Explanatory notes

• Background
• Nature of the term sheet
• Preamble
• Part I
• Clause 1 (Facility)
• Clause 2 (Purpose)
• Clause 3 (Drawdown)
• Clause 4 (Repayment)
• Clause 5 (Cancellation and Prepayment)
• Clause 6 (Interest)
• Clause 7 (Fees)
• Clause 8 (Finance Documents)
• Clause 9 (Security)
• Clause 10 (Insurances)
• Clause 11 (Representations and Warranties)
• Clause 12 (Covenants)
• Clause 13 (Events of Default)
• Clause 14 (Conditions Precedent)
• Clause 15 (Miscellaneous)
• Clause 16 (Governing law and Jurisdiction)
• Annex A (List of Vessels)
• Annex B (Repayment Profile)
• Annex C (Change of Control)
• Annex D (Information and Financial Covenants)
  
  

Background

Following the decision in November 2014 by BIMCO’s Documentary Committee (DC) to launch work on the development of a standard term sheet for ship financing transactions, a specialist subcommittee was formed. The DC adopted the term sheet in November 2016. BIMCO is grateful to the following subcommittee members for their valuable contributions to the project:

• Mr Francis Sarre, Compagnie Maritime Belge (Chairperson)
• Mr Christopher Conway, Citi
• Mr Daming Qian, ICBC
• Mr Gildas Maire, Louis Dreyfus Armateurs
• Mr Klaus Vilstrup, Dampskibsselskabet NORDEN A/S
• Ms Liv Hege Dyrnes, AS Klaveness Chartering
• Mr Matt Hannaford, Hannaford Turner
• Mr Michael Vernell, Watson Farley & Williams
• Mr Michael Ziesenitz, Deutsche Bank
• Mr Nick Fell, BW Group
• Ms Olga Petrovic, Linklaters
• Mr Peter Willems, HSBC
• Mr Robin Bencard, shipping and structured asset financing consultant
• Mr Xavier Riffaud, INGEPAR 

We would also like to extend our appreciation to those who took part in the consultation process during the drafting. More than 50 representatives of banks, shipowners and law firms worldwide joined the sounding board set up to enable a broader group of stakeholders to provide comments to the draft. The sounding board received the draft twice during the process and returned a substantial number of comments and drafting proposals.

SHIPTERM is a standardised term sheet intended for use in a bilateral, secured term loan ship financing transaction. The term sheet has been prepared for use in transactions between a single lender and one or more affiliated borrowers.

The term sheet has been drafted to reflect market practice. Practice may differ from one jurisdiction to another, and the basis for the subcommittee’s deliberations has predominantly been practice as applicable in the London market. The term sheet may, therefore, need to be amended or supplemented to reflect matters specific to other markets; to the jurisdictions in which the parties are situated and/or to the governing law chosen (if this is not English law).

Importantly, the parties should keep in mind that the indicative/non-binding nature of the term sheet may not be upheld in all jurisdictions. Thus, despite the term sheet being clearly indicated as indicative, it may nevertheless be considered as a legally binding document in certain jurisdictions.

The identity of the parties involved, the nature of their business and the type of vessels being financed may also dictate that the form of the term sheet would need to be amended or supplemented.

The subcommittee’s aim has been to produce a comprehensive standard for the shipping industry, which will be useful to lenders, borrowers and lawyers. The goal has been to provide a concise and simple standard document covering the essential elements of a term loan to be provided by a single bank lender and used to finance commercial shipping assets while avoiding some of the details included in other forms of loan term sheets.

These notes are intended to provide guidance on the term sheet and an insight into the subcommittee's reasoning behind the individual provisions contained therein. The notes do not as such form part of the term sheet.

The standard follows the usual BIMCO pattern of a Part I box layout where the parties will enter the variable information of the document; a Part II consisting of the standard terms and conditions; and four annexes covering a list of vessels; a repayment profile; a change of control provision; and information and financial covenants.

The term sheet does not include a section of defined terms as the subcommittee felt this was unnecessary. However, terms which are capitalised in the boxes in Part I are also capitalised where they are used in Part II.

