: Given the tie to global market trends, any shocks to the global economy could hurt Marine Financing offerings. Recent proposed tariffs levied by China and the U.S. could damage the global economy, and thus the shipping industry. A slowdown in the Chinese or Indian economy could also be harmful to the industry as the two countries account for a major part of global trade and consumer spending growth.
• China and India: China and India represent the second and sixth largest economies, respectively, by GDP. Although slower in recent years, China’s and India’s projected growth rates for 2018 are significantly higher than the global average (3.7%) with China expected to grow at 6.5% and India 7.4%. As these economies continue to grow, their influence on the global economy, and the shipping industry specifically, has become significant. Both countries rely on importing raw materials and the export of goods to help fuel this growth. Any slowdown in either economy would have an outsized impact on the shipping and marine industry.

Recent History

Starting in 2003, the global shipping industry went through a five-year super-cycle spurred by the industrialization of China having entered the WTO two years earlier, particularly dry bulk vessels transporting coal and steel. The 2008 financial crisis brought global trade to a near standstill and a collapse of the shipping industry, decimating European banks, the main lenders to the industry.

After a decade long trough with very few new vessel deliveries and mass vessel deconstruction, the dry bulk fleet has reached an equilibrium and the market has recovered. The European banks for the most part, drastically reduced their exposure to marine lending: the top 40 ship finance banks’ portfolios stood at US$355B as of end December 2016, down $40B from December 2015. This has created an opportunity for Yieldstreet Marine Finance to address the increasing demand for asset backed financing.

Why Would a Marine Borrower Work with Yieldstreet?

Similar to our other asset classes, borrowers come to Yieldstreet because of the flexibility we can provide them compared to traditional banks or lending institutions. Marine borrowers can have irregular lending or interest payment timelines that are incompatible with bank requirements. At Yieldstreet, we can custom-structure the loan to fit the borrower’s business plan or timeline.

Where Your Money Goes in a Marine Finance Offering

By investing in a Marine Finance offering on Yieldstreet, your money goes directly to an originator, who seeks to fund borrowers looking to buy, lease, build or deconstruct ships.

Why We Like Marine Finance Offerings

At Yieldstreet, we like Marine Finance offerings because they are short in duration (typically between 1-3 years) and backed by an asset (the ship). In the case of certain vessel acquisitions, principal is not only protected by the interest in the ship itself, but also by the added Residual Value Insurance that further protects downside.