BIMCO has enhanced its ship finance term sheet suite by introducing SHIPLEASE, an industry first standard for ship sale and leaseback. SHIPLEASE is an indicative term sheet for use in both operating and finance leases. It has been developed mainly for second-hand ships but can be adapted to fit newbuildings.

Christian Hoppe, BIMCO’s General Counsel, talked to some of the members of the committee drafting SHIPLEASE – Nick Fell of BW Group, who chaired the committee, Wilson Liu of Minsheng Financial Leasing Co., Shen Zhao of CSIC Leasing Co. and Matt Hannaford of Hannaford Turner – about the reasons behind bringing this form into the market and some of the form’s features.

CH: It was particularly important for BIMCO to involve leasing companies in the development of SHIPLEASE to make sure it meets the needs of leasing companies looking for a standard for their sale and leaseback transactions. Have we succeeded?

WL: SHIPLEASE is meant as a balanced “one size fits all” standard which contains the elements which are likely to be relevant to most, if not all, ship sale and leaseback structures. The drafting committee carefully considered what was likely to apply to the vast majority of sale and leaseback transactions, as opposed to very deal specific elements which went beyond the scope and purpose of the term sheet. On this basis, I think SHIPLEASE is an excellent reference and starting point for both experienced and less experienced users.

SZ: I can only echo that. At the same time, SHIPLEASE is very user-friendly in the sense that the parties can readily adapt it to fit their deal specific needs. This will be important for the form’s acceptance in the market. Not only can parties include the variables agreed in Part I, which is the familiar box layout at the front; they can even adapt Part II, which contains the standard provisions. The annexes included at the end of the term sheet are also very useful as they make it possible for the parties to include more detailed information in relation to key features and bespoke terms such as change of control and financial covenants.

NF: Let me start by saying that we were obviously thrilled to have four of the major Chinese leasing companies on board. The balance of the form cannot be overestimated if we want the term sheet to be accepted and used in the market, and the involvement of the leasing companies in the development of the new form is obviously key to making that happen. Looking back, we set out to develop a standard which is genuinely useful to financiers, shipowners and their advisors, and I think SHIPLEASE fits the bill.

CH: Why is the timing right for a standard form ship sale and leaseback term sheet?

NF: Sale and leaseback provides a viable alternative to traditional financing of ships and a standard industry form can provide the parties with a fair and balanced starting point for their negotiations. BIMCO has already developed two other term sheets for ship financing – SHIPTERM and SHIPTERM S for bilateral and syndicated term loan facilities respectively – and it was therefore a natural step to develop one dedicated to the rapidly growing number of sale and leaseback deals.

WL: I agree. Some leasing companies may have their own standard forms but there are quite a few new entrants to the market who can use the BIMCO form as the basis for their deals. I am sure that even the more experienced leasing companies will look to the new BIMCO form when drawing up their agreement. The parties should easily be able to adapt the term sheet to fit their particular needs. The explanatory notes accompanying SHIPLEASE point to some of the issues that have to be addressed if for example the form is used for newbuildings.

CH: SHIPLEASE contains signature boxes which is not the case for the other two BIMCO term sheets. Why were these included and how does this fit with the term sheet being indicative only and therefore non-binding?

SZ: It is quite common for leasing companies to sign the term sheet before obtaining credit approval. We therefore felt it would be useful for SHIPLEASE to include signature boxes so that there is a place where the parties can sign, if need be. In cases where no signatures are needed, the parties can simply leave the boxes empty. It is a very pragmatic approach, really.

MH: As the term sheet contains an express statement that its terms and conditions are indicative only and do not constitute a binding agreement, from an English law perspective, signing the term sheet will not compromise its non-binding status. However, this may not be the case in other jurisdictions where courts may find the term sheet (or parts of it) to have binding effect (whether signed or not). If parties have concerns on this point they should seek clarification from their legal advisors.

CH: Why did the drafting committee decided not to cater for Japanese Operating Leases with Call Option (JOLCOs), French tax leases, etc.

NF: SHIPLEASE is meant as a framework document which the parties can adapt to fit their particular needs. It was suggested in the consultation process to add JOLCOs etc. but we felt it would add too much complexity to the term sheet. The same was the case for French tax leases and similar structures. That said, if SHIPLEASE is used for such transactions, we believe it can be readily adapted to be fit for purpose. I am also confident that the form will be fit to be used as the basis for future lease structures that will inevitably evolve.

MH: The approach is the same as when BIMCO developed SHIPTERM and SHIPTERM S a few years ago. We maintained the level of detail in the various provisions e.g. when not setting out a full list of required representations and warranties but instead stating that the obligors shall make representations and warranties customary for transactions of this nature. One area, though, where we departed slightly from this is in relation to sanctions and compliance. Here, we added a new condition precedent relating to satisfaction of know your customer, anti-money laundering and other compliance requirements. The covenants section includes a similar reference but in this case it was considered appropriate to also make it a condition precedent that the compliance requirements are met.

CH: SHIPLEASE deals with extraordinary events in Clause 9 and termination events in Clause 18. How do these two clauses fit together?

SZ: There is an important distinction between these two clauses. Clause 9 lists the typical circumstances in which the charter party will terminate early regardless of fault on the part of the charterer. This can be one of the listed circumstances, namely actual or constructive total loss of the ship and illegality, but we have also left a placeholder for other circumstances which the parties might wish to add. It is important to keep the extraordinary events distinct from the more fault based termination events listed in Clause 18.

MH: In relation to termination events, we were mindful that these are often heavily negotiated. For this reason, the clause provides that the listed termination events will in any case be subject to qualifications and remedy periods as may be agreed between the parties when negotiating the full documentation. To help users, we also included an annex where they can insert the basis of calculation for the extraordinary event amount and for the termination sum which should apply in case of such events.