Leasing green equipment without the CAPEX - Q&A with Wavefront

Jun 26

About Q&A

Shipping finance and leasing is rarely the first topic raised in a decarbonization discussion. It probably should be. This Q&A looks at how equipment finance and leasing shape decarbonization decisions, with Kevin Swannack and Andy Bailey of Wavefront Asset Management, a UK-based firm established in 2017 that finances environmental and sustainable maritime equipment. Wavefront is a Sustainable Ships preferred partner.

Kevin's background is in shipping finance in the City of London; Andy's is in the wider maritime industry, including insurance and commercial roles. They started Wavefront to help owners finance ballast water treatment systems as that IMO convention came into force, on the logic that owners would rather use someone else's capital for equipment they are compelled to fit. The model has since broadened to almost any equipment with a genuine green profile, and the session covered the instrument itself, pricing and cost of capital, how Wavefront underwrites a case, timelines, and how regulation factors in.

Key insights

1) Leasing turns a capex decision into an OPEX one, and frees up equity

With 100% finance and nothing down, any savings the equipment generates become close to pure profit. Just as important is the opportunity cost: the equity an owner would otherwise sink into the equipment stays free to deploy elsewhere. For equipment that delivers little or no direct return (ballast water being the classic case), that makes leasing a rational default rather than a fallback.

2) A "high" IRR can be the cheaper option

All-in pricing for 100% equipment finance sits around 11 to 12% IRR. That looks expensive next to debt, but debt usually covers only part of the cost. Once the owner's own equity is blended in at its true, higher cost, the weighted average can reach 13 to 14%, and as high as roughly 20% when the opportunity cost of that equity is counted. On that basis a 12% lease is the lower-cost choice, a point Wavefront finds many owners do not routinely model.

3) Underwriting looks at the equipment, not only the balance sheet

Beyond the usual checks on the customer and their financials, Wavefront increasingly weighs the equipment itself: how mature it is, whether it is proven or still at prototype stage, and whether there is data to support its performance. Charter cover (long-term time charters give predictable cash flow) and regulatory tailwinds (EU carbon pricing, FuelEU paired with wind) strengthen a case. This is where reliable performance data matters, and where Wavefront sees Sustainable Ships closing a real gap.

Questions asked

Roughly how much have you financed so far?
The financed portfolio is approaching 70 million, backed by institutional capital, with every deal sized individually.
What kind of instrument is it, and who owns the equipment?
A single instrument: a finance lease. Wavefront acquires and legally owns the equipment during the term as security, while the owner holds beneficial ownership, and title reverts to the owner at the end of the lease. Terms run by asset class, historically around three years for ballast water and now closer to five (for example scrubbers), with appetite to go longer or shorter for newer asset types.
Who do you mainly work with, shipowners or suppliers?
Both, and it does not really matter. Wavefront works directly with owners and also with equipment manufacturers to help catalyse their sales.
Is "pay after you save" actually attractive, given installation can disrupt operations?
The model works because the financing adds no operational disruption: an owner who has decided to fit the equipment deals with installation regardless. If anything, Wavefront can smooth the delivery profile, including help with staged payments for equipment that takes months to build.
Beyond ballast water, what else do you finance?
Almost anything with a genuine green profile: wind-assisted propulsion, frequency inverters, carbon capture, exhaust gas scrubbers, onboard batteries, shore power both onboard and in port, even individual LNG tanks. New asset classes keep appearing (they cited a multi-axis tidal device and fast-moving battery technology), and each effectively becomes a new product to assess.
Can you give orders of magnitude on pricing and deal size?
Deal size is assessed case by case and scales with the owner and the strength of any charter or offtake contracts. All-in pricing for 100% equipment finance is around 11 to 12% IRR. That seems high against debt, but debt covers only part of the cost; once the owner's equity is added at its real cost the weighted average runs to 13 to 14%, and up to about 20% once opportunity cost is included, so a 12% lease is in fact the cheaper route.
How do you evaluate each case and assess risk?
It starts with fundamentals: who the customer is and how their financials look. From there Wavefront weighs the equipment itself, its maturity and whether performance data supports it, alongside charter demand and regulatory drivers. The aim is a holistic view of risk rather than a balance-sheet-only one, and good performance data makes that easier.
What is the most fun equipment to finance?
Both lean towards wind, enjoying the irony of ships returning to sail. They are also watching newer asset classes closely, including nuclear (interesting, though they are cautious about risks they cannot yet assess) and rapidly evolving battery technology.
Anyone can approach you, so how long does an assessment take?
It varies with complexity. As a rule of thumb, about a week to review a prospect and draw up a question set, then roughly three to four weeks to prepare an investment paper for approval. A thorough first phase, building a complete picture, makes the approval phase much quicker.
What data do you need, and where does it come from?
It depends on the equipment. Some, such as ballast water systems and scrubbers, need little performance data; others need more. Wavefront draws on as many and as diverse sources as possible, now including Sustainable Ships.
How do you factor regulation (EU ETS, FuelEU, IMO) into the model?
Wavefront does not put a euro or pound value on carbon-cost relief; that is for the owner to satisfy themselves on. The focus is more on the fuel-saving profile of the equipment, with a view to developing their own read as carbon regimes mature. For now the European regime is live while other regions move more slowly, so the detail of carbon pricing is left to owners.