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18 January 2013
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18 January 2013
What’s it all about? Ship finance is a form of asset finance, and as the name suggests concerns the financing of ships; this can involve anything from building a new ship, to buying a secondhand ship to refinancing existing debt on a fleet of ships.
What may be more surprising is that a ‘ship’ can encompass everything from a superyacht, to a container ship to an oil rig. The work is invariably international and varied in nature, and one may be involved in a transaction for the construction of a new superyacht in Germany, whilst at the same time handling the financing for the purchase of an oilrig for operation in the Gulf of Mexico.
One common factor to all ship finance transactions is that very large sums of money tend to be involved and financial assistance, traditionally a bank loan, is almost always required by the ship owner. In return for lending the capital the lender will require security, which at its simplest will involve it taking a mortgage over the vessel, an assignment of the ship’s earnings and an assignment of the ship’s insurances.
There are many different ways in which a ship finance transaction may be structured, but in essence, the underlying principle remains the same; funds are advanced to the borrower, usually but not always by a bank, and security is granted to the financier in return to secure their position.
As with most other areas of law, no two days as a ship finance lawyer are the same. Being transactional in nature, it is quite possible to be quiet one day and stretched to capacity the next; when work needs to be done it often needs to be completed within a tight timeframe and it is crucial to have a team of lawyers and support staff that can pull together and get the job done efficiently. In most instances, we work in small teams, with a partner supervising or running the transaction with support from a senior solicitor and assistance from a junior solicitor and/or trainee.
Our clients are spread out across the globe and include leading international banks involved in shipping and offshore financing, shipowners and shipbuilders in addition to arrangers of financial transactions. We also regularly work for shipowners and operators in relation to sale and purchase transactions.
Which other practice areas do you work most closely with?
As a specialised shipping firm we have the advantage of being able to draw on our expertise across all areas of shipping law. In particular, we will coordinate with our colleagues in our shipping litigation group where matters have become contentious.
In the current market, most borrowers are in default in one way or another, often because the value of their vessels has fallen over recent years; in addition many borrowers are unable to meet their repayment obligations due to the general downturn in the shipping market. In the first instance, the parties may agree to restructure the financing package, but if this not possible the lender is likely to consider enforcing their security which at its extreme, can involve the bank arresting and selling the ship in order to recoup their capital. In such instances, our litigators will be very much involved.
The involvement of foreign lawyers is a crucial element of ship finance; almost all the work we do is involves multi-jurisdictional elements. For instance, it is possible to have a Norwegian bank lending to a Greek company, to build a ship in Korea, to be registered on Liberian flag and then chartered to a Singaporean charterer. Foreign lawyers will therefore be instructed in all relevant jurisdictions to prepare legal opinions for lender approval and to deal with all related matters such as the review and approval of corporate authorities, draft documents the foreign company will enter into and any relevant execution formalities. Foreign counsel will also advise in relation to any charge registrations which may be required.
We also regularly work with our energy group, our network of overseas offices, ship registries, public notaries and insurance professionals.
Organisation and time management are essential skills for any lawyer, especially one involved in transactional work. With several transactions on the go at any one time, the ability to prioritise tasks and grasp the essential details of each transaction is important; as a junior solicitor/trainee this can be quite a challenge at times. Teamwork is crucial, and as with most jobs it is essential to be able to work well as part of a team, whilst also having the confidence to work individually and complete the work delegated down by those more senior.
The ability to draft succinctly and accurately is also an important attribute for any ship finance lawyer to possess; the work tends to be document heavy and even at the junior end of a transaction it is likely one will assist with the preparation of documents. In addition, when writing to clients in particular, it is crucial to understand what they want and need to know; it is unlikely they will want a full summary of the relevant law and the ability to draft a focused response addressing the salient points is key.
The shipping and offshore industry in which our clients are involved is highly specialised and whilst it is not possible to keep abreast of everything that is happening in the industry, it is important and extremely valuable to regularly update one’s commercial awareness and developments in the sectors in which we work.
Over the past few years, and with the onset of the global financial crisis, finance has become increasingly difficult to obtain and this includes ship finance. Therefore, whilst cheap finance was available one would have seen transaction after transaction being closed out, in the current market, banks tend to be more cautious lending to established and high profile customers, and even then on tighter terms.
Despite the recession other areas of shipping continue to develop and in particular, the offshore market. We have been involved, for instance, in several transactions concerning the liquid natural gas sector, an industry in which lenders are increasingly showing interest. We have also seen an increase in restructuring work and enforcement situations.
Which phrase(s) is a ship finance lawyer most likely to use and what does it mean?
As a junior solicitor/trainee in ship finance you will sooner or later be asked to prepare a ‘CP report’. A condition precedent (“CP”) is a condition set out in the loan agreement that must be satisfied by the borrower before it may request a drawdown or draw funds from the lender; it is usual for the loan agreement to contain a schedule in which the conditions precedent are set out. The CP schedule may be subdivided as there are often different CPs for each stage of the transaction (i.e. Part I: before drawdown notice, Part II: pre-delivery drawdown and Part III: delivery drawdown. Having prepared the CP report, the junior solicitor/trainee will usually be responsible for gathering the CPs, keeping the CP report updated and circulating it to the relevant parties as the transaction progresses.
The CP documents will be used when the ‘transaction bible’ is prepared by the junior solicitor/trainee at the end of the transaction. The transaction bible will contain copies of all the documents from the transaction, including all finance documentation, registry transcripts, sale and purchase documents, insurance documentation, legal opinions and corporate authorities of the companies. Having prepared a master copy of the transaction bible, arrangements will be made to distribute hardcopies/CD-ROMS to the relevant parties for their reference and safekeeping.
Dean Norton, partner, and Julie Walton, solicitor, Ince & Co