– Business – Securitized loans and their place in the superyacht industry


Credit Suisse has securitized a portfolio of loans for superyachts and private jets, but what does that mean?

Swiss credit securitized a portfolio of superyacht and private jet loans, to offload some of the risk associated with high value lending to UHNW individuals through an innovative and synthetic SRT (significant risk transfer) transaction for capital management purposes and of the balance sheet. But what does that really mean?

Indeed, Credit Suisse has securitized the risk of these loans, currently valued at a notional value of $2 billion, granted to their UHNW clients. High value loans are secured by their yachts, jets and other high value financial assets such as real estate. One of the key things to mention is that loan securitization is a perfectly normal banking technique, often done using mortgage portfolios and other valuable assets to back up the potential risks of high value loans.

What makes the news about Credit Suisse unique is that the use of yachts and private jets to support the deal is considered a market first for a private bank, such as Credit Suisse. Of that $2 billion, $80 million was securitized, meaning Credit Suisse transferred the portfolio’s first loss up to that value to asset management firms and hedge funds, who would now be liable. if the borrowers who had taken out defaulted on the loans. It should be mentioned that due to the synthetic nature of the transaction, buyers of first loss protection do not have visibility into individual borrowers as they are purchasing a portfolio guarantee which is priced based on statistics. aggregate of expected portfolio defaults. From the perspective of banks, synthetic securitization releases risk-weighted assets (RWA), which in turn improve the economic return of the interest portfolio. This allows Credit Suisse to reinvest more risk capacity in future lending transactions. In short, the transaction allows Credit Suisse to continue to lend to more clients, thereby expanding its portfolio.

Some have speculated that the growing conflict between Russia and Ukraine and potential sanctions from Western countries could be a future driving factor in the need to protect lenders from external factors causing borrowers to default. For more context, Credit Suisse has already experienced twelve defaults on aircraft and yacht loans in 2017 and 2018, believed to be due to US sanctions introduced against Russian oligarchs under the Trump administration. However, it should be noted that this transaction was already concluded in November 2021 before the escalation of the Ukraine conflict in December and therefore it is unlikely that Credit Suisse intentionally entered into this transaction as a hedge for the following Ukraine crisis. .

Financing yacht loans is not a new concept. There are generally two routes a potential owner can take if they want to buy a superyacht. As with buying a home, most second-hand buyers will take out a “yacht mortgage” on the vessel they are interested in. However, many factors drive this process, known as Loan-to-Value (LTV) valuation, such as; who built the yacht, where the vessel will be registered, the taxation of the yacht, whether it will be used for private and/or commercial purposes and the tax status and history of the potential owner. Most yacht loans are arranged in a way where the “yacht mortgage” is protected against any other potential creditor claims attributed to the borrower.

The other type of yacht financing is a “Yacht Construction Loan” or “Yacht Construction Loan”. This type of financing is complex and is normally an agreement between the owner and the bank, where the bank will pay lump sums when the new construction process reaches key milestones, such as the laying of a keel and when a vessel is at sea, trials and potential the owner will make payments for these lump sums. Until delivery of the vessel, the bank is the technical owner of the yacht, which means that in the event of default, the bank can contract the shipyard to complete the construction process and sell to a new owner or can find a new owner to take over the construction process and pick up where the payments left off.

Yacht loans are crucial to the superyacht industry as ‘yacht mortgages’ keep the used brokerage market going by allowing potential owners access to upfront money to order newly built yachts and buyers to purchase brokerage vessels. These agreements help to keep the superyacht market dynamic. This allows for the growth of the superyacht fleet, which allows for the growth of the entire superyacht ecosystem to grow further, from the craftsmen who build the vessel to the suppliers who supply the goods on board.

The graph above shows how Credit Suisse’s yacht loans have grown since 2014 and by 2021 were valued at over $1 billion. Credit Suisse is one of many institutions that provide capital for yacht loans, therefore this trendline is simply meant to represent how the value of yacht loans is increasing year on year. When overlaid with the superyacht fleet and current order book for 2022, it shows how increased yacht loans have contributed to fleet growth, particularly with 240 vessels set to be delivered throughout. of 2022, in correlation with the rather strong increase in yacht loans seen between 2018 and 2020, when most of these contracts would have been signed with the various shipyards.

Yacht finance is crucial in the superyacht industry, allowing more potential owners to enter the market through both new builds and pre-owned sales. As the UHNW population increases, the pool of potential homeowners who can sign up for this type of financing option from institutions such as Credit Suisse also increases, however, with the unforeseen circumstances such as geopolitical situations and pandemics to face over the past two years. years, as well as potential data leaks in the ever-expanding digital age, it is completely understandable that these institutions would consider employing strategies that protect them.

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