In June this year, BIMCO announced the development of a new term sheet for ship sale and leaseback transactions. Following consultation with various stakeholders in the leasing industry, "SHIPLEASE" was published in September 2020.
The development of SHIPLEASE follows the publication by BIMCO in 2017 and 2018 of term sheets for bilateral and syndicated term loan facilities, "SHIPTERM" and "SHIPTERM S".
BIMCO have responded to the rise in sale and leaseback transactions by providing what they say is a balanced industry standard that will provide a useful starting point for newcomers to the market as well as facilitate the process for more experienced players.
SHIPLEASE has been developed for sale and leaseback transactions involving second-hand tonnage, however, BIMCO say it can easily be adapted for structures involving newbuild vessels and is applicable to both operating and finance leases.
SHIPLEASE follows the same structure as SHIPTERM and SHIPTERM S and similarly, the terms and conditions of SHIPLEASE are expressed to be indicative only and will not constitute a legally binding agreement between parties to enter into the transaction referred to in the term sheet. However, unlike SHIPTERM and SHIPTERM S, SHIPLEASE does contain signature boxes.
BIMCO have adopted their familiar box format in Part 1, enabling parties to enter the "…essential details relating to the sale and leaseback transaction" including: the fundamental commercial terms of the transaction (such as the maximum purchase price of vessel (for determining the purchase price under the MOA), charter period including any extension period, fixed charter hire, floating charter hire, default interest rate, fees, whether a purchase option or purchase obligation is applicable, asset coverage ratio (if applicable) for the purpose of any financial covenants, hull insurance ratio and any financial indebtedness threshold); the fundamental details relating to the vessel (such as the name and commercial and technical managers) (further vessel details are set out in Annex A); and important legal terms (such as the choice of governing law and jurisdiction).
Part II contains the legal framework of the sale and leaseback transaction, based on the essential terms set out in Part I, and is split into terms relating to:
(i) the transaction overview;
(ii) the sale of the vessel under a memorandum of agreement (the MOA) which is envisaged to be on NSF (2012);
(iii) the charter of the vessel under a bareboat charter (the Charter) to be based on BARECON (2017); and
(iv) other transaction terms.
The terms relating to the charter are, as expected, more detailed than those relating to the sale and include inter alia early termination events, an optional purchase option and obligation, charterer's security, insurances, covenants (vessel, general, information and financial) and termination events. The other transaction terms include terms relating to conditions precedent, lessor's transfer rights, and the governing law and jurisdiction of the MOA and the Charter.
There are five annexes to SHIPLEASE, namely:
(1) Annex A, for vessel details;
(2) Annex B, for specifying hire (including any advanced hire and frequency of hire payments etc.);
(3) Annex C, for definition of amounts payable upon termination events or early termination events;
(4) Annex D, for change of control provisions; and (5) Annex E, for any deal specific financial covenants.
Given the rising popularity in sale and leaseback transactions as an alternative to traditional ship financing, there is potentially more demand for a standardised sale and leaseback term sheet, where there are numerous newcomers to the market, than there was for BIMCO's standard ship financing term sheet.
We expect that many lessors will still wish to use their own standard term sheets but can see the appeal of SHIPLEASE as a negotiation tool, or even a mere checklist, for less-experienced shipowners who are not ready to instruct lawyers but perhaps need some guidance as to what to expect from a sale and leaseback term sheet.
We anticipate that SHIPLEASE could be a more useful tool and more widely used than we have experienced with SHIPTERM and SHIPTERM S.
BIMCO have said that "In turbulent times, it is important for shipowners to be able to free up capital while maintaining the ability to operate a vessel and trade as owners under a long-term lease." We certainly are experiencing turbulent times and if the sale and leaseback boom continues, it will be interesting to see if and how the industry embraces SHIPLEASE.