hittier-based Phillips Cruises and Tours recently finished a two-year project to transform a former New York passenger ferry into a tourism excursion vessel for Alaska. The ferry had a complete retrofit: mechanics and electronics were replaced; new seating and tables were installed; and the interior cabin was opened up to give every seat a clear line of sight outside.

The Bravest—named after a New York Fire Department involved in a 9/11 rescue—made its long-awaited Alaska debut this spring. “The vessel we currently use for the 26 Glacier Cruise [the Klondike Express] has a capacity of 338 passengers, and this vessel will add another 288 seats,” says Bob Neumann, owner of Phillips Cruises and Tours. “So there will be less crowding at peak season. The biggest benefit is that we now have a backup vessel in case of engine failure or other issues with the Klondike Express.”

To facilitate revamping the Bravest, Neumann borrowed $7 million from First National Bank Alaska with a fixed interest rate of less than 5 percent and a twelve-year term. Half of those funds were used to pay off a higher-interest-rate loan from another institution, leaving $3.5 million for the retrofit. “Much of the project was done in house, where we used our own funds,” Neumann says.

Working with First National was “fantastic,” says Neumann, who has been in the Alaska tourism business since 1985. “They gave me so much leeway,” he explains. “They were not on my back asking for progress reports. Right off the bat, we had a trusting relationship, and I really appreciate that.”

He adds: “It’s the first time that I had a bank that actually worked with me and sees the value in the business I am running… They’re one of the few local banks that is left, and they understand my history and I understand theirs. It’s been so nice to have a bank on my side.”

Marine vessels like the Bravest are the mechanical backbone of some of the state’s key industries: tourism, fishing, and transportation. Alaska’s financial institutions have a variety of options to help business owners purchase new or used vessels to support their operations.

First National offers financing for a wide range of commercial watercraft, from private yachts for hire, tugs, and tour/charter boats to fishing vessels like gillnetters, long liners, and tenders. “We can find a way to finance just about any type of commercial marine vessel,” says Zac Hays, vice president and commercial lending unit manager at First National.

At Wells Fargo, there are loan programs available for almost any vessel imaginable, according to Senior Vice President and Alaska Commercial Banking Manager Sam Mazzeo. In Alaska, the bank provides marine vessel financing for everything from commercial fishing boats and barges to various tourism-related vessels. “We do more of this type of lending in Alaska than anybody else,” Mazzeo says. “It’s something we’ve done for a very long time, and it’s an integral part of our business.”

Wells Fargo has an extensive statewide presence, including in coastal communities, Mazzeo says. “We provide unique opportunities for people interested in this type of financing to talk to someone directly whether it’s my office for larger financing or for local boats in Juneau, Kodiak, and Cordova,” he says.

Northrim Bank also offers a diverse range of financing options for marine vessels, with a few exceptions that
include cargo ships, very large cruise ships, and most foreign vessels. Northrim is an Alaskan-run bank that is supportive of its communities, says Senior Vice President and Southeast Regional Market Manager Todd Greimann. Juneau-based Greimann, who began his banking career in the mid-80s in Fairbanks, says Northrim’s Southeast team of commercial lenders has fifty to sixty years of collective experience to assist customers. “We certainly feel like we have as good of an understanding of our communities as anyone,” he says. “We want to help grow businesses and support our clients.”

Greimann says Northrim mainly focuses on using its in-house loans to finance commercial ocean-going vessels. He explains: “We have a number of options for different types of vessels and types of borrowers. Certainly, with the lower-risk types of clients, we like to lend our own money. But as the dollars or risk increase, we ask for a guarantee.”

Over the years, Northrim has received loan guarantees by partnering with the State of Alaska, Small Business Administration (SBA), USDA, AIDEA, and Bureau of Indian Affairs.

AIDEA, for example, facilitates marine vessel financing under its Loan Participation Program. The vessel must be home-ported in Alaska and must ply Alaska waters, according to Chris Anderson, AIDEA’s commercial finance director. “To date, the ones that we have considered are related to Alaska’s tourism sector,” she says.

AIDEA’s Loan Participation Program provides permanent financing, both taxable and tax-exempt, to borrowers through a qualified originator for the purpose of developing, acquiring, or enhancing Alaska business enterprises or for a qualified energy development project. “In this program, we don’t originate loans but are able to purchase up to 90 percent of a commercial loan to a maximum of $25 million that is sponsored and originated by an eligible financial institution,” Anderson explains. “The borrower goes through the lender and is the lender’s client. Then the lender brings the loan to AIDEA and is our client.”

As Alaska’s development finance authority, AIDEA’s mission is to provide a variety of financial tools that support the development of the state’s economy, promote diversity, and create job opportunities for Alaskans, says Karsten Rodvik, AIDEA’s external affairs officer. “Our Loan Participation Program is one of these valuable tools that help provide Alaska businesses access to long-term fixed or variable rate financing,” he says.