Nature of the term sheet

The term sheet has been drafted on the basis that it sets out indicative terms and conditions for a term loan facility but it does not itself create a binding legal agreement. As such, there is no provision made for the term sheet to be signed by the parties.

The terms and conditions of the proposed term loan facility, once agreed, are to be incorporated into a negotiated facility agreement and related security documents satisfactory to all the parties.

It is market practice for any term sheet to be accompanied by a commitment letter prepared by the lender in its house form and addressed to the borrower which would specify in some detail the conditions to be fulfilled before a binding commitment between the parties arises (see also the comment on the confidentiality provision in Clause 15).

Preamble

The opening paragraph of Part I sets out the indicative nature of the term sheet, an approach which the subcommittee considers reflects market practice. To avoid confusion, it has been specified that the term sheet does not constitute an offer to finance the term loan facility. It further provides that the provision of the term loan facility is subject to the lender obtaining credit committee approval and the borrower providing mutually satisfactory documentation.

Part I

Part I contains certain essential details pertaining to the term sheet which must be entered in the boxes provided. Each box contains a short description of the intended contents and, where appropriate, a cross-reference to the relevant clause or clauses in Part II.

The content of some boxes may call for further explanation but these will, for practical reasons, be dealt with in the relevant clauses in Part II.

Clause 1 (Facility)

Clause 1 provides that the lender will make a term loan facility available to the borrower on the terms and conditions set out in the term sheet. The final facility agreement will be based on the term sheet as may be amended by agreement between the parties.

The clause specifies that the term loan facility will be the lower amount of the maximum amount of loan stated in Box 6 and the maximum amount available based on the value to loan ratio stated in Box 15. A value to loan ratio will not always be applicable (Box 15 has been made optional for the same reason) and, in such cases, the term loan facility will be equal to the amount stated in Box 6.

The subcommittee considered whether it was practical to incorporate provisions in the term sheet to cover other forms of bilateral financing such as working capital or revolving credit facilities. The subcommittee concluded that this would necessitate incorporating too many optional alternative provisions dealing with, for example, drawdowns, repayments, reductions in the size of the facility and other matters which would confuse users.

Clause 2 (Purpose)

Clause 2 clarifies that the loan may be drawn under the facility for the purpose of financing or refinancing the vessel(s) stated in Box 7. Such vessels may either be described in the box or in Annex A (List of Vessels).

It was felt that the language used in Clause 2 was sufficiently broad to cover most financings likely to be undertaken using a term sheet of this nature, but there is no reason in principle why the purpose should be limited in this way.

Clause 3 (Drawdown)

Clause 3 sets out when and under which conditions the facility will be available for drawing.

Unless multiple tranches have been stated in Box 14, the facility must be drawn in one tranche. If multiple tranches have been agreed these should be described in Box 14, eg the number of tranches and time for drawing. Note that if tranches are contemplated, certain other provisions may need to be amended or supplemented if, for example, each tranche will have a different repayment profile (which could be specified in Annex B) or is dealt with individually in other respects.

If the parties wish to include a very detailed description of tranches, it would be advisable to incorporate such details in Annex B. In such case, Box 14 should merely refer to Annex B.

Clause 4 (Repayment)

Clause 4 states that the loan will be repaid in accordance with the repayment profile described in Box 13 or, if the parties want a more detailed repayment profile, as specified in Annex B (Repayment Profile).

The clause also states the date by which the loan must be repaid in full.

Clause 5 (Cancellation and Prepayment)

The clause sets out provisions relating to voluntary cancellation of the undrawn facility in subclause (a), voluntary prepayment of the loan in subclause (b) and mandatory repayment of the loan in subclause (c).

Subclause (a) Voluntary cancellation
The subclause sets out the borrower’s right to cancel the whole or any part of the undrawn facility and the conditions for such cancellation.

Subclause (b) Voluntary prepayment
The subclause sets out the borrower’s right to voluntarily prepay the whole or any part of the loan once it has been drawn and the conditions for such prepayment.

