Cautious and Pessimistic MODDERMAN: ON CRUISE GROWTH AND FINANCING
By Ligaya Caban
(Editor’s Note. Our Publisher attended the annual Interferry Convention in London and sneaked a trip to Monaco to pick the thoughts of Mr. Modderman, an international authority on cruise ship financing. A major cruise company already opened two cruise packages in the Philippines; one within our islands, the other includes Taiwan.
Publisher Bacani anticipates interest on cruise, signalled by the growth of RoRo ferries and the allure of our islands. Maritime and hospitality training ships double as event venues, a trend that the Manila Bay dinner cruise is just about to expand to the other islands as part of the global wellness phenomena where vacation is a major segment (and so are cruises).
Hugo T. Modderman is the Managing Director of Dolfinance, based in Monaco. The Dutchman finished Economics at the Universitas Friburgensis Helvetiorum (Switzerland) and started financing industrial and real estate projects in Dubai in the early years of the U.A.E. development. It was through Oryx Investments, the first merchant bank in the Middle East.
In 1976, he financed his first cruise ship, Bon Vivant, for Chandris Cruises. With real training in ship finance at Den norske Creditbank. Hugo did a buy-out in 1988 of the Rotterdam office of DnC which continued as Dolfinance now on its 31st year. Dolfinance is independent but has been working with Dutch banks, creating a.o. Nedscan in Bergen for ING Bank.
For 12 years (2001-12), Dolfinance acted almost exclusively for DVB Bank, the specialized transport bank, gaining for Hugo deeper knowledge of the cruise and ferry market: sector positioning, credit, mergers, acquisitions and financing to a portfolio of US$1-billion.
DVB has abandoned the cruise and yacht finance; Dolfinance has focused on its niche knowledge and relationship with cruise, ferry and offshore and energy related clients.
Today, Dolfinance advises on mergers and acquisitions, arranges financing from public and private sources; primarily for cruise, ferry, offshore service and chemical and LPG tankers. Also, Dolfinance handles mega yachts to over US$350-million range via European Banks.
Hugo is the founder of the annual Marine Money Yacht Finance symposium in Monaco.
Hugo sees Monaco as the right place to be because the heart of the cruise industry ticks in Miami /Ft. Lauderdale, Monaco, Hamburg and Seattle.
It has several cruise related companies, like Silversea, Star Clippers and V-ships. Importantly, decision-makers are here; those who don’t live here come regularly for the weather, food, events and lifestyle. Like the head of Holland America Line, who prefers visiting his ships in Monaco rather than in other ports.
While holding office in Rotterdam, Hugo’s invitations to visit his office were often turned down. He had to travel to see the clients. Operating from Monaco, the situation is reversed: they don’t want Hugo to come; instead, they are eager to visit Monaco for its charm.
For Hugo, Monaco is a well-organized small place that has all the facilities and a good climate. “I’m from the forest, from a small village in Holland so I do not like big cities.”
Monaco is not a big city, but a village with a symphony orchestra, ballet, tennis tournaments and Formula One competitions; A lively and prominent city but without criminality, pollution, intense traffic and lack of control.
From a tax point, one does not have to pay much income tax, only corporate tax and VAT. Life becomes more relaxed without the need for keeping receipts and tickets, facilitating the bookkeeping.
“All that you can forget here.”
Just his niche.
He focuses on cruise ship financing but just on small and medium sized ships, particularly expedition and luxury cruise ships.
For a while, Hugo was also handling financing of ferries but now rather concentrates on the cruise business. In fact, he is not aware of anyone specializing on ferry finance this being a very local activity. It is sector mostly financed by a local bank because the local bank can judge the specific market.
The cruise industry is worldwide, not to transport people from A to B but offering leisure activities and exploration, an international business where both owners and cruisers are global.
Hugo believes it is booming, with close to 30 million cruise passengers a year as published by the Cruise Lines International Association (CLIA). Dominant are Carnival, Royal Caribbean, NCL, MSC and Viking, the latter a relative newcomer. While some think there are too many ships now and those being planned, the Big 5 have done marvellous marketing, giving very interesting offers to clients.
But he is cautious in projections as he sees shadows of a creeping recession with the slowdown of growth in the United States, China and Germany. If at all the cruise companies get all those ordered ships, will there be enough passengers?
