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Ship Finance: A View Rom. And Of The ship Registry

To an onlooker, the classic definition of vessel finance is: finding the money to pay for the ship. One shipowner, attending a conference on the subject "Money and Ships," declared the subject should have been "Money or Ships." Experienced shipping hands know how money can disappear more quickly than the ship can appear. Most executives, however, are at a loss as to why certain decisions are made, and how these decisions affect construction, purchase, and operating costs. This article will describe the linkage between the ship's registry and the money that pays for the ship.

The structure of ship finance is built around the idea that the vessel itself is security for the money that paid for it. The ship mortgag< the basic security agreement, is vital contract from everyone's point of view. If the contract and the law upon which it is based does not meet banker standards, credit will not be forthcoming. The laws of the country in which a ship is registered vary a great deal.

This is important to a lender who does not wish his or her money to disappear too rapidly.

The purpose of a ship mortgage is to give the lending institution, usually a bank or a syndicate of banks, a right to share in the sale proceeds of the ship if there is a foreclosure. Without the mortgage, the lender has no hen. The mortgage also gives the bank other rights, including (possibly) the right of interlocutory sale without the need for lengthy and expensive court proceedings.

It is at the mortgage-drafting stage that trouble can start for the banker and shipowner, partly because bankers to the shipping industry have been historically prone to flashes of excessive enthusiasm during the periodic upswings that characterize the trade. In the 1970s, banks throughout Europe and U.S.

saw shipping as a low-risk growth area, and in some cases they lent to the wrong people, and the wrong ships, at the wrong time.

Stories have been told about ship mortgages being illegally recorded in several places in order to avoid bank hens. Some registries will accept a ship for registration without proper deletion from its previous registry. Banks tend to trust their lawyers, or someone else's, to make sure that the good ship in question has been duly stricken, and the mortgage(s) duly released or discharged, before the ship is registered someplace else.

What the bank doesn't know is that the ship, on which it has a mortgage, has been registered in more than one country. Lenders are often more afraid than the owner is of losing the ship; the ship being the only asset the lender may be able to get his or her hands on.

Shipping is largely asset-based in terms of its financing, and depending on the market, a tanker that is in good condition may be worth almost as much as one that has just been built. Banks therefore look for registries that will look after their ships.

The smart lender looks for a registry that investigates the cause of each major casualty, including unexplained fires and explosions.

Conducting formal inquiries, and whether or not the results of an ivestigation are published will influence the banker's choice of where a flag the ship. There is a definite quality factor in choosing a flag, and astute bankers are aware of certain flag states named suspect by port state control authorities, Most flag states do not fully implement Article 94 of the United Nations Law of the Sea Convention, which lists what a registry is supposedly all about — ideally, part police officer, part jurisdiction, and part document office. A registry should offer a sound legal basis for mortgages, as well as make sure the ship stays out of trouble. Vessel finance, whatever its form, cannot exist without international rules that regulate shipping, and are imposed on a national level. The application of adequate international standards, whether they deal with the safety of ships, the technical requirements for recordation of mortgages, working or living conditions aboard, or protection of marine and coastal environments, are all part of a system of control through national registration. Without this system, the security available to a lending institution that is, the legal system on which it depends — will collapse. The laws applicable to the country in which the owner registers its ship are essential to an orderly regime for financing the construction and purchase of merchant ships. As a part of this system, each ship registry must have in place a structure of corporate ownership laws that is recognized in the courts of major commercial and trading countries, as well as for the sale of securities and publicly-held shipping companies, or public offerings, that will be acceptable to the world's leading stock markets.

A second characteristic of the "registry of choice" is the ability to legislate changes in its operational framework to keep pace with new conditions in financial centers. For example, the recordation and registration process was admittedly simpler when shipping was financed, in earlier decades, almost exclusively on the London and New York markets. Today, the world of ship finance is scattered from Rotterdam to Seoul, and global communications have decentralized the process of registration, often called a "closing." It is those flag states with the highest safety standards and trained personnel that will eliminate outmoded restrictions on debt and security. The progressive registries of today are notable for their ability to adapt to the type of procedures applicable to broader categories of property and equipment finance, whether they originate with European, Asian or U.S. banks. Restrictions on the type of nonmaritime security that may be mortgaged along with a ship are bein eliminated from registration laws in order to satisfy the requirements of sophisticated corporate capital structures. The Liberian and Marshall Islands registries, working with groups of lawyers and bankers in Europe, Asia and the U.S., have enacted a broad range of legal and technical changes in order to adjust their vessel ownership and mortgage laws to the needs of the modern world. As lenders become more wary of being drawn into extended and expensive litigation involving pollution and environmental claims, or loss of life and personal injury, based on even the right of the lender to protect its security interest in the ship, the technical choice and evaluation of a registry becomes a matter of importance




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