ĩ

Institute of

Chartered
Shipbrokers 2015 Edition
SHIPPING PIN A N CE

In s titu te of

C h ARTERED
0>1*'
S h ip b ro k e rs
 Published by the
Institute o f Chartered Shipbrokers
85 Gracechurch Street
London
EC3V OAA

United Kingdom
Telephone: +44 20 7623 I I I I
Email: books@ics.org.uk
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First published 2015

ISBN 978-1-908833-66-2
©Institute o f Chartered Shipbrokers 2015

All rights reserved. No part o f this publication may be reproduced, stored in a retrieval system or
transmitted, in any form or by any means, eiectronic, mechanical, photocopying, recording or other^ise,
without prior permission o f the publisher and Copyright ovvnen

Terms o f use
While the advice given in this book Shipping Pinance has been developed using the best
information currently available, it is intended pureiy as guidance to be used at the user’s own risk.
No responsibility is accepted by the Institute o f Chartered Shipbrokers (ICS), the membership
o f ICS or by any person, fìrm, Corporation or organisation (who or which has been in any way
concerned with íurnishing o f iníormation or data, the compilation or any translation, publishing,
supply or sale o f the document) for the accuracy o f any iníormation or advice given in the
document or any omission from the document o r for any consequence whatsoever resulting
directly or indirectly from compliance with or adoption o f guidance contained in the document
even if caused by a íaiiure to exercise reasonable care.

Printed by Cambrian Printers

A rtw ork production by Jacamar (www.jacamanco.uk)

Pront cover image: Portpictures.nl

ií Institute of Chartered Shipbrokers

 Technical Input

Paul Packard
Conthbuting Editor
Paul began his career with Barclays Bank plc in Pebruary 1986 when he joined the banks Correspondent
Banking Branch. Having a keen interest in shipping, Paui moved to Barclays Shipping Industry Unit in 1989
where he worked until 1994.

After a short period working in Merita Banks (now part o f Nordea) London ship tìnance team, Paul
moved to Dublin in early 1997 to join Kredietbank (subsequently renamed KBC Bank) where ex-Barclays
colleague Peter Stowell had established a ship íìnance business in 1994.

Following KBCs withdrawal from ship tìnance in early 2002, Paul moved brieíly to ING's ship íinance team
in London before being lured back to Dubiin in the summer o f 2002 by the Bank o f Ireland in order to
establish a new ship ĩinance business. Bank o f Ireland Maritime Industries has now been ỉn operation for
nearly 12 years, and has a team o f nine managing a portfolio spread across global relationships and diverse
market sectors.

Shipping Pinance iii

Foreword

Foreword
Shipping is full o f stories o f íortunes made and lost, sometimes even
several times over, vvhich both íascinates and makes the economics o f
shipping vvorthỵ o f study; certainly for anyone intent on a commercial
career in shipping. The industry by its very nature is both Capital
intensive and international which makes the finance decision an
important and potentially crucial one.The choice o f finance will shape
the outcome o f any investment by changing the balance o f risk and
revvard between the owner and the provider o f finance.
This book covers the main sources o f ship íìnance and dravvs out
the diíĩerences. It covers the important consideration o f the mix
betvveen equity and debt finance and the trade-off betvveen cost and
obligations o f each at different levels. Any shipovvning company can
choose the level o f íìnance sought, the security provided, the timing
o f repayments and the cost o f servicing the debt. But these choices
James Kidvvell will have a signiíicant impact on its returns over the life o f the proịect
Chief Executive, Braemar ACM and their degree o f vulnerability at certain points in the cycle. Ships
are useíul assets to oíĩer as security for borrowing, and gearing up an
asset can significantly increase the returns to the ovvners at the right point in the shipping cycle. But at the
vvrong time they can threaten an ovvners very existence.This can apply to any project from an investment
in the smallest commercial vessel to a large fleet held by a pubiic company.
A borrovver will be required to adhere to a range o f obligations imposed by the lender and these may be
regular and routine vvithout any significant effect on the day-to-day operations o f the business. O r they
may kickin in special circumstances and have an extreme effect on operations. An appreciation of the
types o f loan covenants that may be used to protect the lender is important.
The international nature o f the industry means that the choices o f íinance are wide which adds to the
complexity of the choice.Tax treatment and rates are inevitably a key factor vvhich makes certain countries
more attractive places to seek finance. Similarly, the growth o f Islamic finance within the investment
community is an example o f an important cultural consideration.
The public markets provide access to a signiíicant source o f equity and debt finance but that access puts a
large responsibility on management to fulfìl their regulatory and reporting obligations, aimed at protecting
and iníorming the investonThere are also important cost considerations when raising funds in the public
markets, both initially and ongoing, and these will differ depending on the country and the exchange.
This book provides a comprehensive overvievv o f the principal sources o f shipping finance and their main
íeatures. Given its signiíìcance to shipping, it will be o f interest to aspiring ovvners, operators, charterers,
bankers, brokers and many other disciplines within commerciai shipping. Students o f shipping should
develop an understanding o f the tìnancing options available, how they operate and when they are likely
to be used. Pinance is integral to the industry which makes it not just an important part o f the institute o f
Chartered Shipbrokers' proíessional examinations, but a revvarding and essential subject for any student
intent on a commercial career in shipping.

