Nowadays, shipping is considered as an international industry with a high concentration of capital investment where huge sums are generally required to back acquisitions of vessels. A common system used by prospective ship owners, for the finance of ship purchases, is that provided by commercial banks. Nevertheless, there are other sources of financing namely equity, leasing and bonds issuance.
Ship financing entails the provision of assets by the bank to the prospective ship owner (the borrower) in exchange of securities registered in favour of the bank as part of its risk management procedure. Involved parties examine financing from a different, often opposing angle. The bank is commonly interested in gaining a substantial economic return over the financed funds. On the other hand, a borrower is normally interested in obtaining a high percentage loan with the least securities possible to the bank. Important matters such as terms of interest and loan periods are generally assessed by the bank on a case by case basis and involve thorough negotiations with the borrowing party before an agreement is finally attained.
Generally, financial institutions follow defined market criteria when supplying finance. Having said so it is not always feasible to classify or group such criteria. It could happen that for the same project, different banks necessitate distinct conditions and securities. Thus, loan packages are oftentimes tailor-made to the particular project in question depending on the bank’s approach vis-à-vis risk management.
In fact, a huge concern to financial institutions is connected with risk management. Examples of risks associated with shipping industry include situations where a borrower is not capable of executing his contractual obligations namely repayment of the loan (credit risk) and situations where the vessel is damaged or lost at sea due to natural calamities, technical faults in the ship’s equipment or otherwise.
Regardless of the fact that there are rules in place to control risk management, effective risk management by a bank calls for an in depth analysis of the project in order to prevent failures.
Another important issue directly linked with the element of risk is the security available to financial institutions upon providing finance. Security is fundamental to financiers especially when considering that the shipping field is constantly burdened with a lot of risks and that furthermore the purchase of ships involves large costs. Security not only serves as protection to banks but also makes prospective ship owners more responsible and accountable when opting for finance. The main form of security demanded by banks consists of a mortgage over the vessel to be purchased. Other forms of security, such as pledging over assets property of the borrower, are normally required by the bank depending on the type of project and the borrower’s financial repute.
Mortgages under Maltese Law enjoy the status of an executive title. Holders of executive titles, in our case mortgagees, can implement their rights upon default by presenting a notice to the ship owner (acting as the mortgagor), without the need to first obtain a Court judgement. Moreover, since vessels are considered as separate legal entities from the patrimony of their owner, in the case of bankruptcy of the owner of a ship, any actions and claims on the ship shall have preference over other claims and debts of the ship owner’s estate.
Ultimately, for every finance transaction executed, financial institutions’ main concern is to ensure that their interest is secured. This way they are able to guarantee a flexible approach towards prospective ship owners interested in purchasing a vessel, be it a yacht or a ship.
