Marine Finance

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Due to their increasing size, specialization and technological sophistication, today’s vessels present attractive “big-ticket” financing opportunities. However, commercial vessels, regardless of type, will inevitably incur maritime liens, which are priority claims that arise by operation of law, and are enforceable against the vessel in rem. Lenders therefore must be cognizant of, and account for, the special attributes of maritime liens in evaluating and documenting these types of transactions, whether structured as loans or leases.

This article discusses the characteristics of maritime liens, the priority of these liens in relation to the desired first-priority secured position of a lender or lessor, and prudent practices for assessing and mitigating the risks posed by such liens. The focus of this article is on transactions involving commercial (as opposed to recreational or fishing) vessels documented under the laws of the United States.  Continue Reading Don’t Lien on Me: Identification and Mitigation of Maritime Lien Risks in Marine Lease/Loan Transactions

Louisiana Governor John Bel Edwards’ proposal for short term fixes for the State’s fiscal problems includes a shot at already-hurting offshore supply vessel owners/operators. OSV operators/owners currently receive a refundable credit of 100% of the ad valorem taxes paid on vessels operating on the Outer Continental Shelf. The Governor’s plan would suspend these credits for 2016 and reduce them to 80% beginning in 2017.Offshore Supply Vessel Tax Credit

Governor Edwards made his pitch to the industry at a recent meeting of the Offshore Marine Service Association in New Orleans. He cited the need for all sectors of the Louisiana economy to share in addressing the State’s budget shortfall. However, the proposed suspension and reduction of the credit could not come at a worse time for OSV operators already finding it difficult to weather current stormy market conditions.

Vessel Purchase Agreements
Vessel sales are a constant in the marine industry, even during downturns in the market. In fact, some see adverse market conditions as an opportunity to find bargains on vessels and other marine equipment. Once the buyer has “kicked the tires” on a vessel and the parties have agreed on a price, there usually is great pressure from all sides to quickly sign a purchase and sale agreement and close the deal. However, signing an agreement that fails to or inadequately addresses a key issue can cause problems down the road.

Based on years of negotiating, drafting and reviewing vessel purchase and sale agreements for vessels large and small, here is a checklist of the key business and legal points that should normally be addressed in a vessel purchase agreement:

  1. Deposit – If there is to be a deposit, the parties should specify how much it will be and the condition under which it will be deemed forfeited.
  2. Inspection – These clauses vary widely depending on the circumstances. If the buyer has already inspected and is satisfied with the condition of the vessel, the contract may simply provide that the sale is outright and definite upon execution with no right of inspection. Usually, and especially with larger and/or classed vessels with specialized equipment, the buyer will want the right to inspect the vessel and its class records and have the ability to get out of the contract and receive back the deposit, or receive an adjustment in price, if dissatisfied with the condition of the vessel. If there is to be an inspection, the contract normally specifies the scope of the inspection and provides a strict timeline to accomplish it, and may also spell out the consequences for delaying or impeding inspection, insurance and indemnity for claims of inspectors, and allocation of inspection costs.
  3. Time and Place of Delivery – These clauses may include consequences, such as a right of cancellation and/or liability for damages, for failure to timely deliver the vessel.
  4. Total Loss Before Sale – These provisions normally give the buyer the right to cancel if the vessel becomes a total loss before delivery.
  5. Drydocking or Underwater Survey – Similar to inspection provisions, these clauses should address the circumstances under which the buyer may require drydocking or divers’ inspection and who pays for these inspections, which may depend on what is found during the inspection, and insurance and indemnity for claims arising during drydocking. These provisions may also address the buyer’s right to have the tail shaft or other vessel components surveyed during drydocking.
  6. Bunkers, Spares – These clauses typically address how and when bunkers are quantified and priced and paid for, delivery of spares and other items of vessel equipment and whether these are included in the price or paid for separately.
  7. Closing Documentation – The key issue on this point is that the buyer will want to ensure that the seller’s deliverables include all certificates and other documents necessary to meet the requirements of the registry the buyer plans to use. The contract should provide for these to be delivered as a condition of payment of the purchase price, so the buyer does not have to chase the seller after closing for a piece of paper needed to complete registration of the vessel in the buyer’s name.

Vessel purchase and sale agreements usually also have other customary provisions, such as those addressing:

  • Seller’s obligation to deliver the vessel free from all charters, encumbrances, mortgages and liens.
  • Seller’s indemnification for claims incurred prior to delivery that are asserted after delivery.
  • Allocation of responsibility for taxes, fees and expenses.
  • The required condition of the vessel and equipment upon delivery.
  • Default by the buyer or seller and the consequences of default.
  • Dispute resolution.

Numerous forms of vessel purchase and sale agreements are available publicly to use as templates in drafting agreements and specific clauses. However, when presented with any contract, whether based on an established template (e.g. BIMCO, Saleform) or drafted for the particular deal, you should never hesitate to negotiate what is important to you and revise the agreement accordingly.

I think this Workboat article outlined succinctly the challenges faced by debt-laden shipowners in the current market downturn. With adverse market conditions expected to continue for the long term in almost all shipping sectors, shipowners should be taking the following measures to keep their heads above water:
  • evaluate debt service obligations and ability to pay;
  • assess potential for financial covenant default;
  • reach out to lenders to obtain waivers/amendments to credit facilities; and 
  • identify assets that can be sold.