Financing as well as Bankability of Offshore Wind Vessels

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In our first article we highlighted a few of the essential legal factors to consider dealing with shipowners wanting to construct and also charter overseas wind vessels. In this post we discover a few of the factors to consider worrying the funding and also bankability of overseas wind vessels. We have actually seen a varied team of investors curious about funding vessels in the overseas wind market and also, while the nature of the funding readily available will certainly depend to a big degree on the work of the vessel, there are different concerns for them to think about.

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Common factors to consider for investors
Naturally, a lot of the standard concepts that put on all naval possession courses will put on the overseas wind market howeversimilarlyprovided the expert market in which they run, these variables should not be considered given:

  • experience in marketdoes the proprietor have a performance history in the overseas wind market? If they are a brand-new individual, does the proprietor or its team participants have the functional experience needed? The generatorstructure and also undersea electric wire installment and also hefty training procedures are extremely complicated locations which call for knowledgeable employees;
  • cravings for dangeris this a speculative order based on recognized need or is work currently in position with authorized charters?;
  • cash-flow: exists the cash-flow to sustain the financial obligation? This would certainly consist of an evaluation by the sponsor of, to name a few points, the size of any kind of charter term, the charter hire price, the discontinuation legal rights and also the off-hire arrangements;
  • high quality of groupprovided the much shorter nature of employment agreement when it come to installment vessels, what is the high quality of the monitoring group to win tasks and also to record future need?; and also
  • possession high qualityjust how does the vessel’s style and also modern technology satisfy the demands of the marketplace currently and also in the future? Will the vessel have the versatility to operate in numerous territories and also what is the probability of the possession having the ability to complete in the future with more recent and also most likely bigger vessels? In enhancementjust how does the cost of the vessel compare to comparable possessions kinds?

Offshore wind installment vessels
In the overseas wind market, there are 2 essential sorts of vessels. Firstly, there are assistance vessels which usually have long-lasting charters approximately 10 years. Secondly, there are wind generator installment vessels (WTIV) whose charters are much shorter in periodapproximately 6 to eighteen months, depending upon the dimension of the overseas wind job.

For the rest of this post, we will certainly check out a few of the structuring and also bankability concerns in regard of WTIVs as, provided the usually much shorter term nature of their work, it is these installment vessels where we see there being possible for a better range of funding frameworks and also where a lot more assumed might require to be related to bankability concerns.

Drive for newbuilds
When the overseas wind market was establishinginstallment demands were pleased by hefty lift vessels deigned for the oil and also gas sector. However, market demands have actually moved to bigger ability WTIVs and also purpose-built wind structure installment vessels efficient in managing the biggest monopile structures. This demand for specialized vessels and also ecological stress throughout the entire supply chain will certainly cause older vessels lapsing at the installment stage as well as additionally drive need for newbuild WTIVs.

Much has actually currently been blogged about the possible traffic jam for WTIVs, with need forecasted to exceed the supply of qualified vessels by the late 2020s. While we have actually seen a raised variety of brand-new WTIV orders just recentlybased upon present assumptions the marketplace will certainly still call for additional newbuilds by about 2028.

Offshore wind gives an ESG pleasant financial investment atmosphere and also the awaited need for WTIVs appears evident. Although, a variety of variables appear to be adding to the awaited undersupply, with one feasible adding aspect being price of a newbuild WTIV, which remains in the area of $300 million to $500 million.

Short- term work
Our experience reveals that any kind of fundings for a setup vessel will certainly be a lot more custom and also will certainly require to be customized to take into consideration the work of the vessel and also the absence of long-lasting work. As the market advances, while preferably shipowners and also investors would certainly intend to see long-lasting work, we have actually not seen this thus far and also it increases the inquiry regarding just how any kind of sponsor can obtain comfy with re-marketing danger on vessels unless the shipowner has a significant annual reporta collection of employment agreement with later distribution days, or various other assistance to minimize that danger.

An agreement for the installment of an overseas wind ranch might vary from 6 to eighteen months however numerous employment agreement can be established back-to-back to make sure that there depends on approximatively 3 years’ work for a vessel from distribution from the lawn. However, despite having the present high charter prices, this is not likely to make it possible for a complete pay down of the finance at the end of this duration. The record and also experience of the monitoring group to be able to show that they have the ability to win future agreements will certainly be especially crucial right here.

