Complex financing transactions involving sophisticated types of large transportation equipment, such as vessels and aircraft, are becoming increasingly common for a number of reasons. In particular, there is a growing need for the builders of complex transportation equipment to manage and optimize their cash-flows. The construction of a vessel or an aircraft is capital-intensive. Because the buyer of the equipment often pays only a minor portion of the vessel's or the aircraft's total purchase price at the inception of construction, the builder needs to bind substantial amounts of working capital to fund the completion of the vessel or the aircraft.
Structured finance offers an alternative source for working capital to builders of large transportation equipment and can entail benefits for all parties involved. The builder may utilize its working capital more efficiently and thereby gain advantages over its competitors, the customer's credit rating may be taken advantage of in the raising of funds for building via debt capital markets or banking markets (on most favourable terms) and the lenders are adequately protected through the utilization of a special purpose vehicle in addition to more traditional forms of security.
The below model for structured finance transactions involving large transportation equipment, is based on an off-balance sheet assignment of the builder's receivables. Under this financing model the builder may increase its access to working capital needed by obtaining a binding commitment for working capital required even for a whole series of transportation equipment.
As an example of a Finnish company that has effectively used the below described financing model in its business, is the largest Finnish shipbuilder Kværner Masa-Yards. Kværner Masa-Yards is part of the Anglo-Norwegian group Kværner, an industrial technology provider, the main activities of which are focused around international oil services and products, engineering, construction and shipbuilding. The financing structure has proven successful for Kværner Masa-Yards and has been utilized with good results in a number of transactions with various customers. While the financing model has been tested and utilized in Finland for sophisticated vessels, it may be equally applied to the financing of the construction of other large transportation equipment, the ownership of which is based on registration.
OVERVIEW OF A VESSEL FINANCING STRUCTURE
Vessel financing used by Kværner Masa-Yards is a fine example of a finance model, in which an off-balance sheet assignment of the builder's future receivables from its customers has been utilized to provide working capital for the construction.
In the structure used, the financing arrangement between the builder, its customer and the lenders is structured around the assignment to a special purpose vehicle (SPV) of receivables from the builder's customers, in the same manner as in the case of traditional off-balance sheet securitization.
One of the cornerstones of the financing model is the construction agreement. The construction of a new vessel commences as the builder enters into a construction agreement with its customer. Under the construction agreement, the customer orders the construction of a new vessel and agrees to pay its purchase price. Often the title to the new vessel (hull) is vested with the customer right from the inception of construction and the customer, accordingly, will be registered as the owner of the vessel in a separate register for vessels under construction.
For the purposes of the financing model, the builder assigns its receivables under the construction agreement to an offshore SPV.
| The transfer of receivables to the SPV To create a valid transfer of receivables under Finnish law, it is essential that a notification be made to the debtor (the customer). Due notification is required, inter alia, because it entails protection against claims of set-off by the debtor. After notification, the debtor may not validly discharge its obligations under the building agreement by means of payment to the transferor (the builder). |
The SPV, in turn, simultaneously enters into a secured credit facility with various lenders. Pursuant to this credit facility, the SPV is able to pay the consideration for the assignment of receivables. The credit facility will eventually be repaid by the SPV with funds received from the customer, as final payment under the construction agreement is made. As the repayment of the credit facility is dependent upon the ability of the customer to make payments to the SPV, the high credit ranking of the customer is of essential importance to the lenders under this finance model.
THE CREDIT FACILITY
The credit facility would typically fund only a certain agreed percentage of the vessel's construction costs. Advances under the credit facility are available only after the construction has reached a certain pre-agreed stage, often the floatable stage, and are made in line with the percentage of completion, ie drawings are based on periodic progress certificates setting out the percentage of completed construction. This means that the initial funding level under the credit facility is low and rises only towards the delivery of the vessel to the customer.
Moreover, the credit facility would typically be somewhat smaller than the total amount of receivables under the construction agreement assigned to the SPV. This arrangement grants the lenders considerable excess coverage over the debt outstanding for the transportation equipment in question and facilitates the funding of the interest. After repayment of the credit facility, the credit facility will be available for the financing of the next vessel in the same series of vessels.
It is noteworthy that under the above financing model the credit facility alone provides sufficient funds to complete the construction of the transportation equipment. This means that the lenders are not reliant upon the cash-flow of the builder to complete the construction. This feature, together with the pre-agreed level of completion before advances under the credit facility are available, allows lenders efficiently to reduce their dependence on the performance of the builder and gives additional comfort.
The funding under the finance model is normally ring-fenced in a way that the funds received by the SPV from the lenders may only be used for the construction of the particular transportation equipment in question.
SECURITY
In addition to the assignment of receivables due from the customer under the construction agreement, the credit facility may be secured by security such as:
A mortgage over the transportation equipment. Finnish law provides the possibility to register mortgages over certain vessels, aircraft and large road-transport and construction vehicles that are registered in a Finnish register. Vessels are particularly suitable in this respect, since the Finnish Act on the Ship Register allows a vessel under construction to be entered into a separate register of ships under construction, and accordingly, be subject to a mortgage. In order to register a mortgage, the consent of the registered owner (builder or customer, as the case may be) will be required.
Various performance guarantees and debt services guarantees provided by an outside guarantor.
A first floating charge over the SPV's assets.
Assignment of insurances to the lenders.
THE APPLICABILITY OF THE FINANCE MODEL TO OTHER INDUSTRIES
In the above, the finance model has been applied in the context of vessel construction. The finance model is, nevertheless, very versatile and may be adopted for use not only in the construction of movable assets but also in the context of construction of infrastructure assets such as hospitals, tunnels, bridges and telecommunication installations, the construction of which often is equally capital-intense as in the transportation equipment sector. Therefore, the above finance model could also easily provide builders of infrastructure assets a method for increasing their access to working capital.
Waselius & Wist
Etelaesplanadi 24A
00130 Helsinki
Finland
Tel: +358 9 668 9520
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