Prepayment is not restricted to an agreed minimum amount. This is left to the parties’ discretion, who will normally add an amount, multiple or percentage when the facility agreement is being drafted.

Note that the subclause contemplates that a prepayment fee may be payable in respect of the voluntary prepayments listed in paragraph i., but only if specified in Box 22. No such prepayment fee would be payable in any event when the borrower prepays the loan if at that time the borrower would otherwise be under an obligation to make additional payments under the terms of the facility agreement.

Subclause (c) Mandatory prepayment
The subclause lists the circumstances in which the loan must be prepaid.

It was felt that the concept of a change of control should be referenced in subclause (c) in general terms as it is market practice that such an event would cause the loan to become prepayable. However, what constitutes a change of control is so transaction specific that the detailed description would be better included in a separate annex. “Change of control” in relation to a single vessel owning borrower would likely extend to any change in ownership of that borrower’s equity capital but a more nuanced provision might be needed in relation to a holding company or any form of joint venture company. In a number of jurisdictions, the general law may prohibit clauses that effectively prevent shareholders selling their equity interests, especially in relation to listed companies.

Paragraph (c)ii. makes a similar distinction to that in subclause (b) so that a prepayment fee is only payable if specified in Box 22 and when the prepayment arises from actions by the borrower but not where a vessel is a total loss or an intervening illegality arises.

Clause 6 (Interest)

Clause 6 has been drafted on the assumption that the facility will be made available in US dollars and funded on the basis of the London Interbank Offered Rate (LIBOR). If the facility is to be made available in other currencies and/or funded in another market, the provisions of the clause will need to be amended or supplemented to reflect the agreed basis on which interest rates are to be determined and the practice of the relevant market.

The subcommittee recognised that negative interest rates have applied to certain currencies in certain markets. However, the subcommittee was not convinced that there was an agreed market approach in the bilateral loan market on how the “Base Rate” should be determined, should such a situation arise during the life of the loan, and in particular whether it should ever be allowed to be fixed at a rate below zero. It was decided, therefore, that the issue should be recognised in the text of the term sheet but on the basis that the parties would add an additional provision in the term sheet itself or in an additional annex thereto stipulating what would happen in such circumstances. Alternatively, the issue could be addressed during negotiation of the facility agreement.

Clause 7 (Fees)

The clause contains information about the up-front fee and commitment fee and when these are payable. The up-front fee should be stated in Box 20 and should be a percentage of the maximum amount of the loan. The commitment fee should be stated in Box 21 and should be a percentage per annum of the undrawn part of the maximum amount of the loan.

The clause does not cover prepayment fees, which are covered by Clause 5 and should be stated in Box 22.

Clause 8 (Finance Documents)

The clause deals with the relevant finance documents, including but not limited to the facility agreement, security documents and fee letters. These documents should be satisfactory to all parties.

Clause 9 (Security)

Clause 9 lists a number of elements which will form part of the security package and while it contains the usual ship mortgage and associated assignments and is reasonably standard for a single vessel financing, the list will need to be carefully considered in each case to ensure it meets the requirements of the specific transaction. The list provided is not meant to be exhaustive.

In particular, paragraph iv. requires that there be a specific assignment of any charter only if the duration of the charterparty exceeds a period which is stated in Box 28. A typical duration would be 12 months.

Similarly, security over an earnings account and/or security over the equity capital of the borrower is only required if stated in Boxes 26 and 27 respectively.

Clause 10 (Insurances)

The subcommittee recognised that insurance provisions in shipping loan agreements are extensive and lenders often have their own specific requirements. The subcommittee’s approach has been to outline only the required insurance arrangements and it is suggested that if more detailed provisions are required at the term sheet stage these should be added to the term sheet or included in an additional annex.

The clause does require the information in Boxes 23 and 24 to be completed for the clause to be effective.

It was accepted that there was no standard requirement for loss of hire insurance and accordingly it will only be required if specified in Box 25.

Clause 11 (Representations and Warranties)

The clause does not set out a list of required representations and warranties but instead states that the obligors shall make representations and warranties customary for transactions of this nature. These representations and warranties may be subject to qualifications agreed between the parties when negotiating the facility agreement.