Financiers could look for a reduced degree of financial obligation to reduce their financial obligation solution concernhowever this will certainly put higher stress on the quantity of equity that will certainly require to be in position. Given the temporary nature of the employment agreement, there are most likely to be durations of guaranteed earnings for these vessels in the very early years complying with building and construction, so fundings can be structured so regarding record that cash money with suitable and also versatile repayment accounts and also cash money moves. Financings of these possessions would certainly not be linked to stringent long-lasting amortization accounts.

Quality of counterparties and also international reach
The high quality of the charter counterparties and also the charters in this first post-construction stage will certainly be especially crucial to investors as they look for to guarantee their anticipated returns are safeguarded via these first agreements. It will certainly be necessary for investors to develop the credit reliability of the charterer and also whether any kind of warranties will certainly remain in area in regard of the charter responsibilities.

Irrespective of the hidden nature of the charter, where a proprietor is planning to fund a vessel versus the earnings from the charter, there will certainly be different facets of the charter terms that will certainly be greatly inspected by investors. Addressing all such bankability concerns drops outside the extent of this posthowever any kind of components of the charter that can impact a proprietor‘s capacity to service the financial obligation— such as the size of the charter term, the day-to-day price of charter hire and also the charterer’s legal rights to minimize hire or area the vessel off-hire or end the charter– will certainly be thoroughly assessed by the investors.

Given the boom in overseas wind internationallyproprietors need to have the ability to make the most of this globally need and also redeploy their vessels in various other territories to make the most of any kind of diverse work choices. However, installment vessel proprietors will certainly need to show to investors that they have the ability to browse their means via advancing regional material demandsas an example, in Japan, the United States and also in other places. In regard of the United States, the Jones Act restricts the capacity of international developed vessels from participating in coastwise profession country wide. It deserves keeping in mind that there is a considerable rise in cost connected with developing a Jones Act certified vessel and also this, combined with the capacity for international flagged WTIVs to participate in fixed installment job while being serviced by Jones Act certified feeder vessels, might be influencing the variety of Jones Act certified WTIVs we have actually seen being bought to day.

Export credit scores companies and also various other security assistance
Export credit scores companies (“ECAs”) will certainly have an essential component to play in the funding of WTIVs, specifically provided the high building and construction prices. Shipowners and also shipyards will certainly be extremely eager to construct the vessels with ECA assistance. We think that this will certainly include both yard-linked ECAs in Asia and also the European ECAs that offer essential technological devices needed for vessels internationally.

The ECAs are most likely to perform due persistance first of a funding on the safety, charters and also cash-flows. Given their unique standing, ECAs that offer straight funding, while placing along with various other elderly lending institutions in repayment and also safetywill certainly require unique ballot and also approval legal rights in regard of specific issuesespecially those controlled by their plans. In enhancement, where ECAs offer warranties in regard of a lending, they will certainly call for the underlying business lending institutions to get their grant a recommended strategy.

When ECA assistance is not readily availableinvestors will likely seek business or various other security assistance from moms and dad firms with a considerable annual report. This could lead the marketplace to be driven by the larger gamers. However, there are still most likely to be radicals and also speculators in the installment market— equally as there have actually remained in boring and also different other overseas industries for many years.

Technology dangers
Like with any kind of newbuild funding, there will certainly be a component of modern technology danger. Some vessels are currently being prepared with different gas and also we keep in mind that Van Oord has actually just recently bought a brand-new overseas installment vessel which can operate methanol. As these vessels create component of the renewable resource chain, there will certainly be an emphasis by programmers on a vessel’s carbon impact. As with the remainder of the maritime sector, vessel proprietors will certainly require to identify what gas system to make use of progressing and also have the ability to show to their investors and also the charterers that this is a practical option.

In enhancement to option of gasmodern technology growths in installment approaches will certainly be essential to investors‘ factors to consider and also their bankability evaluation. The proceeded advancement of the drifting wind market is an additional essential factor to consider, as vessel service providers will likely intend to recognize just how the development of drifting wind ranches (which do not require jackups for installmentcan influence future need for WTIVs.

