What You & Your CFO Should Know
From MarineNews, June 2010
Richard J. Paine, Sr. is the President of Marine-Finance.Com, a maritime consulting firm specializing in the financing and leasing of commercial marine vessels and other equipment. He can be reached at email@example.com or 516-431-9285.
That glimmer on the horizon that you see is the first indication of a return to some normalcy in the marine lending marketplace. But don’t confuse it with a full-fledged sunrise, it is far from that. It is merely a tease, a harbinger of things to come.
In preparation for better times, knowledge of some key aspects of the marine money industry will prove to be priceless to you as the finance marketplace improves. Whether you are your own CFO, or your CPA acts as one, or you employ a financial expert to help run your business, what you know and how current the information is will enable you to make informed decisions about debt, equity, leasing and other financial issues.
Make sure that your financial house is in order. If your record keeping reflects an unprofessional attempt to report the financial condition of your business, you will be among the last, if at all, to enjoy new capital being made available to the industry. Your financial package should include: three years of financial statements (reviewed or better); your current personal financial statements; an updated narrative about your business; recent valuation surveys of your vessels, real world projections of anticipated income for the next three years; vessel utilization statistics, comparative day rates and a precise and logical explanation of what you have done during the downturn to keep your business afloat financially.
If your revenues have declined due to the ongoing recession or for other reasons, no rational lender today (or tomorrow) will accept a simple or sugar-coated explanation. They will expect you to provide a detailed narrative to quantify how you have addressed the issues operationally and financially to weather this particular storm. Be prepared to discuss, in depth, the steps you have taken to reduce overhead, retire or cold stack equipment, revise your rate structure, postpone or reevaluate your capex spending or readdress your debt picture. You should also be prepared to demonstrate how you have maintained your existing equipment to preserve its asset value. The more relevant your presentation is to market realities, the stronger the case for your continued financial survival and ability to service any new or refinanced liabilities you are seeking.
You and your CFO should determine your obligor risk rating (ORR) by comparing your four major financial ratios with established standards used by Moody’s and Standard and Poors. The key ratios are: interest coverage, current ratio, debt to tangible net worth and cash coverage. Lenders weigh each ratio to determine if you fall in or out of their credit comfort zone. How well you fare in their rating system will determine who has an interest in doing business with you and what terms, rates and conditions they might offer. With your ORR in hand you and your CFO should know the appropriate players for the financial products that you may need. As Sly and the Family Stone said, “different strokes for different folks.”
Money comes from sources in all shapes and sizes: finance companies, banks, equity players, individual investors, hedge funds; cash-flow lenders, asset-based lenders, fair market value lessors, etc. Collectively, call them “lenders.” Move up or down the variable ORR scale, and you’ll find lenders whose appetite for risk and policies for mitigating risk vary as well. Once there were a great many lenders vying for your business. With the consolidation of many lenders (think of Safeco, CitiCapital and others bought by GE Capital), the departure of many others (First National, Bombardier, Transamerica, CIT, Case) and the withdrawal of even more from actively pursuing marine lending, the pickings are slim. Before the crash, risk and rate seemed unrelated. At the time, very low rate loans to high risk borrowers were the norm and created an expectation that cheap money would be around forever. It wasn’t. Those days are over. Expect to pay interest rates that are closely related to the financial strength of your business, the nature of the transaction and the value of your assets. Make your debt service projections based on interest rates, fees and other costs in line with today’s lending market not those of a wishful three years ago.
Get to know who is knocking at your door. Knowing a lender’s credit rating will work to your benefit. A highly-rated lender can borrow money more cheaply than one lower rated. Lower cost of capital means a loan to can be made to you at a lower rate while still making acceptable profit margins. The lender’s core business (think about the interest rate your savings accounts or CDs are paying) may also be a source of low cost funds. Rate should only be a part of your evaluation. Does your lender know your assets? Does the lender require you establish a “relationship?” Will you have to buy other products? Will your loan be sold to another bank or investor? What is the maximum amount your lender will hold before selling? Who’s who means a lot when it’s your money.
Eventually a few of the old, familiar lenders will be back and there will be new ones who suddenly “discover” marine finance. As you educate yourself about your new lender, expect to educate your new lender as well. Veteran marine finance pros are down to a precious few (attrition, layoff, retirement etc.) and your lender’s new calling officer will probably be financing copiers in the morning, golf carts in the afternoon and crewboats at cocktail time. Because our industry and its financing is a small, highly-nuanced and arcane discipline, your new best friend is going to need a lot of educating to become your advocate. Get ready to teach “Marine-Business 101” across your boardroom table over and over again.
Get prepared for the dawn of a new age. Educate yourself, shop around. Instead of getting blank stares from your new calling officer, hire a qualified commercial marine finance consultant, a CPA or CFO who really “gets it,” to represent your best interests in dealing with lenders who are just now getting back in the water ... just over the horizon.