Private placements for ship financing have increased since banks reduced their activities due to the crisis facing shipping and increased equity requirements for banks because of Basel III.
In the case of private placements, selected institutional investors grant financing to a special purpose vehicle (SPV) to which the ships are transferred, while a security agent is mandated usually to administer the securities on behalf of the investors.
Ship-financing projects, however, have specific characteristics, especially due to the international nature of shipping. Depending on the actual location of a ship, its registration or flag status (eg bareboat registration), the law of several jurisdictions can apply. Also, there are specific security-structure requirements where certain pitfalls have to be taken into consideration.
It is quite common to create ship mortgages for the benefit of the investors. In Germany, ship mortgages have to be entered in the competent ship registers to become valid, and they qualify as accessory security rights. For this reason, the claims secured by the ship mortgages are usually not those arising from the financing itself but from a separate and independent abstract acknowledgement of debt (AoD). The financing and the AoD are linked by a security purpose agreement that also stipulates the conditions of a partial or full release. This structure has the effect of a flexible non-accessory security right.
German law furthermore allows comprehensive ship mortgages (fleet mortgages), the advantages and disadvantages of which have to be assessed in each individual case. And it has to be noted that even a first-ranking ship mortgage does not constitute full protection for investors because it is preceded by statutory ship creditors’ rights of lien.
As an alternative or addition to a ship or fleet mortgage, a pledge over the shares in a SPV has to be considered. Mostly, however, a successful sale of the SPV is questionable. Essentially, only the acquisition of the SPV by the investors themselves is likely. The investors would thereby become shareholders of the SPV and the financing would then qualify as a shareholder loan. According to German law, this would result — in the case of a later insolvency of the SPV — in the subordination of claims arising from the financing by operation of law, ie any other creditor of the SPV would rank prior to the investors’ claims. Furthermore, the investors would then have no right any longer for separate satisfaction with respect to the shares in the SPV. Also, any other security might be challenged by an insolvency administrator, whereby a 10-year period applies.
These conditions to acquiring shares in a SPV by investors are only acceptable if the SPV does not have any further material debts apart from the ship financing, something that has to be reflected by respective covenants in the financing documents.
Those documents have to be drafted in compliance with any applicable national law, any restrictions on foreign trade (in particular, black lists) and any regulatory issues. It might be, for example, that a banking licence is required for lending or obtaining material funds, irrespective of the agreed applicable law. Furthermore, the financing documents should explicitly stipulate the actions to be taken in case of overcollateralisation, in other words the conditions for a partial or full release of the securities have to be defined in detail.
Also, if several jurisdictions are affected, for example when German ships secured by a ship mortgage are financed via the issuance and acquisition of notes under the laws of New York, the respective advisors to all relevant jurisdictions have to liaise closely with each other.
