To the uninitiated, the adage about luxury asset finance that says: “If you need the finance, then you're probably not eligible for it” may sound confusing. But, as many of us learned at Quaynote's recent online conference, The Future for Superyachts, Business Jets & Luxury Property, the fact that wealthy business owners and entrepreneurs would sooner finance their jet or yacht purchase, rather than pay cash, often makes perfect sense.
Why is this? What would lead a high or ultra high net worth individual (UHNWI) to finance the purchase of an asset when they can just as easily pay for it with their own money? “If the buyer of a vessel is an entrepreneur and it's their first vessel, they've not accumulated hundreds of millions of assets and their business is generating say 10-12 per cent returns, then they don`t want to be using more cash than required to buy a luxury asset,” explained Bob Atkinson, partner at B Capital Partners, who joined a panel of finance experts at the conference. With interest rates lower than the rate of return from their business activities, it can make better economic sense to finance a yacht or jet purchase and then retain any cash reserves for investing in a growing business.
Even for an established business owner or UHNWI, the principle of using finance rather than your own cash to buy a luxury asset can apply. Indeed, James Jaffa, partner at Jaffa & Co, who moderated the panel, pointed out an interesting trend amongst his clients. “I'm seeing a pattern where owners are buying with their own finance and choosing to refinance afterwards,” he notes, “And I can't see that this is due to the pandemic. We're getting people buying and then financing 48 hours later.” For the client, this means that life is simpler, as they buy the asset with a clean title, they save money on legal fees involved in escrow arrangements and they nonetheless enjoy the benefits that financing offers.
For some buyers, cheaper interest rates have been behind their decision to refinance. “We had a client who bought an aircraft one year ago and then this year, with the interest rates lower, he decided to refinance to take advantage of this,” reports Marie-Laure Gassier, jet and yacht finance specialist at BNP Paribas. Current interest rates vary depending on a range of factors, but via private banking a client looking for a 20million euro loan over a 5-year period would typically expect 2.5-4 per cent.
For non-private banking, the interest rates will be higher than for private banking arrangements. “You won`t be offered 2.5 per cent from asset financiers” notes Bob Atkinson (pictured left). Michel Buffat, head aviation & yacht finance at Credit Suisse points out that interest rates may be impacted by a client`s jurisdiction.
“If the country where they are based is one where repossession is hard to enforce, that individual will have a higher risk profile,” he explains. Geography is a key factor in determining risk for finance arrangements; the nationality or the residency of the buyer, or countries where he has assets or funds, may all be taken into account by the financier.
At The Future for Superyachts, Business Jets & Luxury Property, James Jaffa dug deeper to get to the bottom of the “dark art” of finding finance in different jurisdictions, especially in the 5-10million euro range where there appears to be a gap. “If I have a German client who comes through or door and wants to finance a 40-50m yacht,” he asks, “do you go to Germany first for finance, or the UK because you (the financier) are based there or to the US for example?”
For Bob Atkinson, the answer depends on a number of considerations. “Is that client solely centred in Germany? Do they have property in the States or say in Geneva? Are there some funds in the US? All this will give us a flavour for what options are available.”
As to market gaps in financing, “it depends – is the yacht new or a brokered deal?” resumes Atkinson. “For a German buyer wanting a 40m yacht, five years old and costing 9million euros, that is a tricky deal for banks I would suggest.” Indeed, there are some funders who will not look at a deal of 5 million euros or less and from the buyer`s point of view, if they are looking at a cross-border transaction, then the legal costs involved become disproportionate.
So, what of the differences between financing yachts and jets? And are there any synergies? “It may be easier to find finance for bigger assets than small,” observes Marie-Laure Gassier (pictured left). “Finance is more available for business jets than for yachts because there are more banks who will fund this kind of asset.” For Gassier`s company, BNP Paribas, a distinction is made between the corporate client and the private client. “We are serving wealthy private individuals, primarily when they buy mid-sized or large-sized cabin aircraft or superyachts certified at 40m or above.”
For Michel Buffat, the approach taken to financing either business jets or superyachts at Credit Suisse is similar for both types of asset. “What we see now, with larger clients, is that they have both assets”. The focus is very much on the private banking client. “Whether an asset is used for business purposes or not doesn`t make a big difference,” he notes. “We look at the person behind the company.” The company also has a real estate financing team that can work closely with the aviation and yacht department. “The equity that is released can be used as common security by combining all these facilities,” concludes Buffat.
“Does the wealth of data available for aircraft and engine values make life easier?” James Jaffa pondered. “It definitely does. There are people providing data on valuations for jets, making this so much more transparent,” responded Michel Buffat, adding “The loan-to-value you can get for a yacht is so much lower as there is not the same data available.”
Given the impact on industry of previous global events, such as the financial crisis of 2008-9, it seems reasonable to conclude that yacht and jet financiers will have seen a higher level of payment defaults and distressed assets during the Pandemic. The true picture appears somewhat different. “We have clients who are wealthy enough to manage a tricky situation properly,” Marie-Laure Gassier asserts, adding: “They have less liquidity and let the bank know in advance that they would like to sell their asset.”
Then it is, of course, a question of how the market is looking. Our panel largely agreed that the market was dead in March 2020, but “by June-July it came back and it`s been pretty buoyant since then,” comments Bob Atkinson. Indeed, with the “life is short” sentiment propelling the market, “if you want a second-hand 50m yacht, you may be struggling. The good ones have gone.” James Jaffa agrees: “Something I`ve never seen before where there`s that old trick of saying “There are buyers queuing up.” This year, there really has been that scenario where the yacht really does go.”
How do values in the superyacht market compare to aircraft values? “After one year of the pandemic, it`s interesting to see that some types of aircraft lost the same amount of value in 2019 as 2020, so if you didn’t know there was a pandemic, then you wouldn`t notice the difference," remarks Michel Buffat. “Even more so in yachting, some vessels lost value but this is because they got one year older. If you wait another few months, you will not get a better deal I'm sure.”
For those looking to take the plunge into jet or yacht ownership, the message is clear – inventory is cheaper than it was, but not abundant. And what's more, the funding is available for the right buyers. “The finance itself is not a scarce commodity,” concludes Marie-Laure Gassier. Given this, if you can afford it and you can actually find the right yacht or jet, maybe now is as good a time to buy as any?