BIMCO to Develop Standardized form for Syndicated Ship Financing

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The Baltic and International Maritime Council has formulated a standardized term sheet for bilateral financing for ships and plans to develop another version for syndicates, senior council officials said late last week.

BIMCO’s shipping and bunker standard contract forms and clauses are used across the world, but this is the first time the council has ventured into standardizing documents for ship financing.

Its next form will aim to standardize the terms and conditions for relationships among a group of lenders who come together as a syndicate, said Francis Sarre, chairman of the BIMCO sub-committee that developed the term sheet on bilateral financing.

The initiative comes at a time when thousands of shipping companies are seeking the cheapest possible credit to expand or renew their fleets before new norms on ballast water management and sulfur emissions are implemented.

“A large volume of global shipping finance is done by syndicates and we are aiming to develop the new term sheet in less than two years,” Sarre said.

His sub-committee comprises five representatives each from banking and ship-owning companies and three from law firms.

BIMCO is the largest international shipping association with more than 2,200 members. Global cumulative shipping finance runs to billions of dollars.

“The majority of lending is syndicated but small owners prefer bilateral loans,” Sarre said.

The bilateral term sheet called Shipterm is already available and can be used as a base to develop the new form for syndicates, he said.

The bulk of the spadework has been done in the bilateral Shipterm but details have to be added to cater to syndicated ship financing, Christian Hoppe, a general counsel with BIMCO said.

“Legwork has been done, though actual drafting of the new form for syndicates is yet to start,” Hoppe said, adding there is overwhelming support from stakeholders to formulate the new document.

Specific terms and conditions governing the relationship between the lead arranger and other members of the syndicate, the rules to be followed if a syndicate member exits, and if they can be replaced and under what conditions, are some of the issues that will be considered while devising the new form, Sarre said.

BIMCO’s initiative is significant not only because it has ventured into this segment for the first time, but also against the backdrop of global economic conditions, where obtaining finance for ships has become challenging.

After the global economic recession a decade ago, commercial banks are more focused on their bigger and financially healthy customers, Kenneth Hvid, President and CEO of global shipping company Teekay said last month at the Sea Asia conference in Singapore.

“To obtain ship financing has been further complicated, not least for small and medium-sized shipping companies that are already struggling,” BIMCO President Philippe Louis-Dreyfus said in a foreword to the bilateral Shipterm form.

Sanctions, Negative Interest Rates

While drafting the bilateral term sheet, members of the BIMCO sub-committee grappled with several contentious issues.

“A number of provisions are spelled out in the final document while others are in bullet form to serve as a checklist” for the bilateral parties to develop, said Denmark-based Hoppe.

A case in point is the provision of sanctions, wherein banks have varying and particular views on drafting or wording, and it is best not to guide with specifics, he said.

In case of negative base rates, the base rate shall be as agreed between the parties under the bilateral term sheet.

“We do mention the negative base rates but don’t say how it should be agreed upon, leaving it to both the parties,” Hoppe said.

Negative interest rates are applied in certain currencies and markets but there is no agreed approach in the bilateral loan market on how they should be determined and whether it can be fixed at a rate below zero.

The banks that were represented in the sub-committee that finalized the bilateral Shipterm included Deutsche, Citi, HSBC and ICBC. Deutsche Bank has since left the subcommittee ahead of the drafting of the syndicated term sheet but sources said its exposure to consortium-based lending is limited.

“Many banks may not have committed to the Shipterm but have supported it and this will help it to gain market recognition for direct or indirect use,” one subcommittee member said.

Banks do not have to be members of BIMCO to use the form but it strengthens its relationship with the world of finance, Hoppe said.

Banks typically use their own in-house forms for ship financing and BIMCO’s new long form gives them an option to use a standardized version as a starting point for a loan agreement, he added.

The new form can be used for financing or refinancing, and for one or more new or second hand vessels.

“All parties involved will save time and money by having a shorter, simpler and more balanced starting point for their negotiations than most of the individually drafted standards available today,” Louis-Dreyfus said.

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