What’s it all about?

Shipping finance, put very simply, is the process by which money is made available to a ship owner to assist in a ship-related investment. This can be anything from buying a new ship under construction at a shipyard, acquiring a ship second hand from another ship owner, repairing, converting, altering or modifying an existing ship to refinancing existing debt on a ship. The source of funds for this has traditionally been bank debt but other sources of finance, (e.g. both debt and equity from the public markets) have become increasingly widespread in recent years. In exchange for funds the lender(s) will require security. At its most basic form this will consist of a mortgage over the ship (and/or other ships in the fleet), an assignment of the ship’s income stream (e.g. a charterparty assignment) and an assignment of the insurances of the ship so that the lender can recover its value, should the ship sink.

There are many different permutations and refinements that can be made to the model but the basic premise remains the same.

How is shipping finance different to other forms of finance/shipping work?

Finance covers a very broad spectrum. Shipping finance, on the other hand, is all about the financing of a very specific type of asset – a ship. Ships are quite unique in that they are large, valuable assets that are capable of moving all over the world. As a result the law and practice of shipping finance has developed to take this into account. Specific insurance and registration requirements exist, which are reflected in the financing structure and documentation.

Imagine the situation of a German bank lending to a Greek-controlled shipping company using a Liberian borrowing company to build a ship in a Japanese shipyard and then register the ship upon delivery under Panamanian flag, which will then be bareboat registered on Cyprus flag and chartered long term to Indian charterers to carry coal between Australia and India. Not all examples are quite as extreme as this but all transactions have multi-jurisdictional elements.

Other broad categories of shipping work are:

1. the negotiation phase: negotiating charter parties, shipbuilding contracts, Memoranda of Agreement (sale contracts)
2. sale and purchase work
3. new building work
4. regulatory issues
5. corporate - mergers, acquisitions, joint ventures and strategic alliances
6. charters and other operating contracts; management agreements
7. tax matters – e.g. tonnage tax, international tax planning
8. contentious work: further split into
a. Wet: collisions / salvage etc
b. Dry: charterparty disputes, contract / cargo claims etc
9. restructuring, workouts and mortgage enforcements.

What is the working culture like in a shipping finance team?

The work of a shipping finance lawyer is transactional, which means - like with most transactional areas of work - that things can go from steady or relatively quiet to very busy in a very short space of time. This means it is important to have a good team of lawyers and support staff that work well together to do their bit to meet the client’s expectations within any given timeframe. Each person is very reliant on every other person doing their bit. It also means as a trainee in the department you usually get a lot of exposure to clients and other professionals. On a typical transaction you would have a partner supervising or leading the transaction and then a senior or junior associate (depending on the type of work and complexity of the transaction) running the transaction with support from a trainee or a more junior associate if a senior associate is working on the deal. We typically work in small teams but work closely together to coordinate with one another.

What is the typical makeup of a shipping finance lawyer’s client base?

Our clients of are pretty varied and include most international banks and lending institutions that are even remotely active in the shipping industry to owners and operators. We also advise many owners and operators on both the financing side as well as the actual ship-owning and operation side. We have clients that are intermediaries and arrangers of financial transactions. We also work for many governmental and inter-governmental agencies (for example we do a lot of Export Credit Agency work), ship builders, insurers, P&I clubs, consultants and other intermediaries.

Which other practice areas do you work most closely with?

We work with most other departments in the firm - corporate, tax, litigation. We also work with our international offices be it the shipping finance teams there or other departments. It depends on the type of transaction being done but as an example if something has become contentious or there are problems with a loan facility we would work very closely with our litigation team either to enforce security or to find a way to restructure the facility.

What skills make a good shipping finance lawyer?

Transaction management – it is very important to be able to get your head around a whole deal. You will often be the only one who can fully appreciate how all the bits of the puzzle fit together and how it all works. Being organised helps immensely, particularly as you will usually not only be working on one transaction but many transactions and you may be flitting from one to the other.

Commercial awareness – because shipping is such a unique industry (and actually quite a small world) good commercial awareness is invaluable to give you an “edge”.

Drafting / attention to detail – a financing transaction centres on the documents. It’s important to get it right.

What impact has the recession had on your practice area?

During the boom years up to late 2008 we worked on lots of financings, churning out loan after loan as cheap finance was readily available and shipbuilding contracts were being signed left, right and centre - it was all about getting the deal done as quickly as possible and then quickly onto the next one.

After the crash, credit collapsed and banks tightened their purse strings. Very little new finance has been available and what is available is on much tougher terms. More attention to detail is required and banks are far more cautious about how much, to whom and for what they lend – a marked contrast with the previous cycle. Now many borrowers are in default and so instead of just documenting new loans, the team is more regularly involved in restructurings and renegotiations, enforcement and arrest.

What recent key shipping finance work has your firm been involved in?

We have seen a lot of restructuring work and refinancings where borrowing groups who are in trouble have struggled on and their financing banks have (as far as we have seen so far) been supportive to help them survive.

We have also had some new loan transactions some quite large, and with clubs of banks (in other words, smaller groups than the very large syndicates of banks we used to see). We have seen a fair amount of activity in the Middle East and Asia. We also worked on a series of transactions for different banks involving joint ventures between two shipping companies who were looking to find financing for a series of newly ordered ships.

Aside from this, more unusual but very interesting work we have recently had is to advise banks and ship owners on the issue of UN, EU and other sanctions that have been put in place against (for example) Iran and how such sanctions impact them.

What do you think will be the future shape of shipping finance departments?

Shipping finance will continue as it always has – with peaks and troughs and the type of work or deal flow varying depending on market conditions. In recent times we have seen the type of work change from the usual deals (complex or straightforward) to more restructuring work. One interesting development we at Watson Farley & Williams have seen internally is integration with other asset classes to form a new asset finance group. For many of us this will provide opportunities to work on transactions involving other assets as well as ships, which again brings greater diversity and variety to the work of an associate/trainee in the department.

Which phrase is a shipping finance lawyer most likely to use and what does it mean?

Where will the ship be and what’s the timing/when’s the closing? These are important questions particularly with shipping transactions because of the logistics actually involved in closing a transaction. It involves liaising with insurers to make sure the policies are acceptable and often organising an insurance report from an insurance consultant, liaising with correspondent lawyers to ensure legal opinions are in agreed form (as conditions precedent to drawdown) but most importantly liaising with ship registries to have forms of mortgages pre-cleared and then executed and in a manner that meets all formal requirements e.g. having documents notarised and legalised. If a ship is being delivered in China for example this will mean coordinating a delivery closing meeting in China with a registry in the UK, New York, Greece or somewhere else as well as coordinating with the bank for the release of funds at the delivery and liaising with the borrower for the satisfaction of various conditions precedent. The more time (and notice) you have to put all these arrangements in place the better.