Thailand: Shipping Loan Reps & Warranties

Last Updated: 30 January 2018
Article by Kevin Bourque

Shipping Loan Representations & Warranties, Covenants, Events of Default standard Conditions Precedent – Securitization and Syndication friendly terms

The following provisions are a compendium of useful drafting and review criteria, put together by Kevin Bourque, Senior Counsel, Hughes Krupica, which can be used as a road map or checklist for syndicated and securitization friendly facility agreements and facility agreements generally. While not exhaustive this can be useful for non-shipping finance lawyers, shipping in-house counsels and shipping companies. These provisions pre-suppose the borrower is an SPV and not a trading corporate.

Representations and Warranties

Usual and customary for a syndicated and securitisation transaction including but not limited to:

  • Status / Due incorporation.
  • Power and authority under constitutional documents to enter into to enter into transactions contemplated by transaction documents and to carry out its business and own its assets.
  • All necessary, licenses and authorizations obtained to enter into transactions contemplated by transaction documents and to carry out its business and own its assets.
  • Non conflict with other obligations (laws, constitutional documents or other documents).
  • Legal validity, enforceable, binding obligations and admissibility in evidence of documents (full force and effect language).
  • Good title and ultimate beneficial ownership of its assets generally.
  • No insolvency proceedings.
  • The Owner has not traded or carried on business.
  • The Owner has no employees or obligations in respect of any pensions scheme save for the Master, officers and crew of the Vessel.
  • The Borrower is owned (legal and beneficial ownership) by the [Shareholder][Partnership].
  • No breach of laws and compliance with all applicable laws (including but not limited to ISM/ISPS etc...).
  • The effectiveness of any submission to jurisdiction in connection with the Facility and the choice of governing law of the Facility Documentation.
  • Taxation: no withholdings or deductions, no filing or stamp duty.
  • No defaults.
  • No misleading information generally
  • Accuracy of latest financial statements.
  • Pari passu ranking.
  • No material adverse change (from initial discussions/signature of term sheet).
  • No material litigation, arbitration or administrative proceedings current pending or threatened.
  • No material liabilities (including contingent liabilities).
  • Environmental compliance and no environmental claims.
  • No existing security interests.
  • Ranking and effectiveness of Security (legally valid, binding, enforceable, 1st priority charges).
  • Copies of constitutional and underlying transaction documents provided are true and correct.
  • Accounting Reference Date.
  • Condition of Vessel.
  • No material breach of the Time Charter and Bare boat Charter.
  • Mandatory Insurance in place.
  • Ability of Managers.
  • Vessel in Class

The Borrower will make these representations (including but not limited to the following) on the date of the Facility Agreement and certain representations to be agreed will be repeated on the date of Drawdown and on each interest payment date.

Information Covenants:

The Borrower [and the [Shareholder][Partner]/Guarantor (if appropriate)] will provide each of the following:

  • All documents dispatched by the Borrower [and the [Shareholder][Partner]/Guarantor (if appropriate)] to the Shareholders or to the Borrowers's creditors generally.
  • Details of any material litigation, arbitration or administrative proceedings.
  • Such other information regarding the financial condition, business and operations of the Borrower/[Shareholder][Partner]/Guarantor (and any Borrower/[Shareholder] subsidiaries) as the Lenders may reasonably request.
  • Notification of default under the Facility Agreement, Security Documents or other material contracts.
  • Know your customer requirements.
  • Vessel data, valuation data.
  • Quarterly reports on financial and operating performance of Vessel. Exact form of data to be decided by the Facility Agent.
  • Copies of all Bank account statements to be provided to the Facility Agent at the Facility Agent's request, preferably in an electronic format.

General Covenants

Usual and customary for a syndicated and securitization transaction of this type including but not limited to the following matters:

  • Borrower to provide detailed information and documentary evidence of insurance coverage upon request.
  • Possession and maintenance of all authorisations required for its business and ownership of its assets.
  • Compliance with applicable laws (including but not limited to ISM/ISPS etc...).
  • No merger, re-organisation or change of control.
  • The Borrower not to engage in any business other than operation of the Vessel except with the prior approval of the Facility Agent.
  • Taxation compliance. no withholdings or deductions, no filing or stamp duty.
  • All necessary action to register (English law Charges/Assignments (Insurances, Earnings, Accounts, Bareboat Charters, Building Contracts, Refund Guarantees), perfect and maintain Security (and priority thereof).
  • Restrictions on disposals (disposal of the Vessel permitted if prepayment of the Facility made plus prepayment fee and breakage costs, if any).
  • Restrictions on entry into contracts other than ordinary course of business (subject to agreed exceptions) no acquisitions or investments and, in addition, the Borrower shall not [bareboat charter][time charter] the Vessel to anyone else except the [Bareboat Charterer][Time Charterer] without consent of the Facility Agent.
  • Charters entered into on an arm's length basis.
  • The Borrower will not incur additional indebtedness or issue guarantees or become liable for third party indebtedness [except to the Shareholder/Guarantor (and then only on a fully subordinated basis)] except for unsecured trade credit incurred in the ordinary course of business limited to $["] at any time.
  • Environmental compliance.
  • All of the Borrower's assets to be free of all debts, mortgages or other encumbrances, except for the Security Documents (which represent first priority security over all of its assets) and Permitted Liens (being liens for master's, officers' or crews' wages outstanding in the ordinary course of trading, liens for salvage and any shiprepairer's or outfitter's possessory lien for a sum not exceeding [$"]). [Neither] the Borrower [nor the Shareholder] will [not] create any form of security, including quasi-security, over any of its assets or revenues, except with the Facility Agent's consent.
  • No change to the Borrower's [or the [Shareholder][Partner]/Guarantor's] constitutional documents.
  • Borrower to procure that material creditors [(including the [Shareholder][Partner]/Guarantor)] agree not to petition for the Borrower's insolvency or related proceedings.
  • Separateness covenant, including obligations of the Borrower:

