Skip, Skip, Skip to the Loot
Options abound for operators to make timely payments and maintain access to funding.
There are many different operating models in the commercial marine universe. Some businesses operate 24/7/365, while others operate seasonally. Driven by the low temperatures and inclement weather of late autumn, winter and early spring, snow and ice dictate their schedules. For those operators in our colder climes, this seasonality affects not only operating conditions, but more critically, revenue.
For businesses which carry term loans on their equipment, or still have overhead which is not recompensed by income, the off-season can truly be cruel. Options for keeping the doors open until spring that and the return of revenues are varied. Some rely on additional borrowing, others on variable payment schedules.
Revolvers are short term loans which are generally used to supplement waning revenue or as a temporary substitute for operating capital. Once the amount has been approved by the lender, the borrower may draw down up to the maximum amount of the facility, and repay any number of times. It is sometimes known as an “Evergreen” loan as it really has no term limit. Interest accrues on the funds withdrawn and can be capitalized from available funds or paid down to maintain the greatest availability of funds. In concept, think of this option as a “credit card.”
Fees involved may include an initial approval fee, a per draw fee and be accompanied by restrictive covenants, like any other loan. The revolver is usually secured by collateral. In our industry, that collateral often takes the form of unencumbered marine vessels. The requirement that the collateral be “free and clear” of any loans, liens or other claims can only be waived if the primary lender allows another lender to take a second position subordinated to the first. But rarely will a primary or secondary lender waive their rights through subordination as it complicates the quality and security of the loan. The interest rate charged on the drawn funds will float with a specified index such as prime, libor, swaps or treasuries, as the draws occur at various times.
An annual “clean-up” in which the borrower brings the outstanding funds to zero dollars may be required. A variant is known as a “revolver bond.” This financial product allows a borrower to pay interest only until the maturity date of the bond at which time all principal plus any accrued interest must be paid.
A better strategy might be, as the Boy Scout motto states, “Be Prepared.” You know your business better than anyone. You know when it is the annual feast and when it is the annual famine. If there is true seasonality in your operation, it may make sense when you first make your loan or lease arrangements, to ask your lender/lessor for either skip or seasonal payments.
Skip payments are just that, your lender will allow you to skip a fixed number of loan payments each year for the term of the loan. The lender will compute the balance of your payments to include the principal and interest that you have skipped. For example: you own a vessel located in a port that is subject to freeze-up every winter. Barring global warming, you cannot move your vessel from its dock without help from an icebreaker. Obviously, if there is no vessel movement, there is no vessel work, and no vessel income, and consequently, no loan payments. Hardship in the off season may be severe and could include layoffs, layups and other cutbacks.
To keep in good stead with your lender, loan payments must continue come hell or high water. If there is any deviation from normal principal and interest amortization, it must be specified in your loan agreement. If you take it upon yourself to skip a couple of payments, the results may be dire.
Seasonal payments are another method to smooth out your revenue stream for debt service. You might ask your lender for interest only payments for some period during your yearly payment cycle. Although you continue to pay interest on the outstanding principal each month, your remaining payments will include a prorated share of the principal that was not paid during the interest only period. To avoid late payments penalties and negative credit reports, make seasonal payments a part of your original loan request and get them approved by your lender.
Should none of the aforementioned payment options be attractive to you, and you have satisfactorily serviced your debt to this point, you might consider refinancing the vessel. If you are halfway through your term, let’s say the fifth year of a ten year loan, you have paid off about 60% of your loan principal. You can cut your monthly payments substantially by refinancing the remaining principal (plus take out some equity) for another ten year term. Given market rates at this time, your interest rate will probably be less than when you entered into the loan further dropping your monthly payment. Inasmuch as your vessel may have appreciated over the past five years, your equity in the vessel may actually have increased giving you the ability to increase the principal amount should you choose to. If you have historically paid as agreed and your credit is in good shape, there is no better time than now to consider refinancing your loan and incorporating skip or seasonal payments as part of the package. But as with anything financial or legal, consult with your financial advisor and legal counsel before making any decisions.
(As published in the September 2014 edition of Marine News - http://magazines.marinelink.com/Magazines/MaritimeNews)