Legal Treatment of Ship Finance Loans: Analysis of the Ship Loan Contract


Purpose

Re-financing of the pre-delivery loan and the financing of the delivery installment.

Loan amount

[Currency, amount]

Currency

Currency [if applicable: leading currency is [currency]. [Optional, in conjunction with leading currency, but to be used restrictively:]

Drawdown

In one sum upon [delivery] [takeover] of the ship subject to fulfillment of the disbursement conditions laid down in the loan agreement, but no later than [date].

Term

[number] years, beginning with [delivery] [takeover] of the ship [if applicable: until [date] at the latest].

Repayment

In [number] [semi-annual/quarterly installments] [if applicable: and one final installment/balloon amounting to [currency, amount]], beginning [3] [6] months after [delivery] [takeover].

Extraordinary

repayments

Extraordinary repayments are possible at the end of an interest period [if applicable: equivalent to an amount of [currency, amount] or a multiple thereof] and must be notified to the lender [number] banking days beforehand. Extraordinary repayments will be appropriated to the repayment installments last due and result either in a shortening of the term of the loan, or in a reduction of the balloon/final installment and may not be drawn down again.

Margin

[x] % p.a. [If applicable: The margin initially applies for a period of [x] [months/years] and must be renegotiated afterwards.]

Interest rate

LIBOR/EURIBOR plus margin plus funding fee.

Funding fee

[x] % p.a. This markup serves to compensate for the accruing funding costs and will be negotiated for the following interest period each time. [If applicable: This markup initially applies for a period of [x] [months/years] and must be renegotiated afterwards.]

Interest period

3, 6, or 12 months; other interest periods as agreed upon with the lender.

Calculation of interest

Interest will be calculated on the basis of the Euro market interest computation method (365/360 days).

Commitment fee

[x] % p.a. in terms of the loan amount promised in principle but not used as from the acceptance of the binding commitment in principle, due, and payable quarterly in arrears.

Securities

Typical of this type of transaction, but not necessarily limited to:
 
• [Alternative 1 (German law):] Abstract promise to pay the debt amounting to [130] % of the maximum loan amount plus 15 % p.a. for interest and costs, backed by a first ranking ship mortgage under German law in the same amount on the ship to be financed including a submission to execution clause with regard to a partial amount payable last of 10 % of the amount of the ship mortgage.

• [Alternative 2 (international law):] First ranking ship mortgage under [select international law] [e.g. Liberia, Panama, and Cyprus] law amounting to [130] % of the maximum loan amount plus 15 % p.a. for interest and costs on the ship to be financed. [If applicable: [The abstract promise to pay the debt also secures the Lender’s claims arising from [name type of the further loan/s].]

• [Open and confirmed] assignment of the borrower’s rights and claims in connection with the construction and sales contract regarding the ship.

• Open and confirmed assignment of the rights and claims by the assured/co-assured arising from the agreed insurances on the ship.

• [Open and confirmed] assignment of all rights and claims arising from the charter parties including subcharters, any pooling agreements/pool revenue, freight revenue as well as other revenue connected with the ship operation.

• [If applicable:] Open and confirmed assignment of the rights and claims arising from a charter guarantee (from an address to be agreed upon with the Facility Agreement) to underpin the value of the charter party.]

[if applicable, further additional securities]

Covenants

Typical of this type of transaction, but not necessarily limited to:

• Increased cost clause [for foreign financing (particularly with respect to the rules pursuant to Basel-II)].

• Loan to value ratio up to a maximum of [70 %] of the respective value of the ship

• [If applicable: [105] % currency clause (in the event of infringement reduction to 100 % or provision of additional collateral).]

• [If applicable: For the portion of the loan used in [currency], corresponding exchange and interest hedging transactions must be entered into no later than 4 weeks before the announcement of distributions to enable distributions by [date].

• Construction supervision to be arranged in consultation with the facility agent and lender [both quantitatively and qualitatively]

• [If applicable: Quarterly construction progress reports and certificates issued by the classification society regarding the respective construction stages, which must be presented to the facility agent. Moreover, the facility agent is entitled to have the construction progress of the ship under construction verified by an expert agreeable to the Facility Agent.

• Generally accepted market transfer clause

• Market disruption clause

[If applicable]

Financial

covenants

Typical of this type of transaction, but not necessarily limited to:

• Equity ratio at least [30] % [or at least [currency, amount]].

• [If applicable: No withdrawals by the partners and no distributions to the partners without the facility agent’s prior consent if the loan servicing is not ensured and/or the partnership’s equity ratio is < [30] %.

• No withdrawals by the partners and no distributions to the partners without the facility agent’s prior consent if the equity ratio is < [30] %.

• Minimum liquidity amounting to [currency/amount]. Ratio of net financial liabilities to EBITDA at the most [3.5 to 1].



It is advisable that the term sheet contains an expiry date, after which the offer of the lender becomes invalid. In addition, in situations where the structure is constantly changing, it should include a provision that the current term sheet supersedes and replaces prior term sheets.

If the term sheet is utilized only for indicative purposes, it should outline that the information is only indicative and subject to documentation to be agreed on with the lender, to the consent of the competent credit body of the lender and, if applicable, to the syndicate. The lender might also want to include the presumption that no substantial adverse changes have occurred at the time of the signing of the documentation.



3.3.2 Loan Agreement


The loan agreement contains the terms and conditions under which the financing is advanced. The post delivery financing will be carried out by a term loan by which the lender will lend the ship-owner a fixed amount repayable over an agreed period of time. In general, the loan will be paid out to the borrower in one drawing and will be repayable in equal installments over the duration of the term (Russel 2006, p. 16). The length of the term will be between four and 12 years. In the following, the loan agreement provisions of particular significance will be described in greater detail. Most loan agreements will contain a similar structure, although arranged or subdivided differently.