By Foluke Akinmoladun
A ship-owner who has had a lucrative charter for the first three years of a five year loan but nothing is fixed for the remaining term:
The type of loan that would be helpful to a ship owner in this particular situation is a revolving credit. Revolving credit is a type of credit that does not have a fixed number of payments. It is an arrangement, which allows for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires.
The advantage is that interest is paid only on the amount borrowed. This can help with the ship owner’s liquidity rather than pay the same amount of interest irrespective of the loan amount actually utilised. In addition, any amount available but undrawn is charge a commitment fee that the lender charges to cover its own cost of funds on the committed funds but this is significantly cheaper than the interest rate.
The typical characteristics of a revolving credit line are that the borrower may use or withdraw funds up to a pre-approved credit limit. The amount of available credit decreases and increases as funds are borrowed and then repaid. The credit may be used repeatedly. The borrower makes payments based only on the amount he or she has actually used or withdrawn, plus interest.
Having a revolving line of credit allows the ship owner to be able to access funds at any time when it requires money for its day-to-day operations. Revolving credit for long-term assets is also called “capital investment line of credit” or “investment credit”. It is essentially a pre-authorized credit that allows the borrower to finance current and future long term assets based on a percentage of their net book value. There are no capital payments, which maximizes cash flow when the company is growing and improves the financial profile of the company.
It cuts down on repetitive loan applications and security acceptance processes while offering flexible terms. Ultimately, revolving credit is an ideal financing solution for companies reinvesting in long term assets in the midst unpredictable cash flows or for expansion.
A ship owner in sever financial difficulties and whose vessels have declined in value during a clinical downturn in the market:
There may be a need either to get financing from an export credit agency or to have a private placement of debt or have a mezzanine debt arrangement with an equity kicker option. With the mezzanine debt, the lender has the ability to partake in the equity of the transaction value, which is the net assets, or amount remaining after all debt has been paid off.
The reason for the multiple answers in this particular situation is that there are several reasons why a vessel declined in value due to a clinical downturn in the market and why the ship owner is experiencing financial difficulties. The first question therefore is, was there inadequate liquidity reserves during the operations of the vessel? Is the declining value in the vessel due to the oversupply of vessels in the particular sector that the vessel operates in? Were the severe financial difficulties as a result of bad management of the vessel, inefficient charterers, or a decline in freight prices?
In this particular scenario, there are both cash flow problems, liquidity problems and problems with the realisable value on the purchase of the vessel. In such an instance, commercial banks will be extremely reluctant to grant any loan regardless of how low the loan to value ratio is. This is because aside from the risk of bankruptcy, there is also the risk of not being able to realise their loan repayment from the sale of the vessel.
This leaves the ship owner with few options. If the ship owner operates in a country where export credit agencies are actively supporting the shipping industry and are backed by their respective governments, then the Export credit agency might be a viable option. Export credit agencies offer loans, loan guarantees and insurance to help domestic companies limit the risk of exportation. They can arrange government-backed loans, guarantees and insurance for ship owners seeking for loans from banks.
The export credit guarantees offered by export credit agencies lower the risk of private lending and may thus help the ship owner to get a mezzanine debt that is guaranteed by an ECA. A private placement of debt may also be guaranteed by an ECA even if one of the conditions is for the change of management of the ship owner company.
A ship-owner who cannot predict borrowing requirements over the next five years, but who wants the security of having some sort of loan arrangement in place to cover this period.
In this particular scenario, the ship owner can go for a hunting license loan. The reason is because the ship owner wants to have the predictability and availability of funds when they see opportunities that they can quickly harness in the market.
For this type of funding, the bank is practically flying blind and is therefore taking on considerably more risk than in the traditional loan situation. For this reason, the bank would seek a certain level of control over the would-be asset. In order to assert this control, the bank would require from the ship owner, certain parameters for the vessel to be acquired such as maximum age, limited list of ship builders, pass a special survey and be classified by an IACS member with specific class notations.
The advantage to the ship owner is that the funds are available for when it seeks to take advantage of market opportunities be it in vessel acquisition or in a merger and acquisition opportunity. This saves the administrative cost in getting a last minute loan and allows the bank to be part of the opportunities that the shipping market has to offer.
Foluke Akinmoladun is a lawyer, accountant, mediator and arbitrator. She is the Managing Solicitor of Trizon Law Chambers and can be reached at: Foluke.A@trizonlawchambers.com