Debt financing for medium sized shipping company (2)
By Foluke Akinmoladun
Another way by which a lender may secure their loan repayment is through an assignment of earnings and/or an assignment of insurance. An assignment of earnings requires that the borrower domicile its earnings from its operations with the lender. This applies to banks and financial institutions. Individual lenders will usually lend through bonds issue.
The assignment of earnings will be documented and major clients of the ship owner/borrower particularly charterers will be notified of this assignment through a notice of assignment. This is similar to the notice of assignment given to insurance companies on the assignment of insurance.
In the assignment of insurance, the lender will have a particular threshold above which any insurance claims will be directed to the lender and below which, will be directed to the borrower. The insurance company in the notice of assignment will also be informed that they should keep the lender informed of any changes to the insurance and if, when premiums are not being paid.
Another form of security is a share pledge. Here the shares of the borrower company are pledged to the lender as security for the loan. Since the company is a medium size company, the lender needs to conduct be a proper evaluation of the shares of the company to ensure that it is adequate security for the loan required. This is particularly important if there are no other significant assets that can be pledged.
Where this medium sized company is a subsidiary, it could have a guarantee from its parent company, to guarantee the loan. If the company itself is a holding company, it could have its subsidiary that owns a vessel to mortgage the vessel and also guarantee the loan (upstream guarantee).
Another type of security is with respect to acquisition of new ships. Debt finance for a new ship has two main considerations; one is the fact that the capital cost is generally too high to finance cash flow repayments through operations. Secondly, the construction of the ship has to be paid for in advance. Thus, shipbuilding involves pre-delivery finance and post-delivery finance on delivery of the vessel. Post-delivery finance may involve a shipyard credit scheme, commercial bank credit or leasing.
The types of securities for a shipbuilding contract are the assignment of the shipbuilding contract and assignment of refund guarantees. In the assignment of the shipbuilding contract, the shipbuilding contract is assigned to the lender. The lender thus has both the privilege of taking over the ship in the event of default and the liability to complete payment also in the event of a default. In both cases, the lender can sell the vessel to realise its loan, interest and attendant costs.
With respect to the assignment of refund guarantees, the lender is given the right to be entitled to any refunds that the borrower is entitled to, to the tune of the repayments left on the loan.
A medium sized shipping company can seek debt financing and secure such loan with adequate collateral in several ways. In bank loan financing transactions, the bank and the borrower will negotiate a loan agreement in which the parties will assign various forms of collateral including a mortgage on the vessel, shipbuilding contract, and charter fee receivables (assignment of earnings) as security for the lender’s payment. Some private investors on the other hand may provide debt financing through a senior secured loan, mezzanine loan, and sale and leaseback transactions. What is important is that regardless of the type of loan, it is properly secured based on the risk assessment and credit assessment done on the borrower.
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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