Conclusions
We have actually looked for to highlight a few of the funding and also bankability factors to consider for investors in regard of WTIVs however plainly the above is not an extensive checklist of factors to consider. Each funding will likely be various and also have its very own factors to consider depending upon the certain reality pattern. As the marketplace establishes we will certainly see even more patterns establishing and also we will certainly look for to upgrade this post eventually when those patterns emerge.

n our first article we highlighted some of the key contractual considerations facing shipowners looking to construct and charter offshore wind vessels. In this article we explore some of the considerations concerning the financing and bankability of offshore wind vessels. We have seen a diverse group of financiers interested in financing vessels in the offshore wind sector and, while the nature of the financing available will depend to a large extent on the employment of the vessel, there are various issues for them to consider.

Common considerations for financiers
Naturally, many of the basic principles that apply to all maritime asset classes will apply to the offshore wind sector but, equally, given the specialist sector in which they operate, these factors should not be taken for granted:

  • experience in sector: does the owner have a track record in the offshore wind sector? If they are a new participant, does the owner or its group members have the operational experience required? The turbine, foundation and undersea electrical cable installation and heavy lifting processes are very complex areas which require experienced personnel;
  • appetite for risk: is this a speculative order predicated on known demand or is employment already in place with signed charters?;
  • cash-flow: is there the cash-flow to support the debt? This would include a review by the financier of, among other things, the length of any charter term, the charter hire rate, the termination rights and the off-hire provisions;
  • quality of team: given the shorter nature of employment contracts with regards to installation vessels, what is the quality of the management team to win projects and to capture future demand?; and
  • asset quality: how does the vessel’s design and technology meet the requirements of the market now and in the future? Will the vessel have the flexibility to work in multiple jurisdictions and what is the likelihood of the asset being able to compete in the future with newer and likely larger vessels? In addition, how does the price of the vessel compare with similar assets types?

Offshore wind installation vessels
In the offshore wind sector, there are two key types of vessels. Firstly, there are support vessels which generally have long-term charters in the region of ten years. Secondly, there are wind turbine installation vessels (WTIV) whose charters are much shorter in duration, in the region of six to eighteen months, depending on the size of the offshore wind project.

For the remainder of this article, we will look at some of the structuring and bankability issues in respect of WTIVs as, given the typically shorter term nature of their employment, it is these installation vessels where we see there being potential for a greater variety of financing structures and where more thought may need to be applied to bankability issues.

Drive for newbuilds
When the offshore wind market was developing, installation requirements were satisfied by heavy lift vessels deigned for the oil and gas industry. However, market requirements have shifted to larger capacity WTIVs and purpose-built wind foundation installation vessels capable of handling the largest monopile foundations. This requirement for specialized vessels and environmental pressures across the whole supply chain will lead to older vessels becoming obsolete at the installation phase and also drive demand for newbuild WTIVs.

Much has already been written about the potential bottleneck for WTIVs, with demand projected to outpace the supply of capable vessels by the late 2020s. While we have seen an increased number of new WTIV orders recently, based on current expectations the market will still require further newbuilds by approximately 2028.

Offshore wind provides an ESG friendly investment environment and the anticipated demand for WTIVs seems apparent. Although, a number of factors seem to be contributing to the anticipated undersupply, with one possible contributing factor being cost of a newbuild WTIV, which is in the region of $300 million to $500 million.

Short-term employment
Our experience shows that any financings for an installation vessel will be more bespoke and will need to be tailored to take into account the employment of the vessel and the lack of long-term employment. As the sector evolves, while ideally shipowners and financiers would want to see long-term employment, we have not seen this so far and it raises the question as to how any financier can get comfortable with re-marketing risk on vessels unless the shipowner has a substantial balance sheet, a series of employment contracts with later delivery dates, or other support to mitigate that risk.