He points out the excitement in China. NCL built a special ship for the Chinese market, the Norwegian Joy. Beautiful ship, impressive. But they withdrew the ship from China because they could not fill it, that market over estimated, at least, for the time being.
In Modderman’s expedition sector (small and medium), the fleet consists of, say, 60 ships and most of them are very old. During the last 20 years, none were built with few exceptions. At a normal renewal rate without expansion, you need to build between 1 ½ and 2 ships a year just for the gradual renewal. For a backlog of 30 ships, there are now 40 under construction. And they are a little bigger, so we do see an increase in capacity there.
Hugo is not wary on the expedition side because more and more people want to go on an expedition from two levels. Young people want to do something adventurous and are prepared to spend money on experience rather than on buying a new car or another new boat. On the other hand, we also see people used to go on big cruise ships, being fed up, and want now to go on small ships. That will nourish the expedition and luxury cruise market.
Some big companies now want to get into the luxury cruise market like MSC. The question is whether the clients want that. They may prefer to stay with small or medium size companies. Hugo is not brand conscious but thinks Asians are. Americans are very brand focused for quality, like a yacht from Feadship in the US is very important as a status symbol.
A wealthy American wants a cruise on Silversea, Regent, Seabourn or Crystal. When he says I’ve been on a luxury cruise with MSC, I’m not so sure his neighbours will be as much impressed as if he could have been on any of the prestigious four.
An obstacle on expedition cruise is the limited places one can visit. Like in Antarctica, maybe 15 or 20 landing places only. If you go twice a day, the maximum will be 30 ships or so in the area. But you cannot have 50 ships because they would hit each other. For example in Antarctica, you are not allowed to have more than 100 people ashore at the same place, at the same time.
Large cruise companies like Crystal and Holland America Line, send big ships to Antarctica but they keep the people onboard. “They give binoculars to everyone, see the penguins, oh yeah, I’ve seen that penguin, wow.”
The landscape is nice and they can see whales. But they cannot go ashore without the permits either.
Cruise ship financing.
Clearly, the major source of financing for the cruise ship building is export credit. Countries producing cruise ships (Germany, Finland, France and Italy) all have very active export credit facilities to help clients. Royal Caribbean and Carnival (and MSC) can finance themselves cheaply in the bond market. But during construction, these giants use the export credit guarantee facility. When the ship comes from the shipyard, they finance it at lower cost. Should the shipyard give problems, the export credit agency is there to assist!
The big shipyards in the four countries mentioned are financially strong and they know what they are doing. With the fleet renewal for the expedition and luxury cruise ships, clients have to go to smaller shipyards that build smaller ships.
The warp: These smaller shipyards are not experienced in building cruise ships as they were building offshore supply vessels, fishing vessels and anchor handlers. When the offshore industry collapsed, they were very hungry to build these small cruise ships without realizing their complexity and quoted too low prices.
Thus, Kleven Yard in Norway has decided to stop building cruise ships. Vard in Norway called on its mother (Fincantieri Group) to inject another 60 million euro to survive. At the edge of bankruptcy, the Barreras Shipyard in Spain is yet to build these new luxury cruise ships for the Ritz-Carlton Group. The financial plague infests all the way to Croatia, hitting those which offered too low prices.
Simple: too much money around against none in the past. The banks then had the money but not today when they are bleeding with huge losses and extra capital requirements. Today, it’s private equity (private people) that have the money. There is too much liquidity.
Banks do not want to lend too much on shipping because they want to reduce their balance sheet rather than go to the capital market and issue new shares. Without this purge, their share prices is bad, so low, demanding that banks reduce their balance sheet.
While having less knowledge of the Asian market, Hugo cannot understand why the financing still comes mainly from the USA and Europe, from Chinese leasing. There is a lot of funding opportunity (Singapore and Japan) but obviously, “the market or the people are not yet organized or focused on using their money the way they should in order to help their shipping and cruise industry.” Real estate is still considered more safe and easier to judge.
Greece and Norway, even Holland, Germany and Italy, are very focused on shipping. But in China or Hong Kong, everybody talks about real estate. When they don’t, they do on the latest restaurants or cafes, not shipping.
Modderman says Germany, Greece, Mexico and Brazil buy second-hand cruise ships while Italy France and Germany build new ships.
Export credit is a financial safety net, open to new ships but closed to second-hand ships. It eases risks as a fall back reassuring private equity. But for second-hand ships, age is a major factor. Hugo illustrates an imbalance where he convinced a private party to finance a 30-year old RoRo (which nobody wants to touch) he believes has 15 more years of service.
