Marine finance is a form of asset finance used in the maritime industry, particularly to finance the construction or purchase of vessels. When we think about granting security over a vessel, most people imagine a ship mortgage, but there is much more to it than that, as you will see below.
In this blog we use some terms common to marine finance deals. These terms are shown in bold and their meaning is explained further in our Ship Finance guide to commonly used terms.
The Loan Agreement
The first document you will typically see will be a loan agreement. There are many different types of loan associated with vessel security including term loans, revolving credit facilities, construction or development overdrafts or other similar financial products. Whatever the type of loan, the loan agreement will contain a condition that security be granted over the particular vessel.
Vessel Security Package
The vessel security package generally consists of a ship mortgage and a deed of covenant. There may also be a separate assignment or assignation of insurances, depending on the type of relevant insurance(s) and assignment or assignation of refund guarantees or other rights (for example rights under ship building contracts) as well.
- Ship Mortgage
The ship mortgage is the only form of fixed charge or mortgage recognised in the UK over a vessel. It will typically be governed by the law of the ship's flag state and therefore its form is determined by the legal system of that state. In the UK, there are two types of statutory form which can be used and the ship mortgage will be registrable at the UK Ship Register and at Companies House (where applicable).
As the ship mortgage exists in a statutory form there is minimal scope for amendment of the mortgage or the inclusion of additional clauses e.g general undertakings usually found in security documents. For this reason, it is usually accompanied by a deed of covenant executed by the same parties as a document collateral to the ship mortgage.
- Deed of Covenant
The deed of covenant generally secures "assets" which are ancillary to the vessel itself whilst also including a supplementary mortgage over the relevant vessel. Examples of those assets include earnings under contracts/charters, the rights under any insurance policies or rights under ship building contracts. It also contains all of the material legal and commercial terms and conditions of a security document which are not able to be contained in the short/statutory form of ship mortgage.
A standalone assignment or assignation may be used to create fixed security over certain assets (e.g. contractual rights). Assets assigned in security cannot be sold or otherwise dealt with, without the consent of the secured creditor. Depending on the type of marine finance required the assignment or assignment could create security over insurances, shipbuilding contract(s) or refund guarantees. In each case, the relevant counterparty would receive notice that the borrower (or grantor’s) interest had been secured in favour of a lender.
The above security documents are collectively generally known as the marine finance security package, as they relate specifically to the secured vessel.
Other Potential Security Documents
There may, however, be other securities involved as vessel security is often backed by floating charges, debentures, guarantees or even security over real estate.
Where a vessel or its owner operates outside of the UK, there may also be equivalent security required to be granted under the laws of other relevant countries.
In addition to loan and security documents, there will always be various ancillary documents.
Where the vessel is a fishing vessel, a fishing licence undertaking will also likely be required (placing lender-imposed controls on the sale and/or transfer of a fishing licence).
Where the entity granting security over a vessel is a company or LLP, corporate authorisation documentation will be required to note the approval of the relevant board of directors and shareholders to the entry into the security documentation and ancillary documents.
Keep an eye out for further blogs where we will take a deep dive into the specifics of each of the security documents discussed above.
If you require assistance with any type of marine finance, please contact the marine finance team at Brodies LLP.