This approach was felt to be common in debt markets where the nature of the representations is reasonably standard and where the relevant provisions are not generally the subject of substantive negotiation when documenting the loan. In particular, it was felt that there were no representations or warranties specific to shipping transactions which needed to be highlighted.

Clause 12 (Covenants)

The clause mirrors the approach of Clause 11 in as much as it contains a general requirement that covenants will include those customary for transactions of this nature. However, it was acknowledged that the term sheet should only set out those covenants which were market standard in a shipping finance loan agreement to provide a framework for the parties.

It was agreed that the term sheet should reflect common market practice and restrict the list of covenants to a description of the subject matter of each covenant. It was felt that incorporating fully negotiated and agreed provisions would be counter-productive and was better dealt with in negotiation of the facility agreement. In order to allow for this, the introduction to the clause states that the covenants will be “subject to such qualifications and exceptions as may be agreed”.

The subcommittee is aware of the fact that many financial institutions have strict requirements as to the form and content of certain covenants on matters such as sanctions, bribery and money laundering and it is expected that lenders affected by such requirements may insist that these particular requirements be set out in full in an additional annex to the term sheet.

Subclause (a) Vessel covenants
The subclause sets out the covenants which are specific to the shipping sector. The list contains those which are commonly included in term sheets but it is recognised that other covenants might be appropriate to reflect the nature of the vessel(s) being financed and their particular employment.

Subclause (b) General covenants
The subclause sets out those covenants applicable more generally to the business conduct of the borrower and other obligors. It is recognised that the detailed drafting of these provisions will need to make distinctions between the extent of the covenants given by, for example, a holding company guarantor and a special purpose borrowing company, but it was felt impractical to cover all possible variations in a standard term sheet. The particulars were left for detailed consideration during the facility agreement negotiation process.

The subcommittee was reluctant to include a list of covenants typically required from a special purpose borrowing company when there might be no such entity involved in the transaction. At the same time, there was a wish to recognise that if such an entity was the borrower, customary covenants would be needed limiting its business to ownership and operation of a single vessel and restricting its ability to incur further indebtedness or pay dividends.

Subclause (c) Information covenants
The parties should specify in Annex D the detailed requirements in respect of annual and interim financial statements to be provided to the lender, recognising that this is often a matter for discussion between the parties and driven by the financial statements a particular borrower and/or guarantor produces, when they are produced and whether these are consolidated and/or audited or not.

Subclause (d) Financial covenants
The subclause covers all financial performance covenants.

It includes, in paragraph i., a security maintenance covenant as this is felt to be an almost universal requirement in the shipping sector. It should be noted, however, that the covenant needs to be applied by completing Box 15.

The methodology of valuation of fair market values, the frequency of obtaining valuations and a number of other issues are often heavily debated in negotiating shipping facility agreements, but the subcommittee felt that the term sheet should simply outline the requirements and allow the parties to enter into more detailed discussion of the details at the facility agreement stage of the transaction. Relating to the frequency of obtaining valuations, it was recognised that 6 months might be considered excessive in some trades, but nevertheless found that this period reflected common practice. Valuations by means of automated valuation models (AVMs) are gaining acceptance and, although it was not felt appropriate for the term sheet to refer to AVMs, parties might wish to allow for this by changing the wording of the term sheet accordingly.

The subcommittee wished to recognise that other financial covenants are now very common in shipping loans but these are specifically tailored to individual parties and groups. On that basis, it was better that transaction specific financial covenants were included in an annex to the term sheet. Paragraph ii. provides that such covenants should be set out in Annex D.

Clause 13 (Events of Default)

This clause adopts the same approach as Clause 12 in stipulating that events of default customary for transactions of this nature will apply, while including a checklist of common events to guide the parties during negotiations. Recognising that events of default are often heavily negotiated, the clause also provides that the events of default listed will in any event be subject to qualifications and remedy periods as may be agreed between the parties when negotiating the facility agreement.