Dominating in building cruise ships is the Fincantieri Group; Number One in Italy as builder of cruise ships by volume and also owning the Vard Group in Norway and a major interest in France.
Dolfinance has been around since 1988, independent but associated with various institutions like Dutch banks ING and ABN AMRO then with DVB Bank. Now, it is in tandem with majors in London, Hamburg and Singapore.
Hugo is a senior advisor to the Braemar Group, listed in the London Stock Exchange, with which he cooperates on large and complicated transactions with their teams of analysts, specialists and brokers. He focuses on cruise and large yachts even if, at the moment, demand is not so high for yacht finance.
When not needed.
This is because yachts mostly provide a negative cash flow, (with some exceptions). Thus, people who finance yachts are those who do not need the money. Otherwise, they couldn’t afford the yacht but have a better use for their money.
A normal mix is not 100% finance but more like 50/50 and Hugo looks for the other 50% at 4 or 5% interest.
“What we see today is that a lot of these owners do not have this opportunity to invest their money elsewhere. If you put the money in the bank you have to pay negative interest rates so that is why at present there is not too much demand for yacht finance.”
Hugo regrets not having visited Boracay. But, one of his cousins have already ordered a ferry from the Philippines, now operating in the northern part of Holland.
Beyond the dollars, Hugo laments too many ships are spewing too much sulphur at the environment. In general, shipping is reacting too lax and too slow in cleaning their act, even with engine scrubbers and marine diesel.
Airlines are apathetic, their engine’s fuel consumption is relatively more difficult to change; land logistics movers may opt for better fuel, even electric and solar on the horizon.
Hugo was impressed by the German captain of Lady Moura which docks at Monaco. The port has no cold ironing facility --- ridiculous, as France has the nuclear power just around the corner for electricity. But the captain was strong-willed and insisted, paid for the electric cable needed, instead of running all the engines that will pollute the area.
Modderman believes cruise ships must also be on similar tact as the Lady Moura, using cleaner energy than all the engines revving and spewing sulphur. This shortfall should embarrass authorities.
But Italy, France and Monaco are quite bureaucratic. Nobody dares taking decisions, even if money is not a problem.
In a lighter vein, Robert C. Yeager points to Modderman’s $200k (cost as of 2012) 1930 Hispano-Suiza H^C Cabriolet de Ville, part of Hugo’s 15 car collection (with about $300k just for restoration) which “…be more valuable than the most expensive offerings in any luxury showroom.”
For one, his Hispano-Suiza was originally built for a member of the Vanderbilt family. It offered little weather protection for the chauffeur since “By custom, the lady was never to see a driver's hands.''
Modderman is a vintage automobile expert, doing restoration of special cars near Rotterdam airport, state-of-the-arts car accommodation, even collector cars for the movies.
He is a sought-after speaker, the authority on the state of the cruise shipping market, on building new vessels and design criteria thereof; be it on Arctic Shipping or Superyacht Finance.
Mountains of millionaires.
Hugo is based in the Principality of Monaco, a sovereign city-state, country, and microstate on the French Riviera in Western Europe. It is 2.020 km2 (0.780 sq mi), the second-smallest country in the world after the Vatican. Its population as of 2018 is 38,682, some 19,009 per square km (49,230/sq mi), the most densely-populated sovereign state.
Through reclamation, Monaco's land mass has expanded by 20%. Except for the Vatican, it is known to be the most expensive and the wealthiest place on earth, with 30% of the population being millionaires.
It is a constitutional monarchy, with Prince Albert II as head of state. Since 1297, the House of Grimaldi has ruled Monaco, with brief interruptions. The official language is French, but Monégasque, Italian, and English are widely spoken.
Sovereignty was recognised by the Franco-Monegasque Treaty of 1861, with Monaco becoming a full UN voting member (1993). France is responsible for defence, but Monaco does maintain two small military units.
Now, Monaco has become a major banking centre and has sought to diversify its economy into the services sector and small, high-value-added, non-polluting industries. The state has no income tax, low business taxes, and a tax haven.
Monaco is not formally a part of the European Union (EU), but participates in certain policies, like customs and border controls. Due to France, Monaco uses the euro as its sole currency (disallowing the Monégasque franc). Monaco joined the Council of Europe in 2004. It is a member of the Organisation Internationale de la Francophonie (OIF).