This article is the second of two articles focused on taking security in the financial transactions of ships. This article focuses on the interaction and consideration of the role of third parties in securing asset financing transactions. As in our first article, here we focus on asset financing transactions in the maritime sphere, but the principles and issues highlighted can be largely transposed to other forms of asset financing, especially in circumstances in what the borrower is a special vehicle.
The nature of the security taken in relation to an asset and the asset itself dictates that the lender may need to interact with parties that are not part of the financing, but whose cooperation is necessary for the lender’s security to be effective or at least desirable. provide the lender with the necessary degree of convenience in relation to its warranty rights.
Third party considerations
In our first article “Security in Asset Financing Transactions – Documentation and Jurisdictional Considerations” we discussed the form of collateral that would be taken in relation to a vessel’s earnings, insurance and offsetting requirements (see say, a general mission). Here, we analyze the interaction with third parties / counterparties of the underlying assets that are allocated under this general allocation.
Assignment – Earnings: A boat will generate income through an employment contract, that is, a temporary rental between the borrower / landlord and the tenant, which will be used (in part) to repay the loan. The mortgagee / lender will want to accept an assignment of the income because, unless it was really to take possession of the ship (which for a number of reasons lenders do not always want to do), otherwise they are not automatically entitled to their income. .
In practice, the borrower / landlord and the lender will normally agree that only a notice of assignment will be sent (and therefore meet the latest criteria that would create a legal assignment) to a tenant of employment contracts / long letters time limit. For one-off rentals, it is often the case that in order to alleviate the burden on the borrower / landlord, a notice should only be sent to the appropriate tenants in the event of default. As with all legal assignments, the lender does not need to obtain recognition from the nologator on the notice to ensure the legal validity of the assignment. However, a lender will often request that an acknowledgment be provided, as there are likely to be certain confirmations that the lenders will be willing to offer them to the tenant, for example, confirmations from the tenant that:
- after receiving a notice (usually notified in the event of default) from the lender stating that all profits must be paid into a lender’s account, the corresponding counterparty will pay all profits to that account;
- has not received any notice of any other assignment (this refers to the question of the priority of security interests mentioned above);
- recognizes the mortgage on the ship and the rights of the lender as a mortgage lender in connection therewith.
The above are examples of confirmations that (at the very least) should not be controversial for a tenant. However, if the letter is a long-term rental letter or a bare-chested letter, the lender may be prudent to seek commitments from the landlord regarding their rights under the letter regarding the rights of the landlord. lender as a mortgage lender. For example, the lender may request commitments that the tenant will subordinate all claims it may have against the borrower / owner and the ship to those of the lender as a mortgagee and / or consent to the recovery of possession by the mortgagee. in execution.
Businesses of this nature are likely to require extensive negotiation between the three parties and are not straightforward (especially when the landlord is unaware of the borrower / owner financing agreements or are concerned) and more extensive documentation in the form. of silence letter. Therefore, enjoyment may be required between the lender and the tenant (and, in some cases, the borrower).
However, when the lender only requests certain acknowledgments and / or confirmations from the notice of assignment of the borrower / owner, it is likely that the communication in relation to the service of the relevant notice of assignment and any corresponding acknowledgment will be made between the borrower / owner. and only the tenant, without the direct involvement of the lender. This is usually due to the fact that there is usually a nuanced relationship between the borrower / landlord and the landlord independent of any of the relevant financing agreements where (especially in “vanilla” financing where the tenant is a third party not linked to the borrower / landlord) direct communication between the lender and the tenant may not be considered appropriate.
It can be said that the above issues / practices are usually a problem or at least a consideration for lenders in “vanilla” financing. However, it is worth noting that when the financing structure is one that includes a finance lease, involvement and interaction with the tenant or “tenant” in the security package provided to the lender will be key and, for both will differ from the established one. on top. The reasons for structuring a transaction in this way are varied and go beyond the scope of this article and would require (among other things) any lender to advise on the tax consequences of this structure. However, the main reason for structuring the purchase of a vessel through a finance lease would be to shift the risk of the vessel and the SPV borrower (and its group company) to that of the lessor / lessee. . In this structure, the tenant is intrinsic to the transaction and, as such, some of the practical and technical obstacles to taking security as the “third party” mentioned above would not be relevant.
Commission – Insurance: Borrower / owner insurance is usually distributed in three policies that cover the helmet and machinery, P&I (protection and compensation) and war risks. As stated above, the main resource a lender will have for repaying the loan in case of default will be the boat itself. Therefore, if the ship becomes a total loss or a total constructive loss, this resource will no longer be available. Therefore, lenders require recourse to insurance income.
It is also important to note that in certain cases where a vessel has caused damage to third party property, it may result in the attachment of maritime tax to the vessel. In these cases, the lender will want to access the insurance proceeds to make sure that these claims are dealt with quickly to eliminate any maritime encumbrance as soon as possible.
Unlike the allocation of profits or any letter, the interaction with the corresponding counterparty in relation to the rights assigned and in relation to the insurance will normally be carried out directly by the lender (or, as is more likely) , the lender’s attorney. . The lender’s attorney will contact the insurance brokers directly prior to the date the assignment is to be made to request a series of confirmations regarding the assignment, i.e. that the brokers of insurance companies will agree with the insurers to make the transfer notice effective. (assignment of the rights of the borrower / owner over and over the insurance to the lender) and to the claim clause. The direct nature of this communication is a matter of common practice in the market, as the business relationship between the borrower / owner and the insurance agent is less nuanced and can be said to be in more standard business terms than the which are between the parts of a letter.
Assignment – Compensation Requirement: Compensation by requirement basically refers to all indemnities that may be paid to a borrower as a result of a vessel of his own requisitioned for title or otherwise acquired compulsorily.
This does not include the rental application (what rental amounts would be included in the “revenue” allocation and therefore the provision related to the right to receive such hiring should be included in the clause profit allocation).
The phrase “title requirement” generally refers to the (rare) occurrence in which the flag state that registered the ship’s title required a ship in time of war; ownership of the vessel in such cases is effectively assumed by the state of the flag and equated to all practical purposes for the borrower and the lender that the vessel is a total loss. Therefore, any compensation paid by the flag state government to the borrower should be allocated to the lender.
The interaction of a lender or borrower in relation to the rights of rental requirement or title would be with the corresponding government / state and they would be notified at the time of the requisition of the ship and / or its income. Therefore, the general assignment will normally include the commitments of the borrower / owner who will notify such notice at that time and will also include a power of attorney granted by the borrower / owner in favor of the lender that would allow the lender to execute and notify the assignment notice if the borrower / owner does not. Any interaction with a government or state in this regard is likely to be extremely rare.
In short, taking security into ship financing transactions will often force the parties to consider factors that may not be obvious at first glance and go beyond the trade complexities of the agreement. The relationship that a borrower / owner may have with the lessor of their boat may have their own particularities which a lender may need to take into account when negotiating the form of their security package.