Sale and leaseback – BIMCO’s next move in ship financing

Overview

In October, an Asian-based subcommittee involving major players within the ship owning and ship leasing communities will begin work to develop a term sheet for sale and leaseback transactions to meet a rise in demand and to complete the suite of three term sheets available for financiers, shipowners and their advisors.

With the past couple of years’ adoptions of standard bilateral and syndicated term sheets for ship financing transactions, BIMCO has bolstered its position in the ship financing domain.

BIMCO’s decision to develop a third term sheet dedicated to sale and leaseback deals is due to the steep increase in these kinds of structures over the past decade – they have been booming in the last five years. There is currently no standard available in the market and the goal is therefore to create a template reflecting market practice for use by shipowners, leasing companies, financial brokers and lawyers when drawing up sale and leaseback agreements.

Sabrina Chao, President Designate of BIMCO and Executive Chairman of Wah Kwong, which will have a representative on the subcommittee, says: “Sale and leasebacks have been on the rise, and the time is ripe for BIMCO to develop a term sheet dealing specifically with such transactions. I am particularly pleased that the leasing companies are strongly represented in this project as they will be instrumental to its success.”

A term sheet for sale and leaseback transactions is likely to be of particular interest in the Asian ship financing market given that this is where the bulk of such transactions are originating, and where the newcomers in the field are emerging. The goal, however, is that the term sheet will be used widely by all stakeholders engaged in sale and leaseback deals – such as shipowners around the world including in Greece, Turkey, Norway, Germany, the US, Hong Kong and Singapore where sale and leaseback has become a common way of financing ships.

Wind of change

The sale and leaseback term sheet will supplement the two existing term sheets for bilateral and syndicated ship financing transactions, which were adopted by BIMCO in November 2016 and May 2018, respectively, and codenamed SHIPTERM and SHIPTERM S. The term sheets were drafted as relatively short, simple and balanced standard forms for use in transactions concerning term loan facilities.

The development of the term sheets was considered a worthwhile project for BIMCO to embark on because documentation in this area is often very costly, drawn out and tilted in favour of the banks. A shorter and more balanced form was seen as a better and fairer starting point which would save time and money for all parties involved. It was with this in mind that a specialist subcommittee involving shipowners, banks and lawyers set out to develop the two forms which are already seeing some use in the market.

As a separate project in the ship financing domain, BIMCO published a model shipmanagers’ Letter of Undertaking (LOU) in February 2019, which provides a more balanced and workable alternative to existing LOUs.

The term sheets and LOU, as well as explanatory notes setting out the subcommittees’ reasoning behind the respective documents and their specific provisions, are available on SmartCon. Exceptionally, editable versions of the term sheets can be obtained by contacting the BIMCO secretariat.

Term sheet in the making

Considering the significant number of sale and leaseback transactions taking place in Asia, it was decided that the subcommittee in charge of the development of the term sheet should be based in Asia and involve sale and leaseback experts representing shipowners, leasing companies and law firms in the region, while recognising that sale and leaseback is also becoming a prominent structuring mechanism in other parts of the world.

The subcommittee will be chaired by BW Group’s Executive Vice President Nick Fell who, since May 2019, is Singapore’s shipowner representative on BIMCO’s Documentary Committee. Fell, who was also a member of the subcommittee that developed the bilateral and syndicated term sheets, says: “BIMCO’s decision to move into the area of ship financing was a bold step for an association that, at least historically, has mainly dealt with operational types of contracts such as ship management agreements and charter parties for voyage, time and bareboat. But it seemed a natural step for BIMCO that its documentary activities should also cover ship financing.  The interest in the two existing term sheets and, in particular, the upcoming one focusing on sale and leaseback is a clear sign that the decision was right.”

Shipowners will also be represented on the subcommittee by Lawrence Chao of Island Navigation, Catherine Smith of Wah Kwong and Alex Laios of Navios Corporation. Ship leasing companies will be represented by Wilson Wei Liu of Minsheng Financial Leasing, Jia Zhang of China Development Bank Leasing and Jay Shi of China Merchants Bank Financial Leasing. Three lawyers will be part of the group: Matt Hannaford of Hannaford Turner and Olga Petrovic of Linklaters, who were both members of the subcommittee developing the bilateral and syndicated term sheets, as well as Conor Warde of Mayer Brown.

Have your say

As with all BIMCO documents, it is crucial for the success of the sale and leaseback term sheet that it gains wide acceptance in the market. Similar to the two ship financing term sheets, a sounding board is being set up to get broader input on the work as it progresses and to make sure that what is eventually put up for adoption by the Documentary Committee represents best market practice and can be used on a global scale.

A number of sale and leaseback experts, including financial brokers, have already joined the sounding board and others who have a particular interest in the matter can contact the BIMCO secretariat to sign up. Once the subcommittee has produced a draft, which it considers ready for wider consultation, the sounding board will receive a copy for comments. Sounding board involvement is expected in the first half of 2020.

Christian Hoppe
in Copenhagen, DK

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