In September 2020 the Baltic and International Maritime Council (BIMCO) published the new indicative term sheet "Shiplease". This was drafted to provide the first set of standard terms and conditions for sale and leaseback transactions involving second-hand vessels.
As an indicative non-binding term sheet, the intention is to set out the terms and conditions concerning a proposed vessel sale and leaseback transaction which, once agreed, will be incorporated into:
- a memorandum of agreement;
- a bareboat charter; and
- any related security documents as negotiated by the parties.
As stated by Nick Fell, executive vice president and corporate services and general counsel of BW Group and chair of the term sheet drafting group, "sale and leaseback transactions and structures have been booming in recent years and are now an essential tool for financing the shipping industry". This rise in popularity of alternative sale and leaseback financing, rather than traditional bank financing, has meant that there is an increasing need for standardisation across the market. Wilson Liu, senior director at Minsheng Financial Leasing, demonstrated this by commenting that "there are quite a number of newcomers in the market and having an industry standard is therefore a useful starting point. The term sheet will also facilitate the process for more experienced players".
The Shiplease term sheet does just this, providing a useful balanced starting point for both operating and financial leases for single or multiple vessel transactions. Moreover, although the term sheet has primarily been developed for sale and leaseback transactions involving second-hand vessels, it can easily be adapted for transactions involving newbuilds or vessels that are undergoing major refit. The term sheet has been based upon "Shipterm" and "Shipterm S" (BIMCO's two existing term sheets for bilateral and syndicated term loan facilities) and features the same basic structure throughout. Yet, Shiplease varies significantly from in certain places as it is not applicable to term loan facilities. However, the term sheet is flexible and can be amended or adjusted to suit any specific terms or more complicated arrangements as required on a transaction-by-transaction basis.
Part I of Shiplease follows the customary BIMCO box layout style, allowing the parties to set out the key details of their transaction.
Part II provides an overview of the transaction and contains the standard provisions that parties can negotiate.
The annexes allow the parties to set out more detailed provisions on the important topics of vessel specifics, the hire schedule and the amounts to be paid in case of termination and change of control, as well as financial covenants.
To provide further assistance, BIMCO has also published useful explanatory notes to help parties navigate the individual clauses.
The sale of a vessel will be covered by a memorandum of agreement based on BIMCO Norwegian Saleform 2012, with the purchase price being the lower of:
- the average of two current broker valuations; or
- an agreed maximum price in a fixed amount or based on a separate calculation.
This offers some flexibility for the parties, but the purchase price in a second-hand sale and leaseback transaction will typically be a fixed amount.
Cover for bareboat charter of vessel
The bareboat charter of a vessel will be covered by BIMCO Barecon 2017, which, in these cases, will typically be supplemented by additional clauses. Shiplease includes a useful catalogue of core provisions for leaseback arrangements, including:
- hire;
- charter period;
- termination;
- purchase option or purchase obligation;
- charterer's security;
- insurances;
- representations and warranties;
- covenants (vessel, general, information and financial); and
- termination events.
Provisions for the facilitation of a lessor's financing (subject to a quiet enjoyment undertaking by the mortgagee) and alternatives to a lessor's transfer are also included.
Shiplease, along with Shipterm and Shipterm S, completes BIMCO's suite of term sheets available to financiers, shipowners and their advisers. It is a timely and much-needed effort to standardise sale and leaseback transactions, providing a solid and well-balanced base for negotiation.