Commercial marine vessel financing is a distinctive aspect of business lending. However, the qualification process is consistent with what happens with other types of commercial loans. The main factors that Northrim considers are the standard five “Cs” of credit: character, capacity (the ability to repay), capital (investment or down payment), collateral, and conditions.

Conditions—what’s happening in the borrower’s industry—is probably the most specific factor to lending in Alaska and Southeast, Greimann says. For example, with the fishing industry, king salmon runs have been poorer over the years while halibut has been steady. In the tourism industry, conditions are very favorable. “So we’re seeing a lot of demand for business investment for the tourism industry,” he says. “All the rest pretty much fall into general guidelines, with the standard lending practices.”

Marine vessel loans are typically collateralized with the asset being financed. And in some cases, additional security might be required, according to Marc Guevarra, a vice president and commercial loan officer at Northrim Bank in Juneau. “If we feel there is some additional risk, we may very well look to collateralize the loan with other assets they may have such as heavy equipment or stock,” he says. “It depends on the situation and comfort level that we have.”

Marine vessel financing, Mazzeo says, is a unique subsector of lending that has many unique attributes, in terms of the use of the vessel, how broadly the vessel could be marketed and reused, and understanding the useful life of the vessel and the trends.

It can work to the borrower’s advantage if the vessel being financed can be used for broader applications. If the vessel can be deployed in Alaska and other places, that makes it a more marketable asset and stronger collateral than a piece of property that can’t be moved. “A Bristol Bay gillnetter is a 32-foot aluminum boat with a specific purpose, and a tug that moves barges around for different purposes could be used for a lot of ports around the world with a lot of different economies,” Mazzeo says. “There can be a greater resale value for a general-purpose utility vessel like a tug versus a fishing vessel for a specific kind of fishery.”

Because of the importance of the useful life and effective age of a vessel, Wells Fargo has marine surveyors inspect the asset being financed. Safety inspections may also be necessary, depending on the size of the vessel and the number of crew members and passengers it might carry. “We try to make sure we’re matching the loan term with the effective useful life,” he says.

If a new vessel is to be constructed, considerations are made about the due diligence and analysis of the shipyard that might be building the vessel. “It becomes important for the lender to understand the nature of the shipyard’s contract and financial capacity,” Mazzeo says.

Wells Fargo’s loan term for marine vessels ranges from five to twenty-five years, depending on how specialized the vessel is. If it has a narrower purpose and narrower market for reuse, the loan will have a shorter term. Likewise, longer terms are available for more diverse borrowers and more general utility type vessels.

Mazzeo explains: “A tug that can be used in Alaska, Australia, or elsewhere will have a longer term. For fishing vessels, in general, we want those to amortize in ten to fifteen years, and the term of the loan might be inside of that depending on the strength of the borrower. If it’s a single-purpose fishing vessel and a single species harvester, we’d probably want it to amortize in ten years. If it’s a larger fishing company that’s diversified and involved in multiple sectors, we’d probably have flexibility to make loans out to fifteen years.”

First National uses a similar approach to handling loans for commercial marine vessels. In general, the bank considers the use of the proceeds, source of repayment, and the life of the collateral and then structures the loan accordingly. This requires understanding the use of the collateral and having a solid grasp of the industry itself, says Hays, who’s been in the commercial banking business for twenty-five years, with much of that time related to fishing vessel financing.

With a commercial fishing vessel, Hays says, it’s essential to understand that the source of repayment of the loan is tied to fish. So one of the more specialized aspects of financing is knowing how to structure the loan so that repayment is linked to when the borrower is most likely to have the funds. “Sometimes that means accepting interest-only payments for a substantial period of the year, with the principle due at the end of the year,” Hays says. “And it helps to know what type of fisheries people are participating in.”

The same knowledge of industries and payment structure would be applied to assets like tug boats, barges, and boats being used to haul equipment in Prudhoe Bay. “Obviously, the boat would not be used when things are frozen solid up there, and that would need to be considered when structuring the loan payment,” he says.

Like most financial institutions, First National uses the commercial vessel being financed as collateral. It also routinely asks the borrower to personally guarantee the loan—even if it’s for a corporate entity. Generally speaking, the bank’s maximum term for marine vessel financing runs up to ten years or even longer—if it’s justifiable. Of course, no two loans are the same, and there’s an exception to everything. “With commercial lending in general, we often tie the length of the loan to the length of time you can depreciate that asset on your taxes,” he says. “You also have to look at the reserves available to fix unforeseen problems. Generally, maintenance on boats can cost six figures. You have to make sure the borrower is well-versed and can take care of unforeseen issues.”

Hays advises business owners who are seeking vessel financing to get a good understanding of profit and loss. It’s important for them to not only know how to make revenue but to understand the expenses associated with their line of work. He also encourages people not to be afraid to ask a lot of questions and to shop around for the most appropriate lender for their needs. He says: “We all have weaknesses, and we all have strengths. It’s important that when you deal with specialized lending, you find an institution that understands your business and goals.”