New BIMCO Shiplease – highlights

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BIMCO has recently published a new standard term sheet for sale and leaseback transactions of second hand vessels. The term sheet is based on the well known BIMCO format and contains regulations of key elements of a sale and leaseback transaction.

General:

  • New standard term sheet published by BIMCO for sale and leaseback transactions of second hand vessels, which represent the majority of leasing deals currently being negotiated, but it can be readily adapted to fit structures involving newbuildings or vessels that are undergoing major refit.
  • During the drafting process, the term sheet attracted a lot of interest, and BIMCO received a significant number of comments. However, a lot of the comments were considered too deal-specific to be included in the standard term sheet.
  • The term sheet has been drafted on the basis that it sets out indicative terms and conditions for sale and leaseback transactions, but it does not itself create a binding legal agreement.
  • The term sheet is suitable for use for both operating leases and finance leases, although it may need to be adjusted as appropriate.
  • The layout of the term sheet is familiar, as it is similar to other BIMCO contracts. The term sheet is divided into seven sections: Part I, Part II, Annex A (Details of Vessel), Annex B (Hire), Annex C (Amounts Payable upon Extraordinary Event or Termination Event), Annex D (Change of Control), and Annex E (Financial Covenants). Part I is used to insert the variables that have been agreed between the parties. Part II contains the standard provisions. The annexes can be used to include more detailed provisions, schedules, etc.
  • BIMCO has also published explanatory notes to the term sheet.
  • The term sheet contemplates that Saleform 2012 shall form the basis of the memorandum of agreement and that the bareboat charter shall be based on Barecon 2017.

Highlights:

  • Purchase Price: The term sheet states that the Purchase Price shall be the lower of the Initial Fair Market Value (the average of two current valuations of two brokers) and the Maximum Purchase Price stated in Box 6. In our experience, the parties usually prefer to set a fixed price.
  • QEL: The term sheet states that the Lessor may mortgage the Vessel and onward assign by way of security the Bareboat Charter and any security granted pursuant to the Bareboat Charter to any financiers providing financing to the Lessor, subject to the provision of a letter of quiet enjoyment from the mortgagee to the Charterer on terms reasonably acceptable to the parties. A QEL secures the Charterer's undisturbed use and enjoyment of the Vessel, whether or not the Lessor is in default of its obligations towards its financiers under the relevant loan agreement. Today, it is quite usual for the financiers to provide QELs. However, some banks hesitates to provide a QEL, and argue that they are only providing financing to the Lessor, and not the Charterer, which would effectively be the case for the duration of the Charter Period if the QEL is provided. The financiers will usually require step-in rights to be included in the QEL in consideration of the quiet enjoyment undertaking. This would be even more warranted when an assignment of the bareboat charter alone is subject to a QEL. This may also be reflected in the term sheet.
  • Termination Sum: If a termination event occurs, the Lessor will have the right to take repossession of the Vessel and receive the termination sum as calculated in Annex C. A fixed termination sum can be compared to liquidated damages, and will create predictability for the parties. This is also something the financiers will like to see, as this sum will be used to repay the loan. It is not unusual to include a termination sum in bareboat charters to avoid mitigation issues. The parties should clearly specify how the termination sum is to be calculated in Annex C. The termination sum is usually calculated based on the balance of the lease payments, discounted at a stipulated percentage for the net present value. Alternatively, the termination sum is calculated based on the lease outstanding (principal) with a premium.

Comments:

  • Sale and leaseback structures have been on the rise in recent years, and having a balanced BIMCO standard which can form the basis for the parties’ negotiations is useful.
  • The BIMCO term sheet includes the most important key terms for the negotiation of the memorandum of agreement and the bareboat charter.
  • In our experience, most stakeholders in the leasing industry already have standardized term sheets, which have been developed over the years.
  • We think the new standard term sheet is a good alternative, although it may need to be adjusted as appropriate.