Clause 14 (Conditions Precedent)

The subcommittee wished to include a list of standard conditions precedent to assist borrowers in preparing themselves for the documentation process. However, it was accepted that the details of any such list would be heavily influenced by factors specific to the nature of the assets being financed, the jurisdictions relevant to the transaction and a range of other matters.

The list is intended to cover the types of conditions precedent considered common in almost all circumstances but is unlikely to be exhaustive.

Clause 15 (Miscellaneous)

The clause contains a range of unrelated but nevertheless significant conditions to be included in the facility agreement.

Paragraph i. sets out the circumstances in which a lender may sell or transfer its interest in the loan in the future. The subcommittee wished to maintain a balance between the interests of borrower and lender in this provision but recognises that many financial institutions may insist on greater freedom to dispose of its loan assets.

Paragraph iii. contains a general statement that the facility agreement will contain provisions customary for ship financing transactions and lists certain examples of areas that will be covered by the facility agreement.

Paragraph iv. states that the facility agreement will contain customary provisions relating to confidentiality in respect of the term sheet and its contents. It was felt appropriate to include such a statement to remind the parties that the question of confidentiality is important and should be addressed within the transaction documentation.

Clause 16 (Governing law and Jurisdiction)

The clause states that the facility agreement and all other finance documents will be subject to the governing law and jurisdiction stated in Boxes 30 and 31. The governing law is the law the parties have agreed will apply to the facility agreement and all other finance documents. The jurisdiction will determine which country’s courts the parties have agreed should hear disputes that may arise in relation to the facility agreement and all other finance documents.

The clause recognises, however, that ship mortgages will always be governed by the laws of the vessel registries/flag states stated in Box 8 and that in shipping transactions, security over, for example, insurances and charterparties may need to be governed by the law of the market where the insurances are placed or the governing law of the charterparty. It may not be possible to identify definitively the appropriate governing laws for all security documents at the term sheet stage of a transaction.

The term sheet allows the parties to opt for a governing law mutually agreed between them, which should apply to the facility agreement and other finance documents. Parties using the term sheet are reminded that they should always investigate the implications of their choice to ensure that any term sheet they agree does not contravene any laws of the relevant jurisdiction.

The choice of governing law and jurisdiction does not apply to the term sheet itself. This is in recognition of the indicative nature of the term sheet and to avoid that the reference to a governing law and jurisdiction as applying to the term sheet affords the term sheet enforceability.

It cannot, however, be ruled out that the term sheet will be considered as a binding document in certain jurisdictions. Thus, the parties should be aware that the term sheet may be considered subject to the governing law and jurisdiction stated therein, even if this provision is only intended to apply to the facility agreement and other finance documents.

Use of the BIMCO Standard Dispute Resolution Clause was discussed by the subcommittee, but since arbitration is not considered to be market practice for disputes concerning term sheets, it was not found appropriate to include a reference to the clause.

Annexes

Four annexes are attached to the term sheet: Annex A (List of Vessels), Annex B (Repayment Profile), Annex C (Change of Control), and Annex D (Information and Financial Covenants). The parties may add additional annexes as they deem necessary.

Annex A (List of Vessels)

Annex A enables the parties to provide further details on the Vessel(s) covered by the term sheet in addition to the information included in Box 7.

Annex B (Repayment Profile)

Annex B enables the parties to describe the repayment profile used to repay the loan, further to Clause 4. The parties may describe the repayment profile in Box 13, but the level of detail required will normally make it more appropriate to include such information in a separate annex.

Annex C (Change of Control)

Annex C enables the parties to include information relating to change of control, further to Clause 5, subparagraph (c)i.c. This provision will only apply if change of control provisions have been specified in Annex C and the parties therefore have the choice not to fill in the annex if they do not wish change of control requirements to be applicable.

Annex D (Information and Financial Covenants)

Annex D enables the parties to include specifications relating to information and financial covenants. Thus, further information may be included in this annex on the annual audited and semi-annual unaudited accounts required according to Clause 12, subparagraph (c)i. or other financial covenants as may be agreed between the parties in addition to the security maintenance covenant.