Advantages and Disadvantages: Raising equity (capital) from public markets has the positive point that creates access to a wider pool of investors (institutional investors or retail) which broadens the shareholder base of a shipping company. For example, in order to submit an IPO for approval in the NYSE you need at least 2,500 shareholders (entities or individuals). This is being achieved through brokers / underwriters and agents. However IPO may be of significant concern due to the losing of control of the company by the founders and the risk of a hostile takeover. Raising capital through IPOs permits the use of the capital for investment in more than one project/ship, the partial repayment of bank loans or the restructuring of the existing ones, new investment opportunities and new acquisitions in the second hand market or the acquisition of resales, the ordering of newbuildings or the mergers and acquisitions of other shipping companies or the acquisitions of shipping companies under distress. In addition to the above, the wider spread of the risk and the ability to obtain bank loans with more competitive terms and conditions and finally the attraction of skillful, educated and competent personnel and high ranking and experienced officers is one among the advantages of an IPO.
Among the disadvantages of the IPOs, in addition to the losing of control or the increased risk of a hostile takeover, is mainly the lack of interest from the investment community, especially the institutional investors, due to the weakening or drop of the freight market which may push the price of the ships (and consequently the offering) below the net asset value of the stocks. However, with the same token, the fall of the freight market may create opportunities to acquire and offer in the newly established public company ships at a discount. One may add to the above the additional, sometimes considerable, cost for the reporting requirements to the Stock Exchange and the constant compliance with the regulations of the Stock Exchange. Another disadvantage is the imposed restrictions by the Stock exchange on selling of the founders’ shares for some time, (maybe two years), since the IPO takes place. It goes without saying that in order to organize an Initial Public Offering the shipping company should be relatively quite sizeable and already established in the shipping industry with excellent track record and positive results shown in the last five complete fiscal years audited statements.
The bank loans
The features of a bank loan
A shipping loan agreement is a typical reciprocal contract based on a commitment letter signed between the lenders and the borrowers. The lender (usually a bank or a financial institution) assumes the obligation to advance the agreed amount of the loan facility funds at certain terms and conditions to the borrower (shipowner) and the latter bears the obligation to repay the loan within the agreed period of the loan (tenor) as per the loan agreement precise terms and conditions and under the agreed margin over the banks’ LIBOR (London Interbank Offered Rate). The increment of the total amount of the loan together with the interest payable (LIBOR plus margin) and its compound as well as the expenses involved reflex the credit risk exposure of the bank (lender).
The most substantial features of a bank loan are as follows:
- repayment and prepayment
- interest and interest renewal periods
- security documents such as: (a) first preferred mortgage on the vessel in favor of the lender, (b) deed of assignment of the earnings of the vessel, (c) deed of assignment of the insurances of the vessel, (d) corporate or personal guarantee if any whereas the guarantors act on behalf of the borrowers and in favor of the lenders as primary obligors and not as sureties and (e) any other security documents which may be required by the lender
- insurances: (a) hull and machinery insurance (the vessel should be insured of at least 135% of the total outstanding amount of the loan at any time), (b) war risk insurance, (c) protection and indemnity third party’s liability insurance (P&I Club), (d) mortgagees’ interest insurance, (e) mortgagees’ additional perils pollution insurance and (f ) any other insurance requirements which may be from time to time required by the lenders.
- Covenants, such as: not to register a second mortgage in favor of a third person without the prior consent of the lender, not to borrow any money or to register any en404 cumbrances (without again the prior written consent of the lender), not to provide any loans to any third parties, not to fix the ship for a charter period more than one year without the prior written consent of the lender, not to distribute any dividends to the shareholders without prior written consent of the lender, not to change ownership structure or managers without prior written consent of the lender and others (negative pledges).
- Events of default, such as: the inability to repay the loan agreed interest at the end of each interest period, the inability to repay the agreed instalment in time as per the amortization schedule of the loan, the inability to provide semi-annually proper valuation of the vessel’s market value by reputable independent brokers, in case of any discrepancy between the valuation of the brokers and the outstanding portion of the loan the borrowers are obliged to repay (prepay) the difference or to provide additional collateral approved by the lenders, the disposal of any assets of the borrowers’ property including cash, marketable securities, real estate property etc without the prior written consent of the lender etc. In case of an event of default and besides other steps that the bank may impose on the borrower including but not limited to the call off the loan or any outstanding amount of the loan the borrower is obligated to pay a default rate which is twice the agreed amount of the interest rate which is LIBOR plus margin.
