To learn more about Marine finance check out the following links:
As part of our new asset class, Marine Finance, certain vessel acquisition offerings will contain a Residual Value Insurance (RVI) provision. In this article, we will explain what RVI is and how it helps protect downside in a Marine Finance investment. Standard in the aviation industry for insuring jet engines, we believe this is the first time RVI will be used during the acquisition of a marine vessel. Before getting into RVI we recommend reading our intro article or video on Marine Finance.
What is Residual Value Insurance?
An RVI policy gives the owner of a vessel downside protection by guaranteeing the value of a properly maintained vessel. At the end of the policy, if the market value of a sale price for the ship is below the insured amount, the insurer would make up the difference or purchase the vessel for the insured amount. The main benefit of purchasing RVI is that vessel value risk can be transferred from the ship owner to the insurer. This provides a floor on the future value of the ship. The underwriter takes a percentage (usually around 80%) of the projected future value of the ship to be insured.
YieldStreet Founder Michael Weisz explains how RVI will be used during Marine Finance Acquisition I
RVI does not provide coverage for expenses related to damage to the vessel (the ship’s Hull and Machinery insurance covers that). The owner and insurance company typically agree that the vessel must be in good structure and condition, similar to the preliminary valuation, with reasonable wear and tear permitted. A standard policy covers 3-5 years but can be longer for newer vessels.
Why Purchase RVI?
As discussed in our Intro to Marine Finance article, the value of a ship can increase or decrease in value depending on the current state and projected outlook of charter rates. The value of a dry bulk vessel can actually increase as the Baltic Dry Index (BDI) strengthens because its worth is derived not only from the value of its parts and infrastructure, but also from its future earnings potential. 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.
A ship owner would purchase RVI to protect downside in case of a dramatic downward swing in shipping demand, which would cause the ship value to decrease during a ship’s time charter. At YieldStreet, for vessel acquisition opportunities, we look for offerings that have the first year of the time charter already fully contracted out.
How Does RVI Work?
An insurance company typically works with a valuations firm to estimate the future value of the vessel. If the ship’s value is less than that future estimated amount at the end of the policy, then the insurer is obligated to purchase the ship at a previously agreed upon value (typically 80% of the ship’s estimated future value). As is standard in the insurance industry, the insurer makes money when things go well, and a policy claim is not triggered (typically, if a ship’s value appreciates or stays the same). An insurance company would lose money if they are forced to buy a ship below the insured amount.
To begin, the insurance company undergoes a thorough underwriting process to obtain the current value of the ship. They will work with a marine valuation firm that helps them project the ship’s future value at the end of the insurance policy term, taking into consideration factors like: type of vessel, vessel age, ship builder, policy length, tonnage capacity, and more. Towards the end of the RVI policy, a ship owner has a few options. If the vessel has maintained its value, and the shipowner decides to keep the ship, the contract simply expires and the policy is terminated.
Regardless of the ship’s value, if the ship owner decides to sell the ship, he or she can trigger the RVI policy. The ship’s ‘marketing period’ begins after the ship owner gives the insurance company 12 months’ notice. When the marketing period begins, the ship owner must provide reasonable commercial efforts to sell the vessel, with the insurer approving any offer. The insurer has the right to step in after nine months and assist with the sale. If no suitable offer is reached by the end of the policy’s term, the insurer will pay the ship owner for the previously agreed upon residual amount, and title to the ship passes to the insurer. If however, an offer is made that the insurer approves and is below the insured amount, the insurer will provide the difference to the shipowner. If the sale price is above that residual amount, the ship owner keeps the excess funds.
Here’s a Hypothetical Example of How RVI Works
Benefits of Residual Value Insurance
RVI helps protect ship owners from unpredicted economic swings and helps guarantee their asset at a specific future value. Regardless of the ship’s value, the ship owner has the security that there will be another party helping market their ship if necessary. On the investor side, RVI helps protect downside by securing a significant portion of the investor’s principal.
1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.
2 Represents a net estimated, unrealized annualized internal rate of return (IRR) of your portfolio and is based by reference to the effective distribution dates and amounts to and from the investments, as well as any outstanding principal and accrued and unpaid interest as of the current date, after deduction of management fees and all other expenses charged to the investments.[read more]
3 "Annual interest" represents an annual target rate of interest and "term" represents the estimated term of the investment. Such target returns and estimated term are projections of the returns or term and may ultimately not be achieved. Actual returns and term may be materially different from such projections. These targeted returns and estimated term are based on the underlying agreement between the SPV and borrower or originator, as applicable.
4 Reflects the initial quarterly distribution declared by the board of directors on February 6, 2020, which will be payable to stockholders of record as of June 10, 2020, and the initial offering price of $10 per share.
5 The Fund will cease investing and seek to liquidate the Fund's remaining portfolio no later than 48 months after the Fund's initial closing. It may take up to twelve months thereafter to fully monetize any remaining illiquid investments in the Fund's portfolio.
No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.
Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.
Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.
Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.
Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.
Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.
Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.
Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.
Banking services are provided by Evolve Bank & Trust, Member FDIC.
Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.