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New kind of whole business ABS: Marine logistics

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Harley Marine Service, a marine logistics company that has been expanding rapidly, racking up a significant amount of debt, is tapping the securitization market to refinance and lower its funding costs.

The $455 million transaction, called Harley Marine Financing 2018-1, is essentially a sale-and-leaseback transaction. Harley is selling its fleet of 122 tugboats and barges to a securitization trust, which will pay Harley Marine Services to operate or manage them, according to Kroll Bond Rating Agency. In addition, Harley’s charters, contracts of affreightment, towage agreements, ship assist and management contracts, leases relating to the vessels, certain interests in terminal assets and license to use certain intellectual property – in sum, the vast majority of its assets – will be contributed to the securitization trust.

It’s the latest example of the expanded use of what’s known as a whole business securitization. This type of transaction is most commonly used to refinance the debt of highly leveraged restaurant franchises, though it has also been used by billboard and coin counting machine operators and even vacation resort owners.

The idea is that selling a company’s assets to a securitization trust (largely) insulates the assets from the risk of mismanagement. So the debt issued by the trust can achieve a higher credit rating than debt issued by the company itself, resulting in lower interest payments.

Unlike most whole business securitizations, however, this one is primarily backed by hard assets, as opposed to intellectual property and franchise agreements, according to Kroll analysts. Another distinction is that Harley is not committing ships or other assets it may acquire in the future to the transaction.

Kroll’s presale report does not provide much information about Harley’s balance sheet; it says only that the private company has a “highly leveraged capital structure,” which is not unusual in the shipping industry, and that it has several lines of credit and revolving credit facilities, some of which will be extinguished using funds from the securitization.

Harley Marine Financing 2018-1 will issue two tranches of notes that are expected to be repaid within five years, by May 2022. The $405 million senior tranche of Class A-2 notes is provisionally rated BBB and the $50 million subordinate tranche of Class B notes is provisionally rated BB.

This is an industry that may not be familiar to many asset-backed investors. Harley provides services to oil majors, ports and harbors and shipping companies including petroleum transport and bunker service, where HMS will move product from one terminal, such as refineries, offshore platforms, and storage facilities, to another. It also provides marine fuel to ships in port, and temporarily removes marine fuel from ships just outside of port (a practice known as lightering).

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Whole business securitization