One of your best clients calls and says "I am buying a large yacht. Because you have all of my other banking relationships, I would like you to finance it for me. Will there be any problems with that?"
It is one of the most deceptive types of loans a bank can make without the proper expertise. Unless the bank has strategically planned to start a marine lending program with the design and administration of sound credit, collateral and lien perfection policies, the yacht is an elephant in the room at audit time. And we have all heard the old story about the best place to hide an elephant. However, if you don't have a herd of them, you can't hide it. You need to make sure that everything about the loan is sound.
Usually a yacht will sneak its way into your portfolio in one of several ways. A good client of the bank asks for financing for their yacht purchase, refinancing of a current yacht loan, or a cash-out refinancing to raise funds for another purpose. The relationship value demands that the bank accommodate the client. Their credit is usually outstanding and there may be a commercial relationship to consider. The bank does not want the client to go elsewhere.
Another way to find one or more large yachts in the your portfolio is created by the need to obtain additional collateral for an expanding or deteriorating current lending relationship. The client owns the yacht with no current lien. Their company has requested an increase of their current credit line or is negotiating to maintain a current credit line.
There are several areas of risk in this situation that can be easily avoided.
The risk of borrower default is the obvious one that all loans share. However, the default may be the event that highlights deficiencies created when the loan was approved, funded or missed during annual reviews. Conducting a self audit of the yacht loan can reduce potentially embarrassing and costly deficiencies in the loan process.
Here are just a few procedures that are worth considering.
In the event of a default, a quick decision is usually required to determine whether to foreclose on the mortgage, arrest the vessel and arrange for its storage and maintenance. By preparing a detailed contingency plan prior to approving the loan or prior to any delinquencies or disputes, the costs of the arrest and maintenance are already on file. Although it may seem fatalistic to prepare such a plan, the advantages of having one on file can prove invaluable in determining the true value of the collateral as a source of repayment. Dockage, crew wages, insurance costs, delivery fees and general maintenance are a short list of some of the considerations.
It is also important to periodically review the insurance policy and status of the vessel in relation to the coverages and exclusions. Occasionally an owner will change the use or location of the yacht from the parameters under which the insurance company issued the policy. Chartering the yacht, using it as a full time livaboard, or leaving the vessel in a designated hurricane zone during the wrong time of year can eliminate coverage.
Although generally ignored by lenders, monitoring the maintenance of the yacht is important. The expense of repairing damage from inadequate bottom cleaning, engine maintenance and waterproofing of decks and superstructure can significantly decrease the value and marketability of the yacht. A physical inspection of the yacht, review of the ships logs, and interview with the captain or maintenance crew should be conducted periodically.
Usually a lender will have a survey (inspection report) in the file that was conducted prior to loan approval. This survey will not only estimate the market value of the yacht, but list all significant equipment along with model and serial numbers. Many surveys include photographs to record the existence and placement of electronics, appliances and other equipment. An important task during the yacht inspection is to note any changes from the time the original survey was conducted.
Insurance companies will periodically require the yacht owner to purchase and submit a survey for their review. Make sure to ask if this has been done and, if so, request a copy for your file. Compare the value, equipment and condition findings to the original survey.
Finally, always verify the status of the First Preferred Ship Mortgage with the US Coast Guard Office of Documentation. Ordering an abstract of title is easy and cheap. The abstract will show the status of the mortgage and any additional changes to the title chain since the loan was made. Because large yachts can also sometimes be titled in a state or foreign country, the possibilities of fraudulent transfer of the collateral needs to be considered. Of course, a thorough investigation prior to funding the loan is always best because there are several types of liens that will prime a First Preferred Ship's Mortgage.
All of this may seem more trouble than it is worth, but do not forget the advantages.
Once your client starts to work with other financial institutions, such as an established yacht lender, that lender will usually do anything they can to cross-sell their services and expand the relationship....usually to your loss.
You can easily service your client without assuming additional risk due to a lack of in-house experience by contracting with a yacht lending consultant to help during the approval process or to review any current yacht loan in your portfolio. With their guidance, you will be preventing an embarrassing audit report and you will also be helping the client. Yacht owners are usually very savvy in their areas of expertise, but not in yacht financing.
David R. Blancett is an Accredited Financial Counselor® (AFCPE) who specializes in Yacht Lending . As a past president of the National Marine Bankers Association with over 30 years of experience in the marine industry, he has directed the purchase and sale of yacht loan portfolios, developed credit review procedures for yacht lenders, coordinated the foreclosure and liquidation of large yachts and managed yacht loan credit analysts and originators. Mr. Blancett retired from Wachovia Bank as a Senior Vice President and President of their First New England Financial yacht lending subsidiary in 2002.
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