The Effects of COVID-19 on Ship & Yacht Finance

As the current pandemic emergency continues to develop around the globe, businesses involved in the world of ship finance, sale and purchase, and construction are beginning to feel the impact on the industry. From shipyard and port closures and travel restrictions for surveyors to volatile markets and currency exchange rates, the issues facing businesses are varied and rapidly changing.

Sale and purchase

Anyone involved in buying or selling a vessel will be familiar with the volume of documentation and work required, particularly Class and survey certificates, and any financing and security.  Some of the larger issues facing current and upcoming transactions arise from the constantly changing travel restrictions around the world, potentially preventing parties from travelling to sign documents, closing certain ports and restricting delivery options, and leaving surveyors unable to get to vessels for inspections.

Classification societies and registries are starting to advise on a case by case basis, but some practical guidance and considerations are set out below:

• Flag registers: flag states are taking action to extend certificate dates, or provide short-term interim certificates where applicable (see for example the MCA’s latest guidance for UK flagged vessels). The approach varies from state to state, but in all cases it is important to start the dialogue as early as possible to find a solution that works for all parties.

• Classification societies: Lloyd’s Register and DNV GL are among those working to provide remote survey options, whilst BIMCO has suggested that all statutory certificates should be extended for at least three months.

• Lenders: for transactions being part or fully financed, banks will be closely monitoring developments. Their key concerns will be ensuring that registration requirements are properly met and their security is not jeopardised, and that the necessary surveys and inspections are carried out so that the vessel’s value can be accurately assessed. Check finance availability periods where deliveries are likely to be delayed.

New builds

The above applies equally to ship and yacht construction, but there are some other factors to take into account, both practical and legal.

• Yard closures: in light of the strict quarantine measures in place in some countries, the shipbuilding industry is experiencing some major disruption. Fincantieri’s yards in Italy have closed for at least two weeks, following pressure from unions and Government restrictions on workers’ movement. A number of Chinese yards have had to do the same. The Government in South Korea has announced a series of measures including low-interest loans and exemptions from port duties to help its own closed yards. Work continues at most US yards, with adjustments to employees’ leave arrangements and travel restrictions, but with many American cities and businesses on lockdown further impacts to the shipbuilding industry seems likely. For clients with vessels under construction we are already reviewing the key dates in their contracts and what constitutes a “force majeure” or “permissible delay”. The application of these concepts will vary with the law of the relevant contract, and the legislation being introduced daily in various jurisdictions to address the outbreak. Depending on the circumstances, it may be time to start looking at disputing declarations of “force majeure” and/or “permissible delays” and/or considering damages for delays, or more serious rights of termination.

• Force majeure: There is no set definition in English law for what events fall within the scope of “force majeure”, and in most cases it will depend on how this is dealt with in the shipbuilding contract. Despite this, the Chinese Government has recently started providing certificates to some Chinese yards, such as Jiangsu New Times Shipbuilding which recently declared force majeure in relation to the delivery of two bulkers. The intention is that it will help those yards in asserting that a force majeure event has occurred, often allowing them to postpone construction and delivery with fewer contractual implications.

Ship finance

As businesses are starting to feel the financial impacts of the coronavirus, banks will be keeping an eye on any existing ship finance arrangements they have with their clients. Banks and borrowers will need to be particularly aware of the following:

• Events of default: cashflow is likely to be an issue for many businesses in the coming months. Financial covenants and events of default will need reviewing and/or may need renegotiation. For borrowers with multiple vessels and financing arrangements, there may be cross-default provisions and it may be advisable to concentrate on the “weakest” link first to protect the financing arrangements as a whole.

• Enforcement: ship finance arrangements typically involve a registered mortgage over the vessel in favour of the bank. Banks will therefore be watching out for whether they need to enforce their security. However, other creditors with claims that may give rights to actions “in rem” against the vessel need to be considered, since action by them may “force the hand” of a financier who was reluctant to take the first enforcement step.

The transport sector is, of course, a key sector in times of crisis. Many governments express a genuine desire to seek to protect transport industries at such times. However, it is not a well understood industry and is certainly not one that will be isolated from the effects of this crisis.

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