A contract for the installation of an offshore wind farm may range from six to eighteen months but multiple employment contracts can be put in place back-to-back so that there is up to approximatively three years’ employment for a vessel from delivery from the yard. However, even with the current high charter rates, this is unlikely to enable a full pay down of the loan at the end of this period. The track record and experience of the management team to be able to demonstrate that they are able to win future contracts will be particularly important here.

Financiers might seek a lower level of debt to ease their debt service burden, but this will place greater pressure on the amount of equity that will need to be in place. Given the short-term nature of the employment contracts, there are likely to be periods of assured profitability for these vessels in the early years following construction, so financings could be structured so as to capture that cash with appropriate and flexible payment profiles and cash sweeps. Financings of these assets would not be tied to inflexible long-term amortization profiles.

Quality of counterparties and global reach
The quality of the charter counterparties and the charters in this initial post-construction phase will be particularly vital to financiers as they seek to ensure their expected returns are secured through these initial contracts. It will be important for financiers to establish the creditworthiness of the charterer and whether any guarantees will be in place in respect of the charter obligations.

Irrespective of the underlying nature of the charter, where an owner is intending to finance a vessel against the revenue from the charter, there will be various aspects of the charter terms that will be heavily scrutinized by financiers. Addressing all such bankability issues falls outside the scope of this article, but any elements of the charter that could affect an owner’s ability to service the debt – such as the length of the charter term, the daily rate of charter hire and the charterer’s rights to reduce hire or place the vessel off-hire or terminate the charter – will be carefully reviewed by the financiers.

Given the boom in offshore wind globally, owners should be able to take advantage of this worldwide demand and redeploy their vessels in other jurisdictions to take advantage of any varied employment options. However, installation vessel owners will have to demonstrate to financiers that they are able to navigate their way through evolving local content requirements, for example, in Japan, the United States and elsewhere. In respect of the United States, the Jones Act limits the ability of foreign built vessels from engaging in coastwise trade nationally. It is worth noting that there is a significant increase in price associated with building a Jones Act compliant vessel and this, coupled with the potential for foreign flagged WTIVs to engage in stationary installation work while  being serviced by Jones Act compliant feeder vessels, may be impacting the number of Jones Act compliant WTIVs we have seen being ordered to date.

Export credit agencies and other collateral support
Export credit agencies (“ECAs”) will have a key part to play in the financing of WTIVs, especially given the high construction costs. Shipowners and shipyards will be very keen to build the vessels with ECA support. We believe that this will involve both yard-linked ECAs in Asia and the European ECAs who provide key technical equipment required for vessels globally.

The ECAs are likely to conduct due diligence at the outset of a financing on the security, charters and cash-flows. Given their special status, ECAs who provide direct financing, while ranking alongside other senior lenders in payment and security, will demand special voting and consent rights in respect of certain matters, particularly those governed by their policies. In addition, where ECAs provide guarantees in respect of a loan, they will require the underlying commercial lenders to obtain their consent to a proposed course of action.

When ECA support is not available, financiers will likely look for corporate or other collateral support from parent companies with a significant balance sheet. This might lead the market to be driven by the bigger players. However, there are still likely to be mavericks and speculators in the installation sector – just as there have been in drilling and various other offshore sectors over the years.

Technology risks
Like with any newbuild financing, there will be an element of technology risk. Some vessels are already being planned with alternative fuels and we note that Van Oord has recently ordered a new offshore installation vessel which can operate on methanol. As these vessels form part of the renewable energy chain, there will be a focus by developers on a vessel’s carbon footprint. As with the rest of the maritime industry, vessel owners will need to determine what fuel system to use moving forward and be able to demonstrate to their financiers and the charterers that this is a viable solution.

In addition to choice of fuels, technology developments in installation methods will be key to financiers’ considerations and their bankability analysis. The continued development of the floating wind market is another key consideration, as vessel contractors will likely want to understand how the advent of floating wind farms (which do not need jackups for installation) could impact future demand for WTIVs.

Conclusions
We have sought to highlight a few of the financing and bankability considerations for financiers in respect of WTIVs but clearly the above is not an exhaustive list of considerations. Each financing will likely be different and have its own considerations depending on the specific fact pattern. As the market develops we will see more trends developing and we will seek to update this article in due course once those trends become apparent.

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