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Ship finance considerartions

The ship finance process involves a business entity (usually a bank) that provides money to a borrower to purchase a ship. It might be either a new-build vessel under construction or a vessel that already exists and which is being purchased by the borrower as a second-hand vessel. It is also possible to refinance existing indebtedness already in place in respect of a vessel. The lender will look to put itself in the best possible position concerning the initial security position following the provision of finance and then in the vessel's subsequent operation. Ship financing arrangement uses vessel charter fees as the principal source of repayment. Various forms of collateral structured around shipbuilding and charter agreements are assigned to mitigate credit risk.

containerships operational matters
Oil Tanker Safety Guide
Ship finance is somewhat different from other asset-based lendings such as real estate finance. After all, shipping business earnings can be quite volatile and, therefore, less predictable. Additionally, the collateralized asset (the ship) is exceptionally mobile. The traditional method for ship finance was private resources. It was the basis for the building of many large fleets by traditional shipping families, particularly in Greece, Norway, Hong Kong, and elsewhere. As an example, Stelios Haji-Ioannou, who established the Stelmar Tanker Company (and also Easy Jet Air) with money lent by his father Loucas.

Bank loans remain an essential source of ship finance. Many commercial banks have a separate ship finance department. A mortgage-backed loan will use the ship as security. The shipowner will establish a corporation in a suitable jurisdiction, whether Liberia, Panama, Marshall Islands, etc. to hold ownership of the vessel. In essence, the borrower is a one ship company that allows assets to be isolated from any claims that might arise against other assets held by the shipowner.

Capesize bulk carrier underway
Capesize bulk carrier underway

The lender will need to obtain a valuation of the vessel. It is to be used as collateral and determine the proportion of the ship's current market value that may be advanced as a loan. It will depend on the age of the vessel, the current shipping market, and other factors. The loan will be secured by a ship mortgage, which under the governing maritime law gives the bank "preferred" status in the event of the single ship company's insolvency. The bank's preferred mortgage allows the bank to claim ahead of other contract lien holders in the event of a lien foreclosure and the vessel's sale. The loan agreement may also require that freight and hire earned by the ship be assigned to the bank as further security.

Of course, there are other commonly used financing methods. Corporate loans may be available to larger shipping companies with very sound financial structures. Primarily, the Company uses its corporate balance sheet as collateral. A bank or group of banks will provide a large credit facility that is secured by various assets owned by the Company and its subsidiaries. Private placements have been used as well. Instead of borrowing from a bank, ship owners may secure financing through private placements of debt or equity with pension funds, insurance companies, etc. An investment bank is normally used to handle the placement, which involves the preparation and presentation of a prospectus to potential investors.

Shipping companies have also raised equity by arranging for a public offering of stock to be traded on several stock exchanges. A company that is currently private may consider making an initial public offering (IPO). Once again a prospectus is created describing the Company and its financial performance, and in which shares are offered.

In the case of a new building (a ship ordered from a shipyard), it is customary for a series of progress payments to be made, the final payment made once the ship has passed sea trials and is formally delivered to her new owners. Loans for the purchase of new buildings can come from a variety of sources and can also be negotiated via the shipyard's banks. Another alternative is for the prospective seller/ owner to charter the vessel under a demise (bareboat) charter terms to the prospective buyer.

The demise charter party's basic concept is that the demise charterer, in exchange for the payment of hire, obtains effective control of the vessel for an agreed period. It is akin to a net lease. The demise charterer has full operational and effective control of the ship. Noteworthy, the charter party will also contain terms that allow for the vessel's purchase by the demise charterer at the charter party's end, with the hire payments applied to the purchase price. There are many other methods. Ship finance is complex and requires a good working knowledge of shipping overall.


Note of Reference

Types of losses - Total or Partial or general average losses
A Loss can be described as being either Total or Partial (Particular Average). A Total Loss may be either an Actual Total Loss (ATL) or a Constructive Total Loss (CTL). An Actual Total Loss is where the vessel is actually destroyed or wrecked or where the owner is irretrievably deprived of his vessel e.g. when a ship is sunk in deep waters where any salvage attempt would be impossible. A Constructive Total Loss is when it appears that the vessel is unlikely to be saved or recovered or when she can only be recovered and repaired at a cost, which exceeds her insured value....

P&I Clubs guideline
The P&I Clubs are correctly called Protection and Indemnity Associations and number around 20 worldwide, with the majority being the United Kingdom-based. The shipowner in taking out insurance with a particular association becomes a member of that Club. The Clubs are mutual, which means that all costs involved in providing cover or paying out a claim to anyone are shared by all members. It is achieved by setting a rating or premium for the owner, known as an "advance call, " based on the owner's history and exposure to risk.

War risks areas -related advisory
There are additional trading restrictions placed on the ship regarding so-called war risk areas. War risk areas do not necessarily mean an area where there is a war and may include hostile environments such as areas where civil commotion or revolution is taking place.

Cargo ship procedure - Deviation clause and port of refuge
A deviation is a departure from the intended voyage or contract of carriage. It can occur either where the course of the voyage is specifically stated, and is departed from, or where the course of the voyage is not stated, but the usual route or customary route is departed from. However, it should be noted that deviation does not necessarily mean a physical change in the course and can occur in a simple case of slowing down to receive stores at an intermediate off-port-limits call. ...

Salvage contract -Using The Lloyd's Open Form for "No-Cure-No-Pay" salvage contract
The Lloyd's Open Form or "LOF" is the most widely-used "No-Cure-No-Pay" salvage contract. In return for salvage services, the salver receives a proportion of the salved value (the ship, its cargo, and bunkers).

Role of ship classification society
Classification societies verify the structural strength and integrity of the ship's hull and its fittings, as well as the reliability and function of the propulsion steering systems, power generation, other systems on the ship....

The Master’s Responsibility during Salvage Operation
Request for Salvage - The Master shall normally request salvage after consultation with the Company. However, he has complete authority to seek salvage assistance without referencing the Company if he considers this necessary.

Requirement of towing arrangement in oil tankers, readyness, & training onboard
All Oil, Chemical and Gas Tankers above 20000 DWT, constructed on or after 1st July, 2002, are equipped with an “Emergency Towing Arrangement (E.T.A.) both Forward And aft to provide the ship with a rapidly deployed towage capacity in an emergency.

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