Banks, Private Sectors Show Sudden Interest in Scrubbers Financing

Scrubbers, a Valid Investment?

Coming back to the Marine propulsion report on scrubbers financing, we see how the scrubbers financing momentum is picking up and showing prospects for the investors.

“We can talk a lot about scrubber payback periods, and the differential between high and low sulphur… I firmly believe [scrubber technology] is a valid investment,” said Mr Bednar.

“What would be palatable for most people [looking to fund a scrubber purchase] would be an interest rate between 5% and 8% over a three- to a five-year term, repaid in stages… In practice, there are a number of roadblocks for financiers to agreeing to such terms, which means they are typically looking for annual returns of 10–15%.”

Why the higher rate of interest?

One of the key reasons for the higher rate is that lenders believe they can only offer the financing as an unsecured loan.

“Scrubbers are especially suited to installation on newbuilding vessels. However, newbuilds typically have a high debt ratio. In the event the owner breaches one of the covenants, lenders see their prospects of recovering anything against a scrubber as very remote.”

Short Period Lending Problem

When it comes to payback periods no finance company wants to lend over a short period of time. The returns do not justify the work involved in pulling the deal together. Any early repayments would incur “some serious penalty charges”.

The Question of Financial Recovery

There is also trepidation when it comes to the prospects for financial recovery in the event an owner defaults. “How do you repossess a scrubber?” asked Mr Bednar. “It’s going to be nearly impossible once installed on a vessel.” And this, in turn, raises the unresolved legal question of whether a scrubber unit is an integral part of the vessel. “Unlike radars, lifeboats and maybe even ballast water treatment systems, financiers are unclear of the extent they can threaten to remove systems in the event of non-payment.”

Negative Scrubbers Reporting Influence

Mr Bednar also noted that financiers are not agnostic when it comes to scrubber manufacturers – “they read the press just like anybody else” – and there is a sensitivity when it comes to financing scrubbers, given the present conversations in the media around open- and closed-loop systems. Part of this sensitivity is informed by ‘conversion risk’; this applies where a scrubber is incorrectly installed, or the scrubber does not work. Where this happens, the financier is left exposed.

“In the event the owner breaches one of the covenants, lenders see their prospects of recovering anything against a scrubber as very remote”

The Financing Options Available

Surveying the different financing options available, Mr Bednar said leasing arrangements were of limited value. “Most leasing companies won’t cover soft costs. They will only cover the installation of the scrubber itself. Some sort of pre-financing agreement will need to be arranged to cover training, design, modelling and so on.”

An initially more promising variant would see the shipowner pay a monthly hire charge to a third party which has bought the scrubber outright and paid the associated costs. Such schemes are common in construction and are also attractive because the cost of the equipment is off the balance sheet.

“This sounds great in principle until you talk to a finance person sitting in New York or Chicago and they consider the implications of financing a piece of equipment on a moveable asset with international ownership and registration,” explained Mr Bednar.

He acknowledged that some major trading and oil companies have touted the idea of financing an owner’s full installation costs in exchange for entering into an agreement to buy high sulphur fuel at a premium. “Uptake on that has not been very good, as shipowners are loathed to give away their bunker choices to one client, or even a consortium of clients.”

Pay-as-you-save

There have also been discussions around ‘pay-as-you-save’ schemes, famously championed by Richard Branson, where repayment would be linked to the price differential between high and low sulphur fuel and the savings the owner is expected to enjoy through continued use of high sulphur fuel. “Monitoring that is difficult and owners are likely to feel they are surrendering their competitive edge if they have to hand over all the savings being made straight away,” said Mr Bednar.

Export finance arrangements were also seen as constraining, primarily because of their local content requirements. “There is a scrubber manufacturer based in France that is trying to work with the French Government and French banks on this. But we’ve had a lot of roadblocks and just haven’t been able to put it together,” he said.

“How do you repossess a scrubber?”

Upside in Green Finance Initiatives

Governmental green finance initiatives were also considered. Last month ING and the European Investment Bank signed a €110M (US$125M) loan agreement to finance retrofitting 42 Spliethoff vessels with scrubbers and ballast water management systems.

“The upside is the rates can be favorable. The downside is that these agreements are slow-burning processes, the lenders are very conservative and often driven by local content requirements. Most scrubbers will be manufactured in the Far East. With nine months until the implementation date, this will limit uptake.”

Reducing the Lenders’ Risk

Mr Bednar’s company is working on approaches that will reduce the perceived risk for lenders, which in turn could reduce the interest rate. These include linking repayments with time charter income or other interests or assets the shipowner might have, such as hotels or property.

“Another thing we’ve tried to do – and had some traction – is around portfolio financing, or in other words, creating financing around 200 scrubbers for a range of owners.” A further initiative would see lenders able to attach a lien against a vessel in the event of non-payment. Under such terms an owner that had defaulted on the scrubber financing would not be able to dispose of the vessel until the outstanding scrubber debt is repaid. “It’s a nascent idea and we’re looking primarily at options in English law, but it is something to consider,” he said.

Importance of Scrubber Implementation Plan

Mr Bednar also stressed the value of owners presenting a scrubber implementation plan when looking for financing. This is a plan whereby a shipowner in the run up to the IMO 2020 implementation date documents how they will deploy the scrubber, including on which routes, for what durations, and when using which fuels. “Financiers will feel more comfortable that an owner has their act together with the added benefit for the owner that it codifies their intentions as well.”

Mr Bednar was also clear the outlook shifts when it comes to refinancing scrubbers once installed. “At that point, you can demonstrate to a lender you have a working system and operational experience,” he said.

Export credit for scrubber retrofits?

Not all export finance contracts are hamstrung by local content requirements. A Bergen-based tanker owner is to install scrubbers on its entire fleet using financing from Norway’s export credit agency.

Inventor Chemical Tankers’ seven 19,000-gt chemical tankers qualify for export credit because they are deployed in foreign trade. Export Credit Norway and its guarantee agency GIEK will provide around US$10M in seven tranches, mirroring the retrofit equipment deliveries to take place over 2019.

Financing is available for 85% of the contract value and will be integrated into Inventor Chemical Tankers’ existing loan facility with banks that financed the building of its fleet between 2015 and 2017. The company bought scrubber systems from Lysaker-based Clean Marine, meaning that the Norwegian component of the contract was higher than the 30% needed to qualify for export credit.

“Clean Marine was very proactive in securing the sale agreement with Inventor Chemical Tankers, which liked our financing solution,” said Export Credit Norway senior vice president Laila Johnsen. “We offered the company a loan at a fixed rate set by the OECD. Since then, US interest rates have skyrocketed, and it is precisely when interest rates are rising that a fixed-rate loan is favorable.”

Clean Marine CEO Nils Høy-Petersen says: “Securing financing for scrubber retrofits has proven difficult, given the relatively large investment required in terms of both equipment and installation. We plan to continue using export financing as a sales tool going forward.”

Shipping companies can also apply for a framework credit agreement to finance retrofits of ballast water treatment systems.