    • to keep separate books and records;
    • to maintain separate accounts;
    • not to co-mingle its assets;
    • to conduct business in its own name;
    • to observe all corporate and other formalities required by its constitutional documents;
    • to prepare separate financial statements;
    • to maintain an arms-length relationship with the [[Shareholder] [Partner]Guarantor];
    • to pay its liabilities out of own funds;
    • to maintain adequate capital;
    • not to become liable for third party obligations or pledge the Lenders' credit;
    • not to make available any loans or advances to any entity including the [[Shareholder][Partner]Guarantor];
    • to use separate stationery, invoices and cheque books;
    • to hold itself out as a separate entity; and
    • to correct any known misunderstanding regarding its separate identity.
  • The Borrower to have no employees, save for Master, officers and crew of the Vessel.
  • The Borrower not being a member of a VAT Group.
  • The Borrower shall be 100% owned, directly or indirectly, by the [[Shareholder(s)][Partners(s)]]Guarantor].
  • All [Shareholder][Partner](s)/Guarantor loans to the Borrower [and all claims of the [Shareholder][Partner](s)/Guarantor against the Borrower], sums owed to the Managers and all other material claims against the Borrower to be fully subordinated whilst any amount remains outstanding under the Facility Agreement.
  • Unless reasonably incurred in the normal course of business, the Borrower shall not enter into any transactions without the prior written consent of the Facility Agent.
  • The Class, Flag, Managers (including terms of management) and the Time Charter and the [Bare boat Charter of the Vessel not to be changed without the prior written consent of the Facility Agent.
  • No shareholder profits or other distributions, of a revenue or capital nature, or payments of principal or interest on debt to related entities or persons, while the Borrower has any remaining liability in connection with the Facility Documents unless the Borrower [and the Shareholder/Guarantor] [is] [are] in compliance with the Financial Ratios (as defined above)[: insert relevant financial tests].

Affirmative Vessel Covenants

Usual and customary for a syndicated and securitized transaction of this type, including but not limited to:

  • Vessel to be registered in a jurisdiction acceptable to the Facility Agent.
  • No Change of vessel name or Flag – without prior consent of Facility Agent
  • Borrower to hold good, marketable, absolute title and entire beneficial interest in the Vessel, Insurances and Earnings.
  • The Vessel to be managed by commercial or technical managers (the "Managers") approved by the Facility Agent. The terms of the Management Agreement(s) to be acceptable to the Facility Agent and to include appropriate duty of care terms acceptable to the Facility Agent.
  • The Borrower, the Manager(s) and the Vessel to be in the possession of proper trading certificates and to comply with other relevant regulations (including the ISM/ISPS Codes).
  • The Facility Agent will have the right to arrange for an inspection of the Vessel on an annual basis, at Borrower's cost and to request and receive latest complete technical reports from the Managers.
  • The Vessel shall be classed with a class notation and with a classification society which shall be acceptable to the Facility Agent. Furthermore, the Vessel shall be free of all recommendations and qualifications unless otherwise agreed by the Facility Agent in writing. The Facility Agent will require to be notified of the Class and the Classification Society with which the Vessel will be classed at least 15 days prior to the date of initial Drawdown of the Facility.
  • Restrictions on entering into, granting, amending, waiving, surrendering and forfeiting charterparties and consenting to assignments, sub-charterparties and charter hire reviews (subject to agreed exceptions).
  • Maintenance of appropriate Mandatory Insurance.
  • Compliance with applicable environmental laws and licences.
  • Borrower to procure that any charterparty in respect of the vessel (including, without limitation, any bareboat charterparty entered into by the Borrower or by any subsequent disponent owner) contains a provision whereby a copy of any jointly appointed independent inspection report accepted and signed by the owner/disponent owner and charterer in respect of the vessel is provided to the Borrower with full rights of disclosure to the Facility Agent.
  • Borrower to provide the Facility Agent with a copy of any jointly appointed independent inspection report accepted and signed by the owner/disponent owner and the charterer in respect of the vessel which is issued during the Facility Period, promptly upon the issue of any such inspection report and whether or not the Borrower is party to any such inspection report.

