UK government unveils its Shipbuilding Credit Guarantee Scheme
On Wednesday, 26 July 2023, the UK Department for Business and Trade finally announced its Shipbuilding Credit Guarantee Scheme.
The scheme has been eagerly awaited for many months and while the devil will be in the detail, the announcement itself will be welcomed by UK shipyards, lenders and particularly vessel owners intending to order newbuildings or undertake refits, retrofits or repairs of existing vessels at UK shipyards.
The scheme is not as many predicted, in that the scheme is not a straight forward refund guarantee scheme. The scheme is essentially a partial government guarantee in favour of the lender of the buyer/borrower's repayment obligations under a loan. This will surprise most as there had been a general understanding in the industry that the scheme would be a refund guarantee scheme.
Nevertheless, we do not see the scheme itself materially changing a lender's credit committee's decision making approach. Ultimately, the level of risk associated with a particular shipyard and ship owner will not change because of the scheme. The scheme however will give lenders an additional level of protection and may well encourage lenders to support projects that hitherto would not proceed.
What does the scheme cover?
The scheme will cover newbuilds and refits and repairs of existing vessels. Newbuilds includes conventional ships, yachts and work boats. The coverage of the scheme is therefore encouragingly wide. While there is always a focus on the newbuild sector, we anticipate the demand for refits only to increase as vessel owners transition towards net zero. Refits being included in the scheme is therefore only positive.
Who is eligible?
The Department for Business and Trade has not disclosed all of it eligibility criteria however the main requirements disclosed to date are:
- the shipyard must be carrying on business in the UK; and
- the bank making the loan must be "acceptable"; and
- the underlying financials and contractual structure are "acceptable".
How much will the scheme guarantee?
The Department for Business and Trade can provide partial guarantees covering up to 80% of the risk to the lender which we understand to be payment risk of non-payment of loan principal and interest for whatever reason. Compared against China and Korean government export credit support at 90-95%, this is a relatively lower percentage.
How long does the application process take?
The Department for Business and Trade stated that it wants to process every application within 8 weeks. This is an aggressive timeline considering the complexity involved, especially in the earlier applications.
What are the guaranteed obligations?
The Department for Business and Trade announcement has not detailed the guaranteed obligations and when such guaranteed obligations are triggered enabling a lender to recover its loan. This information will be critical in assessing the usefulness of the scheme.
How much does it cost?
Unfortunately, there is no clear guidance on this point as the Department for Business and Trade only states that their premium is determined on a case-by-case basis. Such premium will fall to be paid by the buyer/borrower.
The outline of the scheme is encouraging but further details about the scheme will be critical to access the likelihood of its success. Of course, the real test will be how many applicants are successful in applying for the scheme and what coverage they can obtain. That will only be revealed in due course.
We have been advising on such guarantee schemes and export credit insurance policies for many years. Please do not hesitate to contact us if you have any questions on the scheme.