by Idil Erbil, Solicitor and Marine & Aviation Claims Consultant
INTRODUCTION
Some key decarbonisation initiatives are significantly affecting the shipping industry. These include International Maritime Organization (IMO) strategies, which enforce a 0.50% sulphur cap on marine fuel and the Poseidon Principles which integrate climate considerations into lending decisions in ship finance. Other important initiatives include the Energy Efficiency Design Index (EEDI), Emission Control Areas (ECAs), and the Ballast Water Management Convention. As a result, there is not a single day in the shipping industry without one hearing the word “decarbonisation.”
Since the concept became paramount in the sector, ship finance lawyers have started to do origami with financial tools to fund environmentally friendly ships and retrofit existing fleets. The traditional and most common way of financing ships has been through debt and equity financing. However, in recent years, the ship sale and leaseback structure has gained attention as one of the key tools for financing the acquisition of ships. In this structure, a shipowner sells the vessel to a buyer and then leases it back, allowing the shipowner to continue using the vessel while freeing up the capital tied up in it.
This article delves into the benefits of sale and leaseback structures for the shipowners, highlighting how they can be used to finance environmentally friendly ships and retrofit existing fleets.
ADVANTAGES OF SALE AND LEASEBACK STRUCTURES IN SHIP FINANCE
- Liquidity Benefits
The shipowner converts an illiquid asset (vessel) into cash through this structure, which can be particularly helpful since traditional debt financing from banks and financial institutions has become limited in ship finance due to increased regulation, risk aversion, economic difficulties, and the current focus on greener projects. Consequently, shipowners seek alternative structures to gain cash liquidity. This structure allows shipowners to obtain financing without depending entirely on bank loans, enabling them to use the cash for various purposes, such as paying off debt, funding environmentally friendly ships, or investing in retrofitting existing fleets with green technologies.
- The Recent Market Expansion
The number of leasing companies in this market has increased. Chinese, Japanese, South Korean, and Hong Kong financial institutions are active players in this business area. Recently, Greek banks have also started to aggressively offer sale and leaseback structures for vessels and fleets. The increased number of lessors in the market has led to competitive pricing and a variety of structures. As a result, shipowners can have several leasing options available to them.
- Provide Options of Lease
In this structure, lease terms can be tailored in duration and payment structures, providing shipowners with options to adjust to changes in market conditions. For example, leasing can be arranged as either an operating lease or a finance lease, depending on the preferences of the parties.
- Off-Balance Sheet Financing
Depending on the lease terms, the asset and the associated liability may or may not appear on the shipowner’s balance sheet, potentially improving financial ratios. Operating leases do not show up on the balance sheet, which enhances financial ratios and creditworthiness. In contrast, finance leases do appear on the balance sheet.
- Customisable Lease Terms to Comply with Ongoing Environmental Regulations
The lease terms can be tailored to include provisions for the lessor to undertake vessel maintenance and repairs. This could involve installing scrubbers and other energy-efficient equipment at nearby shipyards to comply with ongoing environmental regulations. Incorporating such a term would provide additional benefits to the shipowner beyond the financing options offered.
- Tax Benefits
Lease payments (hires) are often tax-deductible as business expenses, which can provide tax benefits to the lessee.
- Streamlined Transactions
BIMCO has developed SHIPLEASE, a standardised term sheet for ship sale and leaseback transactions. Although it was primarily designed for second-hand ships, it can be adapted for newbuilds or refits. This standardisation has made transactions more straightforward, allowing most deals to be closed within only a few months.
CONCLUSION
In conclusion, the sale and leaseback structure has emerged as a pivotal financing tool for the shipping industry, usable in the context of decarbonisation initiatives. This structure offers multiple advantages to shipowners, including liquidity of vessels, increased worldwide options of lessor (financial institutions), customisable lease terms that enable compliance with environmental regulations, off-balance sheet financing, tax deduction, and streamlined transactions. As traditional debt financing becomes more restricted due to stringent regulations and a growing emphasis on sustainable practices, sale and leaseback arrangements provide a flexible and efficient financing tool. By enabling shipowners to unlock capital, fund environmentally friendly ships, and retrofit existing fleets, these structures support the industry’s transition towards a greener future while maintaining operational continuity and financial stability.
RESOURCES
Bimco
Hellenic Shipping News
Tradewinds
Seatrade Maritime