Securitisation

The Facility Agent may include all or part of the Facility in a securitization or similar transaction without consultation with or consent of the Borrower or the Shareholder(s)/Guarantor. The Facility Documentation will include various provisions in this regard including:

  1. The requirement for all earnings to flow through and into dedicated bank accounts (including, where applicable, bank accounts opened with the Facility Agent).
  2. A requirement for the Borrower [and the [Shareholder][Partner](s)/Guarantor] to assist the Facility Agent to achieve a successful securitization (or similar transaction) provided third party costs are met by the Facility Agent.
  3. Insurances to be with insurers of the requisite rating and bank accounts to be held with banks of the requisite rating.
  4. No restrictions on transfers in connection with or in contemplation of the securitization (or similar transaction).
  5. Full rights of disclosure of information in connection with or in contemplation of the securitization (or similar transaction).]

These will include customary terms for a transaction of this nature dealing with issues such as:

  1. Increased costs.
  2. Illegality.
  3. Market disruption.
  4. Mitigation by the Lenders of circumstances giving rise to the above.
  5. Breakage costs.
  6. No set off (other than required by law).

Market Terms

Usual and customary for a syndicated and securitized transaction of this type, including but not limited to:

Events of Default

  • Payment default.
  • Breach of insurance requirements.
  • Breach of Covenants and Minimum Value.
  • Breach of other obligations under the Facility Documentation.
  • Misrepresentation.
  • Compulsory acquisition and/or expropriation of the Vessel.
  • Instability affecting a country of Flag.
  • Major damage to the Vessel not covered by hull insurance.
  • Arrest of a Vessel.
  • Bankruptcy or insolvency of the Borrower [and/or the Shareholder(s)/Guarantor].
  • Cessation of business by the Borrower and/or the Shareholder(s)/Guarantor.
  • Repudiation, invalidity or unlawfulness of Facility Documentation.
  • Material litigation.
  • The occurrence of an environmental incident which has, or is reasonably likely to have, a material adverse effect.
  • Termination of the Time Charter and/or the Bare Boat charter.
  • Change of control or change of beneficial or legal ownership of any of the Security Parties.
  • Material Adverse Change in the financial position or prospects of the Borrower or any of the Shareholder(s)/Guarantor.
  • Cross-default with other financial indebtedness (including leases, FX and derivatives) of the Borrower.
  • Default events under Swap Facility to be aligned with Facility Agent's standard list of amended ISDA termination events.

Usual and customary events of default for a syndicated transaction of this type, including but not limited to:

  • Delivery of certified resolutions of the board of directors and, if required by the Facility Agent, shareholders of the Borrower [and the Shareholder(s)/Guarantor] approving the Facility and, if applicable, the Swap Facility.

Sample Conditions Precedent

  • Delivery of certified copies of the constitutional documents of the Borrower [and the Shareholder(s)/Guarantor] and such evidence as the Lenders may require in order to satisfy their Know Your Customer regulatory obligations. " Specimen signature of authorized signatories.
  • Evidence of appointment of any process agent required.
  • Financial information regarding the Borrower [and the Shareholder(s)/Guarantor] and the Charterer.
  • [Due Diligence report on the Facility Documentation and charterparties prepared by the Borrower's lawyers with an overview prepared by the Facility Agent's lawyers].
  • An up-to-date FMV of the Vessel by an independent broker to be appointed by the Facility Agent dated not less than 2 weeks prior to Drawdown.
  • Insurance report evidencing that insurance on approved terms is in place and that the Facility Agent is named as a [co-insured] [loss payee].
  • Evidence of cancellation of any existing facility.
  • Accuracy of repeating representations.
  • Execution and delivery of all documentation in form and substance satisfactory to the Facility Agent, the Lenders and their legal counsel.
  • Receipt by the Facility Agent of copies of all the technical and commercial management agreements and charterparties (including the Time Charter and the Bare boat Charter for the Vessel.)
  • The security documents referred to under "Security" and any appropriate evidence and ancillary documentation in respect of any secured assets.
  • Evidence of satisfactory capital structure (equity and subordinated debt) or the Borrower [and the Shareholder(s)/Guarantor] is received by the Facility Agent. Such evidence of capital structure to be in a form and substance acceptable to the Facility Agent.
  • No Event of Default or event that with the giving of notice or passage of time could give rise to an Event of Default under the Facility Documentation.
  • Receipt by the Facility Agent of all fees and expenses due and payable by Borrower under the Facility Documentation.
  • Delivery of all relevant legal opinions from lawyers in the jurisdiction of incorporation of each of the Borrower, Shareholder, Gurantor and other security parties..
  • Survey report in respect of the Vessel.
  • Evidence of compliance with the ISM/ISPS Codes.
  • Class Maintained Certificate evidencing the Vessel is free of all recommendations and requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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