Vedder Price P.C. 13th Annual Marine Money Ship Finance Forum November 15, 2012 Chairman s Opening Remarks: Innovation in Ship Finance

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1 13th Annual Marine Money Ship Finance Forum November 15, 2012 Chairman s Opening Remarks: Innovation in Ship Finance Vedder Price P.C. Francis X. Nolan, III Shareholder +1 (212) fnolan@vedderprice.com

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3 MEANING OF THE WORD INNOVATION The introduction of something new A new idea, method or device Can be an improvement to something already existing as well as the creation of something radically new Adaption of a device or method used in one context or application to a new context or application 3

existing as well as the creation of something radically new Adaption of a

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6 MEANING OF THE WORD INNOVATION What structured innovations have we seen in ship finance? 6

7 PREFERRED MORTGAGE OR STATUTORY SHIP MORTGAGE Why? Addresses the limitations in financing vessels through bottomry bonds Shipping moved from wood and sail to steel and steam Cost now much greater and can t be financed over voyage duration; mortgage allows: longer terms protection from usury laws (carryover from bottomry statutes) favorable position vis á vis maritime lien creditors favorable position vis á vis judgment creditors unlike bottomry bonds, amounts secured need not be tied to vessel operation 7

now much greater and can t be financed over voyage duration; mortgage allows: longer terms protection from usury laws

8 CREATION AND EXPANSION OF FLAGS OF CONVENIENCE Flexibility in evolution of concept of genuine link has resulted in the dramatic inversion of the ratio of national flag tonnage to Open Registry tonnage. Why? Tax neutral, sometimes tax advantaged Commercial approach to managing registries and flags Ease of entry and departure Adherence to international safety regimes 8

9 CREATION AND EXPANSION continued OF FLAGS OF CONVENIENCE Why? Credible infrastructure for flag operation and discipline investors and lenders trust these flags and know that they can knock on a door in major international commercial centers like New York, London, Oslo, Hamburg and Tokyo with good contact to the registry administration. Marshall Islands, Liberia, Vanuatu, at least, have maritime laws and regulations that are either based on U.S. law or heavily influenced by it. Other benefits: Open Registries have probably aided harmonization of international regulations of ships since, by year 2000, over 80% of major oceangoing tonnage was registered in only a few open registries. 9

centers like New York, London, Oslo, Hamburg and Tokyo with good contact to the registry administration.

10 BANKRUPTCY LAW, CHAPTER 11 AND CHAPTER 15 A stop on the way down the drain? These proceedings have evolved to make shipping company restructurings more possible, allowing for a rationalized approach to sorting out creditor and claimant rights. 10

11 INNOVATIONS IN THE PIPELINE Example is the pending adaptation of title retention structures to traditional ship mortgage provisions. The Marine Finance Committee of the U.S. Maritime Law Association developed draft amendments to U.S. law which would allow a financing charter to be filed and recorded as a preferred mortgage. The Concept: Bareboat Charters which are intended to function as security devices, as in title retention structures, would be treated under the law as other security devices. An owner in such a structure would be treated as a mortgagee and would not face uncertainties associated with recharacterization. 11

The Concept: Bareboat Charters which are intended to function as security devices, as in title retention structures, would be treated under the law as other

12 continued INNOVATIONS IN THE PIPELINE Why? Why not? This is how aircraft and railcar finance is done as well as much other personal property finance. Proposal specifically states that filing of a charter in the registry, by itself, does not make the charter a financing charter. The nature of the charter will be subject to determination on its merits. 12

13 continued INNOVATIONS IN THE PIPELINE Example: U.S. bankruptcy court would determine whether charter constitutes a lease or a security agreement. If the charter is deemed to be a lease, the owner would be entitled to the vessel as its owner. If the court were to determine that the charter is a security agreement, the owner would be deemed to have perfected its security interest by filing at the registry and the owner (mortgagee) would have the priority not only of a perfected secured party, but also the enhanced priority of a preferred mortgagee. 13

If the court were to determine that the charter is a security agreement, the owner would be deemed to have perfected its security interest

14 continued INNOVATIONS IN THE PIPELINE International Recognition: When it comes to enforcement in U.S. Courts, U.S. law defines a preferred mortgage to include: a mortgage, hypothecation, or similar charge that is established as a security on a foreign vessel if the mortgage, hypothecation, or similar charge was executed under the laws of the foreign country under whose laws the ownership of the vessel is documented and has been registered under those laws in a public register at the port of registry of the vessel or at a central office. 14

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16 continued INNOVATIONS IN THE PIPELINE So where is this innovation now? DOA in the constipated and dysfunctional process of the U.S. Congress. But alive in the legislature of the Marshall Islands and Liberia. The concepts of U.S. MLA proposal were adapted by the MLA s Marine Financing Committee to suit the language and organization of the Marshall Islands and Liberia, and it is hoped and expected that these proposals will be adopted in those registry states within the coming years. 16

But alive in the legislature of the Marshall Islands and Liberia. The concepts of U.S.

17 continued INNOVATIONS IN THE PIPELINE Criticism: This idea only addresses a U.S.-focused problem. Not so. Has implications for any ship trading to the U.S. for any investor/lessor/lender where lessee or charterer may file for bankruptcy in the U.S. and look at who has filed in the past. Allows a lessor who finances vessels in the Far East or Latin America to have measure of security knowing that if its property/collateral transits from a region where title alone determines ownership to an area where that s not so, the new provisions would support a new measure of safety for the lessor s claim to the vessel. The device allows an investor to more safely explore financing products that mix fixed returns with market upside potential, possibly enhancing the returns and justifying the risk in shipping assets. 17

Allows a lessor who finances vessels in the Far East or Latin America to have measure of security knowing that if its property/collateral transits from a region where title alone determines ownership

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21 13th Annual Marine Money Ship Finance Forum November 15, 2012 Chairman s Opening Remarks: Innovation in Ship Finance Vedder Price P.C. Francis X. Nolan, III Shareholder +1 (212) fnolan@vedderprice.com

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