The Shipping guide provides expert legal commentary on the key issues for businesses involved in Shipping. The guide covers the important developments in the most significant jurisdictions.
Last Updated April 24, 2017
Lawrence Rutkowski is head of the Firm's Maritime and Transportation Finance Group, a cross section of attorneys within the firm from the Corporate Finance, Corporate Securities, Litigation and Tax departments with expertise on matters of interest to clients in the transportation industry and is a member of the Firm's Business Transactions Group. In such capacity, Mr. Rutkowski has worked on matters ranging from the formation of joint ventures, asset finance transactions, secured and unsecured lending, registered and unregistered securities transactions, mergers and acquisitions and cross border leases to restructurings and bankruptcy. In addition to representing clients in the transportation and financial services industries, Mr Rutkowski's practice has included considerable experience in equipment finance and in the energy and mining fields. He is a member of the Firm’s Energy Finance Restructuring Team, a highly focused and specialized cross-disciplinary team dedicated to energy sector bankruptcies and restructurings. Mr Rutkowski has been featured on CNN and appeared on both the Fox News and Fox Business networks as an authority on the impact on the shipping business of piracy off the coast of Somalia.
Seward & Kissel LLP is a worldwide leader in maritime finance law. The groundbreaking structured finance and capital markets transactions in the shipping, offshore and logistics arenas have earned the team an international reputation for excellence and innovation. With offices in New York City and Washington, D.C., the firm offers convenient access for clients while maintaining proximity to key financial institutions, shipping companies, legislators, government officials and regulators. The team offers an experienced, highly skilled, dedicated group of partners, counsel, associates and legal assistants distinguished by their industry experience, responsiveness, efficiency, focus and flexibility.
What a wild ride the shipping industry has had of late. The dry bulk shipping market remains depressed by weak demand as 2016 unfolds, with no industry pundit willing to go on record as to when the recovery will finally arrive. Supply growth from the continuing flood of new deliveries spurred by the now false hopes of ever-increasing Chinese consumption has overwhelmed what demand growth there may be. The last twelve months have seen the term “historic low” used to describe the Baltic Dry index all too often. The container market continues to be plagued by overcapacity and crushing competition. In 2015, this segment of the industry witnessed fleet growth of 8%, with deliveries of ever-larger capacity container ships against a backdrop of minimal demand growth, as major economies continued to struggle to reach equilibrium. While new alliances develop among the major liner companies, one wonders whether this alone can do much to stem the tide of rate reductions.
Meanwhile, the offshore supply vessel and drilling platform markets, until recently comprising the growth drivers for the portfolios of some financial institutions, have succumbed to the pressures unleashed by low oil prices. LNG charter rates and vessel utilisation rates declined markedly in 2015 and LPG charter rates have fallen from their highs as fleet growth has outpaced demand and the opening of the new Panama Canal portends a reduction of ton-miles. Only the tanker trades have seemed to retain some vigour as the year progresses, but even that market has seen less than smooth sailing, as the troubles of other shipping segments have cast a shadow over the crude and product tanker segments while investors fret over whether the tanker market is vulnerable to the same fate as dry bulk.
The Impact of Market Vulnerabilty
Of course, this is not the place for market prognostications and this author is a lawyer, not an analyst. Hence, the appropriate query in respect of the above is what does all this mean for shipping finance, shipping finance law and shipping finance lawyers? There are some relatively easy observations to make and, perhaps, some that are a little less obvious. There is a legitimate concern about the flight of capital from the industry. The fact that many banks withdrew from the shipping market following the economic crisis of last decade is well documented. Reportedly, bank loan volume shrunk by two thirds in the period from 2007 to 2009 and, while there was some rebound as economic conditions improved, more banks have now withdrawn (or are withdrawing) from the market. These banks include some of the better known banks that have loaned money to the industry. On top of the shrinking pool of banks, regulatory pressures (eg Basel III) have made it more difficult even for the industry stalwarts that remain to lend into the industry. On top of these obvious issues, as losses mount in non-performing loan sectors (such as dry bulk), the ensuing squeeze on the banks’ balance sheets makes it more difficult for them to loan to performing sectors (such as tankers). It is axiomatic that, to the extent that loans are not being repaid, there is less money for banks to lend in absolute dollars, irrespective of the burden of additional loan loss reserves.