- Law and Jurisdiction
Various types of shipping loans (regarding the duration and the repayment schedule)
Shipping loans depending on the maturity of the amortization period and depending on the repayment schedule (tenor) as well as on the profile of the loan could be longer, such as a tenor of 12 years repayment without balloon, or shorter with 5-6 years amortization period of say a tenor of six years consisting of 12 semi-annual instalments for the 80% of the loan and a 20% balloon payable together with the last instalment. \
There are also 1 year loans which are intended to be used for retrofitting costs (the installation of a scrubber or of a water ballast system) or for a major conversion of the ship, for example from a tanker to a combo etc, and also short term loans for up to 2 or 3 years as a working capital to the shipping company (however this type of loans for working capital which are given in way of an overdraft facility are granted to shipping groups with more than one ships and shipowning companies which are subsidiaries of the shipping group mother company or to the management company of the group which also should be a subsidiary). The repayment of these loans (working capital) is in a way of a bullet repayment, which means no repayment schedule in instalments i.e. no payments in the interim but one bullet payment together with the interest at the end of the period.
Sometimes, but not nowadays, moratorium periods are provided to the borrower by the lender, for a duration of one or two years before the semi-annual consecutive instalments start. In some other cases instead of equal semi-annual or quarterly consecutive repayment instalments (schedule) the parties may agree loans with back / front end in order to facilitate the borrower with larger instalments at the end and lower instalments in the beginning, if the lender’s risk assessment study of the borrower gives them comfort and vice versa (front end loans).
Collaterals
As mentioned already, the main collateral of a bank or financial institution for security of the loan agreement is the ship mortgage, which is a tangible security provided by the borrower to the lender, registered in the ship registry of the ship and ensuring payment of the loan. The mortgage has priority of ranking for the satisfaction of the loan, with the exception of the maritime liens. Although the mortgage is the main collateral of the bank lender, additional collaterals may secure a shipping loan facility, such as a deed of assignment of the earnings, a deed of assignment of insurances (including loss payable clause), a pledge of the shares of the borrowing company or companies to the lender with or without voting powers, in some extreme cases also the pledge of the shares (stock certificates) of other shipowning companies of the group, such as in a cross collateralized loan, either in way of guarantors or in way of primary obligors in the cases of syndicated loans. Another additional collateral may be, depending on the commitment letter and the loan agreement, the requirement of the bank of a corporate guarantee by the mother company of the borrower or of the beneficial owner of the various layers of the ownership structure of the borrower. In all cases the corporate guarantor is acting as a primary obligor.
Regime applicable to a Greek ship mortgage
Greek legislation provides for two types of ship mortgage: the simple mortgages (articles 195-204 Code of Private Maritime Law) and the preferred mortgages (Legislative Decree No.3899/1958). Apart from the manner in which they are constituted (a simple mortgage is established through a unilateral declaration by the owner before the notary public followed by registration, while a preferred mortgage is a contract subject to registration), their main difference lies on the way that creditors can pursue satisfaction of their claims.
a. How can a lender pursue satisfaction of its claims in each case?
In the case of simple mortgages, the payment of the claim is secured by the judicial sale of the vessel and by priority ranking conferred upon the mortgagee. However, in the case of preferred ship mortgages, the protection accorded to the creditor is far more extensive and effective. In addition to the abovementioned right of judicial sale, the creditor is by statute entitled to manage and operate the vessel (arts. 9-14 of the L.D. 3899/1958), with a view to satisfying its claim through earnings from such operation. The creditor may also choose to sell the vessel in private sale (art. 5 of the L.D. 3899/1958). It is at its absolute discretion to choose the way considered more appropriate to secure payment of the claim.
b. Are there any weaknesses of the ship mortgages?
