Shipping | SHIPLEASE – New standard term sheet for sale and leaseback transactions
Sale and leaseback financing is an alternative to other financing sources, such as traditional bank financing, and has become an important source of capital for many shipowners. We have seen an increasing use of lease financing of vessels over the last years.
The SHIPLEASE term sheet can be used as basis both for operational leases and financial leases. The term sheet is developed for sale and leaseback of second-hand vessels, but is also well suited as a reference point for sale and leaseback of newbuildings and more bespoke arrangements than traditional sale and leaseback of vessels “on the water”, although specific adjustments and additions will have to be made.
Key terms outlined in the new term sheet
SHIPLEASE provides the indicative terms of the sale and leaseback transaction and is not meant to be a legally binding document. The term sheet is subject to inter alia internal approvals and agreement on long form documentation.
The term sheet contemplates that the standard contract for sale and purchase of vessels, SALEFORM 2012, and BIMCO’s standard bareboat charter party, BARECON 2017, shall be used as basis for the long form documentation, supplemented by additional clauses. The term sheet is accompanied by explanatory notes.
SHIPLEASE is based on the standard BIMCO contract set up, with Part I of the term sheet containing general boxes to be filled in, including details of the parties, purchase price, charter hire, purchase option and obligation, governing law and dispute resolution mechanism. Part II sets out further details of the transaction and more detailed clauses, including security, insurances, covenants, termination events and conditions precedent. The term sheet also includes five annexes; (A) details of the vessel, (B) details of the charter hire, (C) termination amount, (D) more detailed provisions on change of control and (E) details financial covenants (if applicable/relevant).
From the standard clauses we highlight the following:
- Purchase price: The term sheet contemplates that the purchase price shall be the lower of the average of two fair market valuations of two brokers and a pre-agreed amount. This has the result that the purchase price in the memorandum of agreement may be different from the purchase price stated in the term sheet. In our experience, the parties normally agree a fixed price rather than a variable purchase price, and it remains to be seen whether the variable purchase price contemplated by the term sheet is a mechanism that will be widely used. The term sheet further contains the possibility of advance hire, being effectively the equity portion (if any) of the financing amount.
- Financial covenants: The term sheet envisages that financial covenants may be agreed as part of the transaction. In such scenario, the term sheet contemplates inter alia an asset coverage ratio linked to the fair market value of the vessel (average of two broker valuations) to the outstanding hire. Breach of the ratio triggers an obligation of the charterer to provide acceptable security or to prepay a portion of the hire in order to restore the agreed asset coverage ratio.
- Cross default: The term sheet contains a cross default clause making a default under the charterer’s/guarantor’s/other obligor’s (as applicable) financial indebtedness a termination event under the BBCP, subject to a threshold to be agreed and inserted in Part I of the term sheet.
- Payment upon termination: The term sheet contemplates that the parties shall agree specified amounts payable by the charterer in case the owner terminates the agreement upon an “extraordinary event” (total loss, illegality and other agreed events) or a general termination event. An alternative to a pre-agreed amount would be compensation for loss calculated based on the actual loss incurred by the owners. The possibility to agree in advance the amount of damages various in different jurisdictions and should be considered based on agreed governing law.
- Lessor’s financing and QEL: The new owner is entitled to mortgage the vessel and assign by way of security the BBCP and security granted under the BBCP to its financiers, provided it obtains a quiet enjoyment letter from its financier in favour of the charterer on terms satisfactory to the parties. There is no standard form of quiet enjoyment letter and the content of quiet enjoyment letters vary.
We support the initiative. As always, the terms will need to be tailored to the specific transaction, the governing law and requirements of the parties involved as there is no “one size fit all”, however, the standardised term sheet provides a suitable foundation and starting point for negotiations of the key terms of a sale and leaseback transaction.
The complete term sheet is available at BIMCO’s webpage: https://www.bimco.org/
Do not hesitate to contact any of BAHR’s shipping team members for further information.