September 2020 has seen the recent publication of the new “SHIPLEASE” indicative term sheet by the Baltic and International Maritime Council (BIMCO). SHIPLEASE has been drafted to provide the first set of standard terms and conditions for sale and leaseback transactions of second-hand vessels.
As an indicative non-binding term sheet, the intention is to set out the terms and conditions involving the proposed vessel sale and leaseback transaction, which once agreed, are to be incorporated into a memorandum of agreement, a bareboat charter and related security documents as negotiated by the parties.
As Nick Fell, Executive Vice President, Corporate Services and General Counsel of BW Group and chairperson of the term sheet drafting group recently said “Sale and leaseback transactions and structures have been booming in recent years and are now an essential tool for financing the shipping industry”. This rise in popularity of alternative sale and leaseback financing, rather than traditional bank financing, has meant that there is an increasing need for standardisation across the market. Wilson Liu, Senior Director at Minsheng Financial Leasing demonstrated this by recently commenting that “There are quite a number of newcomers in the market and having an industry standard is therefore a useful starting point. The term sheet will also facilitate the process for more experienced players”.
SHIPLEASE does just this, providing a useful balanced starting point for both operating and financial leases for single or multiple vessel transactions. Moreover, although the term sheet has primarily been developed for sale and leaseback transactions involving second-hand vessels, it can easily be adapted to be used for transactions involving newbuilds or vessels that are undergoing major refit. The term sheet has been based upon SHIPTERM and SHIPTERM S (BIMCO’s two existing term sheets for bilateral and syndicated term loan facilities) using the same basic structure throughout, although it is important to note that it does significantly vary from these forms in certain places as SHIPLEASE is not applicable to term loan facilities. The term sheet is however flexible in nature and can be amended and/or adjusted to suit any specific terms or more complicated arrangements as required on a transaction by transaction basis.
Part I of SHIPLEASE follows the customary BIMCO box layout style allowing the parties to set out the key details of their transaction. Part II provides an overview of the transaction and contains the “standard provisions” that parties are open to negotiate. The Annexes allow the parties to set out more detailed provisions on the important topics of vessel specifics, the hire schedule, amounts to be paid in case of termination and on change of control, as well as financial covenants. To provide further assistance, BIMCO have also published useful explanatory notes to help navigate the individual clauses.
The sale of the vessel is contemplated to be covered by a memorandum of agreement based on BIMCO Norwegian Saleform (2012) with the purchase price being the lower of (i) the average of two current broker valuations and (ii) an agreed maximum price in a fixed amount or based on a separate calculation. This offers some flexibility for the parties, but the purchase price in a second hand sale and leaseback transaction will, in our experience, typically be a fixed amount.
The bareboat charter of the vessel is contemplated to be covered by a BIMCO BARECON (2017), which in these cases typically will be supplemented by additional clauses. SHIPLEASE includes a useful catalogue of core provisions for the leaseback arrangement, including hire, charter period, termination, purchase option / purchase obligation, charterer’s security, insurances, representations and warranties, covenants (vessel, general, information and financial) and termination events. Provisions for facilitation of lessor’s financing (subject to quiet enjoyment undertaking from the mortgagee) and alternatives for lessor’s transfer are also included.
SHIPLEASE, along with SHIPTERM and SHIPTERM S, completes the BIMCO suite of term sheets available to financiers, shipowners and their advisors. It is a timely and much needed effort to standardise sale and leaseback transactions, providing a solid and well balanced base for negotiation.
Fact – “Sale and leaseback”
A transaction where an owner sells a vessel and immediately leases it back from the purchaser. This allows the owner to utilize the cash invested in the vessel for other purposes, whilst continuing to use the vessel to operate its business. Sale and leasebacks can be attractive as alternative methods of raising capital and has become increasingly important in the capital mix of shipping companies in recent years.