Alternative financing in the shipping industry | Conyers
In the decade since the global financial crisis, the financing of ships has changed dramatically. Traditionally, debt financing from banks and equity financing have been the most common methods used by shipping lines to raise funds. However, these traditional forms of financing have increasingly been replaced by alternative sources of financing such as convertible debt, private equity and sale-leaseback agreements. This trend has intensified over the past year due, in part, to the volatility of the industry following the COVID-19 pandemic, and some banks, including many European banks, leaving the industry and selling their shipping wallets or not taking on new business while existing loans are being paid off.
Sale-leaseback agreements have recently gained in popularity. In a sale-leaseback arrangement, the original company that owns the vessel sells a vessel to another company and then re-leases it to them. The original shipowner then becomes the tenant and the new buyer lessor. Sometimes transactions will also include a purchase option, under which the lessee has the right of first refusal to buy back the vessel at the end of the lease. Due to the growing popularity of sale-leaseback agreements in 2020, BIMCO introduced SHIPLEASE, which is a standardized condition sheet for use in sale-leaseback transactions.
Benefits of sale-leaseback agreements
Sale-leaseback agreements have advantages for both the lessor and the lessee. They allow the original owner (the lessee) to raise funds and release capital, thus improving liquidity when receiving funds from the sale of their vessels. The funds raised by the tenant can be used to invest in other activities or to finance operating expenses. For new construction or purchases of second-hand vessels, such provisions can be used by shipping companies to facilitate delivery of the vessel without the shipping company (lessee) having to increase the company’s debt or dilute it. its own funds. Benefits to the lessor include increased security over the asset as it will become the owner. Under traditional bank financing, in the event of non-payment or default, the secured party would generally be required to initiate enforcement proceedings to recover the asset, which can be both time consuming and costly. As the owner of the vessel, in the event of default, the lessor can terminate the lease or charter and repossess the vessel, which will be faster than attempting to enforce a mortgage.
Chinese rental houses in particular are responsible for a significant portion of the growth in sale and leaseback transactions, which have apparently grown exponentially in recent years. While rental homes were once primarily focused on the new construction market, they are also increasingly entering the second-hand market. Trends indicate further growth in sale and leaseback transactions throughout 2021.
In addition, in recent years, we have seen an increase in simple lease transactions with option to purchase in Japan (JOLCO). While JOLCOs have always been predominant in aviation finance arrangements, we have seen them increasingly used in the shipping industry. These operating leases are financed by an equity investment from Japanese investors and senior debt financing provided by financial institutions to a Special Purpose Vehicle (SPV) which finances the costs of acquiring the vessel by the SPV . The SPV and the shipping company simultaneously enter into a bareboat charter. Such agreements allow shipping companies to access competitive rental rates and off-balance sheet financing, and are popular in Japan due to specific provisions in Japanese tax laws. JOLCOs represent an evolution towards alternative sources of financing in the shipping industry.
At Conyers, our shipping team has considerable experience in advising on Bermuda law issues related to such sale and leaseback transactions and JOLCO. Some of these transactions also included the registration of vessels in the Demise Register of the Bermuda Shipping and Maritime Authority. The BSMA accepts both disappearance “out” (when the underlying register is in Bermuda and the vessel is under the flag of another state) and disappearance “in” (when the underlying register is outside. Bermuda and the ship flies the Bermuda flag), thus assisting both lessors and lessees.