Mar.03--On 9 January 2017, BIMCO published its first ship finance related form – “SHIPTERM”. BIMCO describes SHIPTERM as a simple, short form, non-binding, bi-lateral term sheet which is intended to be used for secured term loan ship financing transactions.
BIMCO’s stated aim in publishing SHIPTERM is to provide an important tool for shipowners, banks, lawyers and other players in the industry involved in ship financing transactions.
BIMCO presents SHIPTERM as being most useful to small and medium sized shipowners and banks with limited experience of negotiating ship financing facilities. BIMCO expects that all parties involved will save time and money by using SHIPTERM.
SHIPTERM is designed for use with simple bi-lateral secured ship financing facilities. Whilst it would be to possible to adapt the form for use by multiple borrowers with multi-ship financings, many consequential amendments would be required and SHIPTERM is unlikely to be the best starting point for such financings. As this is BIMCO’s first form in the ship financing space, BIMCO decided to start with a simple document. However, BIMCO has indicated that it will embark shortly on preparing a BIMCO term sheet for syndicated facilities.
The terms and conditions of SHIPTERM are expressed to be indicative only and will not constitute a legally binding agreement to provide the financing referred to in the term sheet. This is why the form does not include any signature boxes. The provision of the term loan facility referred to in SHIPTERM will be subject to credit committee approval of the lender and to the finalisation of loan and security documentation satisfactory to the lender.
How does SHIPTERM work?
BIMCO has used its box format in Part I of the form, which is designed to record, in a simple user-friendly manner, the “essential details” of the term sheet including: the fundamental commercial terms of the loan (such as the maximum amount, the interest rate, the maturity date, security over earnings accounts and shares in the borrower(s)); the fundamental details relating to the ship (such as the name, flag, class, commercial and technical managers, major casualty amount); and important legal terms (such as the choice of governing law and jurisdiction). It is worth noting that some clauses will only be effective if the applicable box is completed – for example the security maintenance covenant will only be applicable if box 15 is duly completed.
When it is not clear how a box should be completed, a brief explanation has been provided together with, where relevant, a cross-reference to the applicable clause or clauses in Part II. BIMCO has made it clear that the explanatory notes do not form part of the SHIPTERM document, but are for guidance only.
Some boxes will require further detail to be inserted, which may be best set out in detail within the body of the term sheet, or within an additional annex. For example, where the term loan is to be drawn in multiple tranches it would be sensible for the tranche mechanics to be set out in an annex to SHIPTERM, rather than in box 14 of Part I.
Part II contains the bare bones of the loan structure and the legal framework of the term loan facility, based on the essential terms set out in Part I. BIMCO has stated that it did not intend to create a “mini-loan”, hence the pared back approach to this term sheet.
Part II sets out how questions such as mandatory and voluntary repayment and prepayment will be regulated, the security package to be provided by the borrower(s), the ship insurance requirements and the financial covenants. SHIPTERM provides for the facility agreement and security documents (with the exception of the mortgage, which will be governed by the law of the ship’s flag) to be made subject to the governing law and jurisdiction chosen by the parties and specified in boxes 30 and 31 of Part I. These issues may require further consideration, for example, where bank accounts located in other jurisdictions are to be charged or pledged to the lender by way of security for repayment of the loan.
SHIPTERM does not provide any detailed provisions in respect of terms which typically are heavily negotiated, such as detailed cash flow matters to address dry-docking retention amounts, blocked operating and earnings accounts, dividend restrictions, events of default and conditions precedent.
SHIPTERM has 4 annexes for the parties to complete to address multi-ship financings, repayment profile, change of control provisions, and detailed information and financial covenants.
Does SHIPTERM deliver?
Whilst we can see some potential appeal of SHIPTERM to small and medium sized shipowners, the form does leave much detail to be worked out and agreed between the parties.
This and the fact that most lenders typically prefer to use their own term sheets suggest that, if it manages to achieve market penetration, SHIPTERM is more likely to be used as a generic checklist by shipowners seeking to save costs by not involving experienced legal counsel than as the “go to” template for documenting ship financing term sheets.
BIMCO has explained that its intention is not to override the Loan Market Association form term sheet: instead, SHIPTERM seeks to provide a shipping specific document. This is highlighted by the differing approaches applied to clause 11 (representations and warranties) – which tends to be a fairly standard clause, with no industry specific references required – and clause 12 (covenants), which focuses on shipping industry specific matters, such as ship covenants and shipping industry specific information covenants. This is where SHIPTERM seeks to add value for the shipping industry.
While there is much to be said for standardising legal documentation in the ship financing space, there is a sense that in promulgating a term sheet for simple ship financing transactions BIMCO may be striving to create and satisfy a demand that does not yet exist.
It will be interesting to see if SHIPTERM is taken up by the parties for whom it is designed, and also to see if the form eventually fulfils the stated aims of becoming an important tool that saves time and money for all involved in simple ship financing transactions.
But in the current market conditions, the continuing challenges associated with raising finance stem from the drying up of traditional sources of ship loans rather than a lack of standardization in financing documentation.