The GE Finance Article JTF sat with a group of top people from the

The GE Finance Article
JTF sat with a group of top people
from
the
“GE
Infrastructure”
organization, gathered from London,
Oslo and Stamford, Connecticut,
discussing its diverse financing
activities in the maritime arena. The
meeting also included a review of its
recent
FPSO
financing
for
Norwegian offshore player Sevan
Marine, which came about through
synergies between the transportation
finance and energy finance groups.
In the words of Mr. Brandon Blaylock, Executive Vice President of GE
Transportation Finance, the offshore segment “looks and feels a lot like a ship;
the energy finance and the transportation finance groups work very closely
together, and we leverage our expertise across sectors”.
The parent company, General Electric (NYSE: GE), a component in the Dow
Jones Industrial average, is a household name by virtue of its global reach and
sheer size; at recent equity prices, its market capitalization is roughly $373
Billion. Among the priorities identified following a June, 2005 re-organization
along lines driven by the markets served, GE’s “Infrastructure” business was
tasked with providing a unified interface to customers. Under the Infrastructure
umbrella are GE Energy Financial Services, GE Transportation Finance, a unit
within GE Commercial Aviation Services (GECAS). Mr. Blaylock’s group, based
in Stamford, handles “all transport modes except for aviation.” Mr. Blaylock said:
“The team here is also involved in financing of seaports and terminals.”
Maritime professionals may be familiar with another face of this industrial giant,
GE Capital Solutions, a part of GE’s Commercial Finance business (which until
recently also housed the Energy, Transportation and Aviation finance areas)
handling smaller transactions, typically asset based “brownwater” finance of tugs
and barges that ply the US inland river system. Showing the further synergies
that abound within GE, the Capital Solutions group has provided vendor
financing for boats propelled by diesel engines manufactured by GE’s Marine
Propulsion group (part of yet another business unit, GE Transportation).
GE’s activities in maritime finance are well known, providing a wide spectrum of
funding across the debt and equity spectrum, including single investor and
leveraged leases that place GE into the role of vessel owner, albeit a financial
lessor whose customers must provide technical and commercial management of
assets. Additionally, GE provides debt ranging from conventional bank finance
(offered in conjunction with other banks) to debt that fits into structured financing
solutions. Oslo-based Senior Vice President Mr. Jon Willmann, one of several
transaction “Originators” within GE Transportation Finance, told JTF: “We
certainly work closely with other institutions, and this includes the traditional
shipping banks.” He added that “We would try to come in as a lead arranger, or a
co-lead arranger. We have a greater ability to structure the deal if we are further
up in the hierarchy.”
GE’s involvement in the maritime markets is an evolution that has occurred on
multiple fronts. A decade ago, the old “GE Capital” would finance commodity type
vessels, such as Handymax bulk carriers, differentiating itself through its ability to
customize terms, advance rates and maturities. In a number of cases, its
mezzanine type debt would include equity kickers- which would enable it to
partner with growing companies that were precluded from obtaining traditional
loans from the shipping banks. With bespoke structures came high spreads- at
least that was the reputation. Another of GE’s Oslo - based professionals, Mr.
Lars Vikjord, Managing Director of GE Transportation Finance, said: “These
days, you will find that we are closer to where everyone else is on pricing targets.
We face a big challenge where the market has moved lower and the spreads
have shrunk . Sometimes, we face a challenge on meeting the market on the very
good credits.” Mr. Blaylock joined in the conversation and said “We are looking at
different structures, and at higher advance rates than the typical bank would do.”
One theme throughout our conversations was that GE, while quite comfortable
sitting at the same table with traditional banks, will find ways beyond simply rock
bottom pricing to bring value, with Vikjord saying: “We have seen margins at 100
b.p. down to 55 b.p .- these are too low for our taste. We are looking for
transactions where we can use our expertise in putting together deals with some
structure
to
them.”
Clever people come up with novel and profitable ideas. By virtue of its innovative
financial structures, particularly in the area of mezzanine debt with equity
characteristics, GE assumed equity stakes in various bulk carrier and container
deals which proved valuable as the market turned upward. In the mid 1990’s, GE
Capital was a minority shareholder in ship management powerhouse V Ships
(since bought out by management in 2003 with the backing of the Close Brothers
private equity fund). The V Ships deal was noteworthy at the time because of its
defensive nature (providing in-house expertise in operating vessels that might
come back to a lender after a default), while at the same time offering a conduit
to potential financing deals (with V Ships then handling technical management on
hundreds of vessels). The timing of GE’s entry was particularly prescient
because of the huge regulatory burdens driving highly competent owners to the
doors of ship managers.
Sometimes, brawn (rather than merely brains) is what counts. GE, a finance
company with its huge balance sheet, (rather than a deposit taking bank), can
take risks that others can’t or won’t. The Oslo based Mr. Vikjord told JTF: “You
can say that our differentiation now includes a willingness to finance ships in
flags off the normal track in different jurisdictions.” Often, the customers are
required to maintain a national flag because of local cabotage restrictions- or as
requirements for carrying a country’s imports and exports. As examples, Vikjord
cited India, Turkey and Mexico, adding, “We have looked at Russia.”
Developing country commodity movements often involve oil or oil products, but
Mr. Blaylock said that “we are not keen on taking equity stakes in tankers.”
Typically, fears of exposure from an oil spill have caused financiers (who,
axiomatically, will have large balance sheets) to shy from owning crude oil and
products carriers, in spite of indemnities against liability issued by bareboat
lessees.