Despite their central role in securing the repayment of loans, the weaknesses of ship mortgages should not be underestimated. The first arises from their accessory nature and the fact that they are linked economically to the value of the ship, with the effect that any fluctuations in her value proportionally affect the efficiency of the collateral. Their accessory nature entails also that if the ship is lost, the creditor remains unsecured. The second weakness, which is of a legal nature, stems from the fact that, depending on the applicable law, all or certain classes of maritime liens have priority over the claims of the mortgagee to the sale proceeds. This is the case also in Greece according to articles 1012 par. 3 of Code of Civil Procedure and 205 par. 2 of Code of Private Maritime Law. Regarding the Greek flag ships registered in the Greek registry as foreign capitals (in accordance with the article 13 of the Legislative Decree No.2687/53), the ranking is different to a certain degree: preferred mortgages (Legislative Decree No.3899/1958) have priority over the maritime liens, with the exception of the maritime liens which are provided both by article 205 para 2 of the Code of Private Maritime Law and art. 2 of the International Convention of Brussels of 1926, now art. 4 of Conventions 1967 and 1993 (see clause 19 of the Approval Acts issued upon registration).
c. Alternatives to the ship mortgage
Alternative collaterals in lieu of the preferred mortgage are the ownership based collaterals in favour of the bank / lender. There are two types: first, the transfer of ownership by the borrowing shipowning company to the bank / lender as security for the loan as per the provisions of articles 190-194 of the Code of Private Maritime Law (law 3816/58) and second, a (capital) lease finance combined with a bareboat charter.
In the first case of the ownership transfer, the borrower – shipowner transfers the title of the ship to the lender for securing the payment of the loan but retains the power to manage and operate her and the lender’s right of ownership is subject to rebuttal irrespective of how the loan relationship develops. If the claim has been satisfied and a declaration to that effect is registered in the ship’s registry the ownership of the vessel reverse ipso jure to the shipowner / borrower. If the loan however becomes due and payable for whatever event of default in the loan agreement, the lender is entitled to seek satisfaction of the claim from the sale proceeds of the vessel in public auction.
In case the agreement takes the form of a capital lease finance with bareboat charter, the creditor – lessor conveys to the lessee, in return for rental payments, the use of the asset for exclusively professional purposes for a specified period of time, following which the lessee has the right to either buy the asset back or hold it on lease for a further period specified in the contract. In this case, the title is transferred directly from a third party (the seller) to the creditor, which provides the funds for the purchase of the asset. When this mode of financing is chosen, the asset is operated in accordance with the contractual models prescribed by maritime law to maximize the economic potential of the asset. Accordingly the leasing agreement is made through a bareboat charter (such as Barecon, the standard form of BIMCO, a new form of which published recently - Barecon 2017). The lease of Greek-flagged vessels is for the moment prohibited by law, with the exception of pleasure of yachts (L. 1665/86, art. 1 para 3).
Advantages and Disadvantages of bank loans
The main advantage of a bank or financial institution loan to a shipping company, if there is no reason for substantial expansion especially in the case of a group of shipping companies, is that the shipowners keep the control of their corporations and ships and the decision making as such. They have no reporting requirements to any governmental or intergovernmental authority such as any Stock Exchange; they decide quickly to acquire or to dispose the ships, subject of course to the fulfillment of their obligations arising out of the loan agreement; they bear no risk of dilution of the value of their assets or shares of the shipowning company / companies and they keep their independence and freedom in the decision making whatsoever. The main disadvantage however is that, in the case of bank loans, the shipowner is required to define the purpose for the financing and he is absolutely bound to use the borrowed money for that purpose, i.e. the purchase of a ship or the ordering of a newbuilding or the restructuring of a loan with the same bank or banks. It has also to be stressed that although in a successful equity raising, either in a way of a private placement or through an IPO, the capital raised may exceed the net asset value of the ships (although sometimes in an Initial Public Offering which takes place during a recession in the shipping industry the opposite may happen) in a bank loan the borrowed funds does not exceed the 70% of the market value of the ship / ships (nowadays the 50%).
Any other source of financing of a shipping company
In addition to the equity and loan finance which was described above, some other types of finance should be mentioned such as the issuance of a bond or debenture usually in public listed companies which may be also convertible to equities (shares).
