Debt financing for medium sized shipping company (1)
By Foluke Akinmoladun
A medium size shipping company may because of operations and revenue have a smaller revenue base than a larger shipping company with greater assets particularly fleets or vessels. This means that the options for finance may be relatively less. However, every business in developing its performance strategy will have some form of funding strategy as well. One of such strategies is debt funding. Here, we will analyse debt funding for a medium size shipping company and also look into the various forms of security it may make available to potential lenders.
For a medium size shipping company, the risk of default may be generally higher than a larger shipping company that has more assets to pledge in security. Therefore, the first step in a debt funded expansion strategy is to determine what the funds will be utilised for. It could be to finance working capital of the company particularly shipping operations. On the other hand, funding could be to expand the number of trade routes that the company engages in by either buying new vessels that are already trading or order for new vessels to be built. The capital requirement for ordering a new ship is considerably higher and the complexities in terms of the securities required and the documentation and institutions involved are higher as well.
Once the company has determined what it requires the funding for, the next thing is to determine what the source of that funding should be. Here we are considering debt financing. The types of debt finance potentially available to medium-sized company wanting to diversity the risk component in its funding portfolio, ranges from cash flow finance, bank overdrafts, secured loan, mezzanine loan, sale and leaseback transactions, senior bank loans, leasing/hire purchase agreements to venture capitalists and stock market listing(bonds).
The focus here is on the types of securities that a medium size shipping company will give to guarantee the loan since lending to it may pose a higher risk than a larger shipping company. For banks and financial institutions, the most important security is a ship mortgage.
A ship mortgage is an arrangement whereby, a ship owner or ship owning company, gives the lender (referred to as the mortgagee) an interest in the ship as security for a loan. The ship owner then becomes the mortgagor. A ship mortgage arrangement has three main component parts- the mortgage loan, the mortgage deed and the rights derived from the mortgage deed attributable to the lender.
A lender needs to be sure of its rights as a mortgagee in the flag ship of the vessel as this may affect the ability of the lender to exercise its rights over the mortgage in case of a default. The jurisdiction where the mortgagee wishes to execute its interest on the ship mortgage is equally important. In some jurisdictions, the mortgagee has equal rights with the ship owner while in other jurisdictions; the mortgagee’s rights could rank lower than some unsecured creditors because of the operation of the law. Priorities are variously determined by the lex fori- (The law of the country in which an action is brought), the lex causae (Lex causae is the law or laws chosen by a forum court from among the relevant legal systems to arrive at its judgment. This is mostly used in international or interjurisdictional cases), the lex registri (The law of the port of registry of the ship) or the lex situs (In law, the situs is where the property is treated as being located for legal purposes. This may differ for a ship depending on where it is located as, the situs of a ship within territorial waters is where it is located, but the situs of a ship in international waters is its port of registry). A number of jurisdictions apply the lex fori.
In the United Kingdom for instance, a mortgagee has the right to arrest a ship within the jurisdiction of the Admiralty Court irrespective of the country of registration due to the Admiralty Courts Act of 1840. In Nigeria, there is no distinction between the places of registration of a mortgaged vessel for the purpose of enforcement by way of arrest proceedings according to section 3 of the Admiralty Jurisdiction Act. In China, under Article 21 (21) of Special Maritime Procedure Law of the People’s Republic of China 1999, there is no distinction between mortgage claims arising from a domestic registered ship and from a foreign registered ship. Where there is a ship mortgage claim, according to Article 21(21), it can be brought by way of arrest of ships.
The use of loadlines for shipping operations (1)
By Foluke Akinmoladun
There are various statutory provisions in domestic laws and international conventions concerning the quantity and type of life-saving apparatus that is to be carried on board a vessel. Broadly, it is determined by the type of vessel, crew establishment and the passenger certificate (authorized number of passengers permitted to be carried). Life-saving apparatus includes lifeboats, lifebuoys, inflatable life rafts, and individual lifejackets.
Another important aspect of the safe use of the vessel is buoyancy. Buoyancy refers to the upward force exerted by sea water on the vessel when the vessel is afloat. It is the upward force that results from immersing the vessel in water and which increases the deeper the vessel is into the water. Therefore, the stability of the vessel is determined by the force of buoyancy provided by the underwater parts of a vessel to the sea, coupled with the combined weight of its hull, equipment, fuel, stores and load. These forces can be adversely affected by the prevailing weather conditions and sea-state.
Freeboard thus represents the safety margin showing to what depths a ship may be loaded under various service conditions depending on the type of cargo the vessel is carrying, the waters to be navigated, and the season of the year. Freeboard is determined by the design of the vessel, particularly the shape and dimensions of its watertight hull; by its structural strength; and, in the case of a passenger ship, by the subdivision of its watertight compartments.
Freeboard encapsulates the principle of reserve buoyancy, where freeboard allowance gives the vessel enough counterweight against the force of buoyancy of the sea. It is therefore recognized that the freeboard should ensure adequate stability and avoid excessive stress on the ship’s hull as a result of overloading.
While ships trade and move mainly in sea water, they may also travel on fresh water in rivers and brackish water (a mixture of sea water and fresh water) in estuaries. Sea water by its nature, is denser than fresh water due to the quantity of salt it contains. Cold water, on the other hand, is denser than warm water. Vessels float higher in denser water than in less dense water with the same load on board. This means that they need more weight in denser water to keep it from being unstable than it would need in less dense waters. The implication is that failure to have the ship with the right amount of weight could adversely affect the balance and buoyancy of the ship depending on the type of waters it is upon.
A vessel that is overloaded is at greater risk of being overwhelmed in hazardous sea conditions than if it is correctly loaded. Overloading can also result in catastrophic failure of a ship’s hull. The more cargo that is carried the greater the earnings of the ship operator and this informs the temptation to overload the ship. This has resulted in ship hulls being marked with a ’loadline’, to indicate a safe draught to which the ship can be loaded.
The IMO in 1966 adopted the 1966 Load Lines convention, whose provisions were made for determining the freeboard of ships by subdivision and damage stability calculations. The regulations take into account the potential hazards present in different zones and different seasons. In the 1966 Load Lines Convention, freeboard was adopted as the distance measured from the waterline to the main deck of the vessel. This is normally the uppermost continuous deck in a ship with one or more deck. Another important measurement to the stability of the ship is the draught of the ship. The draught of a vessel is the vertical distance from the keel to the waterline (height wise). The maximum permitted draught varies according to the seasons and waters in which the vessel moves on the sea.
The purpose of the load line is to ensure that a ship has sufficient freeboard (the height from the waterline to the main deck) and thus sufficient reserve buoyancy (volume of ship above the waterline). It should also ensure adequate stability and avoid excessive stress on the ship’s hull as a result of overloading. Ships intended for the carriage of timber deck cargo for example, are assigned a smaller freeboard as the deck cargo provides protection against the impact of waves.
The exact location of the load line markings is calculated and/or verified by a classification society, which then issues a load line certificate.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. She is also a Chartered Secretary and Business Rescue & Insolvency Practitioner.
She belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector.
She can be reached at: Foluke.A@trizonlawchambers.com
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