Though GE is mum about actual transactions- public filings are rich in examples
of GE touching the maritime industry in developing countries. In the late 1990’s
GE Capital provided $105 Million of dollar denominated debt to India’s Essar
Shipping, which saw U.S. dollar borrowings as a cheaper alternative to very
expensive Rupee-denominated borrowings. In late 2004, as Essar had grownthis debt was refinanced. Essar Shipping’s $200 Million facility (at 120 b.p. over
LIBOR) in a consortium led by the NIB Bank. Argentinian linked maritime and
offshore specialist Ultrapetrol (Bahamas) Ltd, in the news through its early
October $125 Million (net) NASDAQ IPO effort (where the price was dropped
below targets at the last minute), also has a GE equity connection, through the
large ownership stake tied to the AIG-GE Capital Latin America Infrastructure
Fund L.P.- partnership based in Bermuda ("LAIF"). Solimar Holdings (wholly
owned by LAIF) will emerge as the largest shareholder after the Ultramar
offering. Interestingly, GE has not been a debt provider to Ultrapetrol (Bahamas)
Ltd- whose liabilities include $180 Million of 9% notes (due 2014), and more than
$41 Million of ship finance debt from DVB at all-in rates varying between 7.33%
and 7.96%.
Over the years, GE has owned container ships (through its capacity as a lessor,
or an investor in companies running them). Mr. Blaylock told JTF: “Presently, we
are not owners in the container vessel sector, but we are looking at a couple of
things.” In a very separate equipment leasing initiative, a group within another
GE business unit (Equipment Services) owns a 50 percent interest in container
leasing leader GE SeaCo, which remains a very active container lessor- with a
fleet of nearly 1 Million boxes.
Though the evolution of GE’s maritime financing activities have taken it closer to
the world of shipping banks, there continue to be important differentiators.
Increasingly, GE’s traditions as a technological innovator enable it to get
comfortable with technologies as they unfold in the maritime world. The Sevan
deal, where a new type of FPSO was financed, provides an example of what Mr.
Vikjord calls “our ability to offer a solution because we understand the entire
project.” He stressed the importance of “understanding the credit, the financial
structure, and the technology,” and pointed out that few institutions can bring
such breadth together under one roof.
The value of this technology infused approach may be less relevant to LNG
vessel finance than was the case several years ago, according to the GE team.
Not only is the financing market increasingly competitive (as evidenced by the
narrowed spreads), but the marketplace (including financiers all around) is more
comfortable with the vessels. In Brandon Blaylock’s view: “Where the vessel
financing is tied to a project finance- we can apply our expertise in structuring
complex projects. We have been involved in the past, have looked at deals
recently, including a trip to Qatar.”
Lars Vikjord chimed in: “However, it is well known that spreads have been quite
narrow in the sector. We’ve seen that the LNG <business> has developed into
one where risk is anticipated to be low, and the contracts are with very good
names. This is much different from even five years ago- when the technology
was riskier and there was more worry about the gas prices.”
He said that offshore shuttle vessels could be financed with a long term contract,
or performance of company that owns them (such as Teekay or Knutsen OASboth with suitable balance sheets behind them). On the subject of conversions,
he added, “Once you start modifying the asset, there is some talk of modifying
existing LNG tonnage, then it becomes more specialized, and the contract
becomes part of the collateral.”
The $120 Million Sevan Marine transaction (JTF #??? ) was a good example
of what Blaylock termed “bringing the best of both <energy and transport
expertise> to the deal”, where a ten year project type loan (limited recourse) is
expected to be paid off during the term of an eleven year time charter to
Petrobras.
Jon Willman talked about some of the risks of such deals, including the rapid
shifts in technology- “when the ten years are up, maybe there will be other types
of FPSOs. You structure around that residual risk by paying off the loan before
the expiry of the charter.” Both Willmann and Vikjord described a process where
GE, as co lead arranger on the deal, along with ANZ Investment Bank, was able
to have considerable input into the contours of the Petrobras charter.
Another element of risk in FPSO deals, albeit for the customer rather than for
GE, centers around the technical management of the asset- which in the Sevan
case is contracted out to a third party. Cost escalation is a conundrum facing
owners of LNG vessels (or any ship entering a long tenured contract under a
time charter). Mr. Willman said that time charter contracts, where the “owner”
must either provide or outsource technical management, might include an
escalating daily cost (tied to an index), or, alternatively, the owner and the
technical operator might agree on a price that incorporates expectations of cost
increases over the term.
Willmann’s colleague James Berner, Senior Vice President with GE Energy
Financial Services in London (which is co-underwriting the FPSO financing),
added: “In some respects the LNG finance is looking much more like regular ship
finance- the assets are very fungible.” Mr. Willmann, who played an important
role in executing the Sevan transaction, along with Berner and the other
members of the team, said that “project type structures could be used on non
commodity vessels and for offshore vessels and pipelayers.”
All things considered, Sevan Marine must be very happy with the GE
Infrastructure teams- as our meeting concluded, the Oslo members of the GE
group were quick to point out that GE (jointly with DVB) has recently received
mandates to raise both construction finance, and a term loan (each up to US $65
Million) for Sevan Marine’s next FPSO. The new unit, to be named
“Hummingbird”, will be placed into a two and a half year fixed charter (with
options) to Venture PLC when delivered in Summer, 2007. In addition, Sevan
has awarded GE with a mandate to raise $100 Million for construction, and a
similar amount for a term loan, on its drilling rig (based on the same “SSP”
cylindrical technology underlying the FPSO’s) set to come into service in early
2009 .