Posted on: 25 March 2020
International law firm Watson Farley Williams (WFW) has issued a briefing discussing the effects the COVID-19 pandemic is having on Ship Finance.
As a result of the spread of COVID-19, the shipping industry is one of many contending with a global crisis. We have received numerous queries from concerned lenders and borrowers as to the potential effect of the crisis on their English law loan facilities and the following is intended to address at least some of these concerns.
However, each facility agreement is different and, as with any contract, the devil is in the detail, so a review of the relevant agreements is vital before any action should be taken. So far there has not been any UK government intervention which directly affects the issues touched upon in this briefing, but government policy is constantly evolving in response to the crisis so this might yet come.
What provisions commonly seen in a ship financing facility agreement might be triggered by the current global problems?
Any breach of a provision of a facility agreement is likely to constitute an event of default either immediately or after a contractual grace period which will entitle the lenders:
- to accelerate outstanding amounts; and
- to refuse to comply with a utilisation request.
Each facility agreement is different, but the following are standard ship finance facility provisions that are particularly relevant:
These are always deal-specific but the following are the most common:
- EBITDA and similar covenants: A significant fall in group-wide income might also trigger a breach of financial covenants set in relation to the guarantor or topco borrower. However, as these are usually tested by reference to annual audited accounts or semi-annual accounts, it is likely to be some time before a breach will be shown to have occurred.
- Loan to value: A global downturn in the shipping industry is very likely to have an adverse effect on vessel values. Ship values are volatile at the best of times and this is one area where the effect of COVID-19 is likely to have a more immediate and measurable impact where (as is usually the case) the loan facility includes loan to value provisions although often valuations are restricted to set times in each year which might give the relevant borrowers some breathing space.
- Covenant status: One sometimes sees provisions requiring a guarantor to have a minimum share price or rating (such as with Moody’s or S&P). Both are likely to be affected by the global downturn.
- Fall in income stream: It is rare to see income stream covenants looking at charter income (unlike in real estate finance where lease income is often carefully monitored). However, in more structured deals where the loan repayments rely on specific charter income, breach by the relevant charterer of its obligations under the charter might trigger a default as might reliance by the charterer on a force majeure clause, depending on how the events of default have been drafted.
Please use this link to read the briefing in full.