A Guide to Financing Shadow Yachts
- The Lending Code and Guarantees
- Individual Guarantees: the requirement for independent legal advice
- Regulated Mortgages Briefing paper
- HMRC consults on significant extensions to withholding tax on interest
- A Guide to Financing "Shadow Yachts"
We are currently acting on the financings of several superyachts and one question which arose recently was in relation to "shadow yachts" and the potential legal issues surrounding the financing of them. We thought this would be a useful opportunity to look in more detail at the points which a lender may have to consider when faced with the financing of shadow yachts.
What is a shadow yacht?
A shadow yacht is a support vessel which accompanies a main super yacht. It functions as a holding space for additional objects, such as jet skis, helicopters and fuel supplies. It may also contain sleeping quarters for the crew of the main yacht.
Financing a shadow yacht
Similar to the finance structure of a principal yacht, a shadow yacht is commonly financed using the basic asset finance structure. The bank lends money to the borrower to enable it to purchase the shadow yacht, or to pay the pre-delivery instalments of a yacht in construction. The borrower also grants a mortgage over the yacht to the lender. It is probable that both the principal yacht and the shadow yacht will be financed together by the same lender.
It is preferable to have one loan agreement covering the finance of the purchase or construction of both the principal yacht and its shadow yacht. It is also usual for a special purpose vehicle ("SPV") to act as purchaser of both yachts, so that ownership remains centralised, avoiding two separate loan agreements and two separate borrowers. However, if a different SPV were to act as purchaser of the shadow yacht, cross-collateralisation would be prudent, so that the collateral of the loan for the purchase or construction of the principal yacht would also be available to the loan in respect of the shadow yacht and vice versa.
The terms of the loan agreement will include the usual representations, warranties, undertakings and conditions precedent. If the bank is providing pre-delivery finance, it will generally require an assignment of the benefit of the building contract of the shadow yacht, so that in event of default, the bank is left with the option to continue with the construction of the yacht (to then sell post-delivery to satisfy the outstanding debt). In the case of a shadow yacht built by a German yard, it is likely that the bank will also be able to take a mortgage over the hull prior to delivery.
Although a single loan agreement is most likely to be used for both the principal and shadow yachts, it is important to note that a separate mortgage must be taken for each vessel (and hull, where appropriate).
Registration of a shadow yacht
The super yacht and shadow yacht should be registered in the same jurisdiction and their respective mortgages should be registered in such jurisdiction. Recognition and enforcement of foreign mortgages, however, may vary from jurisdiction to jurisdiction. Therefore local legal advice should be obtained with respect to yacht registration, in order to ensure that taking possession over the shadow yacht is valid and enforceable in any relevant jurisdiction.
Enforcement of securities over shadow yachts
In the event of default, the options for the enforcement of a mortgage over a shadow yacht are identical to those for a super yacht; i.e. to take possession of the yacht and sell it as mortgagee in possession, or to arrest the yacht and apply for it to be sold by the court. If a shadow yacht is specifically designed and tailored to match its principal yacht, its full value may not be recoverable if it were to be sold separately. This poses a large risk for lenders, and so when drafting the security documentation for the shadow yacht, its value, if sold separately, would need to be considered. It may be that both yachts would need to be sold to the same purchaser to recover the outstanding debt effectively.