Shipping is a capital-intensive business; it always has been and always will be. At times, capital has freely flowed into shipping, but when the bank market tightened at the end of the last decade and the capital markets grew less receptive to the industry, there were those who thought limits on new capital would finally regulate supply in an industry where the freight markets seemed to distort (with ever-optimistic ship owners ordering newbuildings with every upward spike), rather than control supply. However, there were new entrants in ship finance. Whether through the access of debt in a now burgeoning secondary loan market or through direct investments of equity capital, private equity, hedge funds and family offices discovered shipping. Lured by depressed values in an industry known for its cyclicality, opportunities for quick, robust returns beckoned. In this instance, though, the so-called “first mover” advantage may not have been realised. Indeed, while there have been some successes, there have also been some notable failures, and the perception of a private equity withdrawal from the shipping market clearly exists. Of course, this perception may be erroneous. Some private equity sponsored deals continue to close, especially in dry bulk newbuilding re-sales, but that is a limited market.
So what have we seen over the last year or more? The quick answer is mostly out-of-court and in-court restructuring, some market consolidation and an ever-shrinking loan market. The capital markets remain effectively closed to all but the strongest players. Some of the restructurings have been high profile (eg Eagle Bulk Shipping, one of the largest operators of dry bulk vessels completed its second pre-packaged Chapter 11 reorganisation in a little over two years) but many have involved private companies, big and small, and have been accomplished out of court and under the radar. These restructurings stress banks, who are pressured to extend loan maturities, reduce amortisation requirements and/or relax loan covenants in order for these restructurings to work, and add to the stress upon cash-strapped owners, who are required to come up with even more cash to obtain these concessions from their banks. Some “traditional” ship owners may have the cash if they have stockpiled it during the good years; others may not. And others, notably the private equity sponsors of some shipping companies, may have it but wonder whether now is a good time to invest and whether more investment now will save prior investment, earn a handsome return on its own in the next market upswing or if it is just good money after bad. Certainly in the dry bulk space and the offshore support vessel market there have been times in the last twelve months where earnings could not even cover operating expenses, never mind debt service.
Yes, some loan activity remains and certainly will grow once this round of “amend and extend” transactions and restructurings draws to a close, but this challenging market has demonstrated that legal practitioners in this arena need to know more than how to document a new loan transaction. A lawyer engaged in ship finance today must look beyond the basics. Sure, he or she needs to understand fully all the nuances of perfecting security interests in collateral, but a practitioner also needs to understand the true value of that collateral in the context of a challenging market. More importantly, a lawyer needs to understand whether the value of that collateral will vary depending on where it is located. At least a basic knowledge of the laws of the jurisdictions wherein their client’s vessels or their client’s customer’s vessels operate (or are located and are registered) is essential. One need look no further than a recent Brazilian court questioning whether under local law a mortgage on a non-Brazilian flag vessel could be enforced on a vessel operating in Brazilian waters, or the United States Supreme Court inadvertently throwing into doubt precisely what constitutes a “vessel” under United States law. Perhaps even more consequentially, the rapid development in the use of the United States bankruptcy process by shipping companies with only tenuous connections to the United States demonstrates that it is necessary for practitioners around the globe to understand the consequences of the Chapter 11 petition.
The above are just some of the reasons that in this guide our contributors present answers to important questions about registration of vessels, whether a drilling platform or an FPSO is a vessel, how are maritime liens and mortgages recorded and/or ranked, how are mortgages enforced, how are vessel charters treated in insolvency proceedings, what rights do creditors have in bankruptcy and whether secondary loan trades impact rights in collateral, to name a few.
Shipping finance has grown more complicated over the past several decades and with it the life of the ship finance lawyer. Not that long ago, vessels were financed, often individually, with simple loans over relatively short periods based on LIBOR plus a margin, and probably between bank and customer in the same jurisdiction. Such a transaction is a rarity now. Loans are large, cover fleets or large parts of them and have multiple lenders. Shipping loans are routinely traded in the secondary market when they never were before. The legacy of the high-yield bond market remains. Equity capital markets have created large shipping companies. And at this point in the cycle, shipping bankruptcies are more prevalent than ever. As a consequence, the timing of this volume’s entry into the literature of shipping finance could not be better.
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