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Ship finance: good news for the New York deal crowd

Ship finance: good news for the New York deal crowd
Across all sectors, shipping is capital-intensive, where multiple dollars of assets are required to generate each dollar of top line income. In the wake of banking pullbacks, vessel financiers have scrambled to fill in those lost dollars on the right side of financial balance sheets.

Moore Stephens, a leading shipping accountant and financial consultant, has recently emphasised a funding source for shipowners struggling to raise finance. The lead article in Moore Stephens’ Spring 2013 newsletter is titled “Shipping should explore leasing solutions.” This entreaty fits squarely with the ambitions of New York to expand its role in ship finance.

Through New York Maritime (NYMAR), local bankers, lawyers and other professionals have launched a strategy to develop innovative financing solutions to the shipping industry, given the pullback of some traditional sources. This comes after several high profile maritime “Chapter 11” cases have gone through the bankruptcy courts in the States - to the consternation of some maritime financiers. The US Chapter 11 process, where the debtor, which precludes actions like vessel attachments and other moves by creditors against obligors, is protected by an automatic stay, is viewed as more debtor friendly than bankruptcies in other jurisdictions. 

The Moore Stephens article, carrying the imprimatur of one of shipping’s highly trusted advisors, looks in detail at the Chinese financial marketplace, where rules enacted in 2007 have led to the formation of many new financial leasing companies - some of which could have an appetite for shipping deals. Transaction parameters are wide ranging, consisting of “indigenous and foreign ship leasing transactionsflying non-Chinese as well as Chinese flags, under finance or operating leases.”

A working committee of the Maritime Law Association, spearheaded by Frank Nolan- who is a veteran transportation finance specialist with Vedder Price, has been responsible for a breakthrough with the potential to bring fresh finance business to New York. The collateral security positions of lessors in vessel charters used as financing instruments would be enhanced. According to a Vedder Price presentation, the idea has implications for any ship trading to the US where the lessee or charterer files for bankruptcy in the US.

Importantly, the Marshall Islands ship registry, with a highly visible presence in New York, has taken these ideas onboard. In early April, the Marshall Islands amended its Maritime Act to allow “…equipment lessors, who provide lease financing of vessels, to enjoy the same security in collateral as a mortgagee enjoys under a preferred mortgage,” according to IRI, which manages the registry for the Marshall Islands. 

Offering the hypothetical case of a vessel owned by a Chinese lessor, flagged in the Marshall Islands, that somehow finds itself in a US bankruptcy proceeding, Nolan explained to Seatrade Global that lessors would be treated as the owner of the ship if the court sees the bareboat charter as a true lease. Alternatively, if the court characterises the charter as a security agreement, the leasing company, with its enhanced security status, would see more safety in its claim. The bottomline is that the new developments offer good news for the deal guys in New York.