Jannes Kidwell - 2 0 15

iv Institute of Chartered Shipbrokers

 AcknowIedgem ents

Acknovvledgements
Pirst and íoremost, we vvould like to thank James Kidvvell for his support and encouragement in the
revision o f this book. We must also acknovvledge the contribution o f several industry proíessionals, among
them Paul Packard who has shared his wealth o f knovvledge and experience with the Institute.
Special thanks are due to George Alexandridis, Jonathan Challacombe and Paul Wogan ío rth e ir efforts in
the review o f this book.

Acknowledgennent must also go to Andrevv Lansdale and Costas Lambrou for their assistance in the
updating o f this book and to Caroline Possey and Dinah Bromvvich for their efforts in improving the
quality o f the text.

The illustrations have been sourced from across the industry but particularthanksto Carnival Corporation
& plc and Danny Cornelissen o f Portpictures.nl. The artistry o f their images raises the stakes in the
appearance and presentation o f our maritime textbooks,

Shipping Pinance
Contents

Contents
Contributing editor iii

Foreword iv
Acknowledgements V

Peatures o f ship tin a n c in g I

1.1 INTRODUCTION 2
1.2 THE OBJECTIVES OF LENDERS A N D BORROWERS IN
THE SHIPPING BUSINESS 2

1.3 SHIPPING CYCLES 3

T h e c u rr e n t s ta tu s o f th e sh ỉpp ing
tin a n ce m a rk e t 5
2 .1 THE CURRENT SITUATION 6

11 REGULATORY PRESSURES 6
2.3 EFFECTSONSHIPFINANCELENDERS’ APPETITEs 6

2.4 SHIPPING MARKETS 6

2.5 RELAĨIONSHIP BETVVEEN SHIPPING A N D
PINANCIAL MARKETS 9

T h e lender*s p e rs p e c tív e in th e
s h ip *fin a n c in g decìsion 11
3.1 HOWTYPICAL LOANS ARE ASSESSED, STRUCTURED
A N D DOCUMENTED 12
3.2 TRANSACTION STRUCTURING 12
3.3 CREDITASSESSMENT 16

Loan d o c u m e n ta tio n 25
4 .1 iNTRODUCTION 26

4.2 GOVERNING LAW 26

4.3 LOAN AGREEMENT 26
4.4 SECURITY 28

4.5 EXERCISINGASHiP MORTGAGE 29

Legal aspects re la tin g t o ship tỉnance 35

5.1 SHIP REGISTRATION 36
5.2 MORTGAGES 38
5.3 EQUITABLE MORTGAGES 39
5.4 ADMIRALTY JURISDICTION 39

vi Institute of Chartered Shipbrokers

 Contents

5.5 THE IN PERSONA/MACTION 40

5.6 THE IN REM PROCEDURE 40
5.7 USE OFTHE ONE-SHIP COMPANYTO PREVENT
SHIPARREST 42

5.8 ARBITRATION 42

6 E q u íty as a source o f fín a nce in th e

s h ip p in g busíness 45
6.1 OWNER'S EQUITY 46

6.2 PRIVATE EQUITY 46

6.3 PUBLIC EQUITY 49
6.4 SPECIALPURPOSEACQUISITION COMPANIES (SPACS) 54

7 D iffe re n c e s b e tw e e n ty p e s o f d e b t
and e q u íty 55
7.1 INTRODUCTION 56
7.2 SENIOR BANK DEBT 56

8 T ype s o f loan used in s h ip p in g fin a n c e 59

8.1 TYPES OF SENIOR BANK LOANS 60
8.2 JUNIOR DEBT A N D MEZZANINE DEBT 63
8.3 EXPORTCREDITAGENCIES 63
8.4 SELLER'S CREDIT 64
8.5 YARD CREDIT 65
8.6 EQUIPMENT MANUPACTURER PINANCING 65
8.7 PRIVATE PƯVCEMENTS 65

9 D e b t fín a n c in g and th e b o n d m a rk e ts 67
9 .1 HIGH YIELD BONDS ( 144a ISSUES) 68
9.2 NORWEGIAN BONDS 68
9.3 TITLE XI BONDS 69
9.4 CONVERTIBLE BONDS 69

10 o t h e r fo rm s o f tin a n c e 73
10.1 SECURITISATION 74
10.2 LEASING 74
10.3 KOMMANDITGESELLSCHAPT (KG) PINANCING 76
10.4 KO M M ANDim ELSKAB (KS) PINANCING 77

Shipping Pinance vii

Contents

II S ignificance o f th e d e b t- e q u ity s tru c tu re

f o r a sh ip p in g c o m p a n y 79
11.I BASELCOMMÍI 1EE 80
1 1.2 BENEPITS OF LEVERAGE 80

ndìces 83
1 Typical repayment schedule 85
2 Single vessel cash flow 89
3 Breakeven comparison 93
4 LTV comparison 93
5 Balloon comparison 94
6 Loan agreement 95
7 Navios Maritime Holdings lnc,'Fleet and
company update’,June 23, 2009 145
8 Marshall Islands Mortgage 157

viii Institute of Chartered Shipbrokers

Chapter I

Peatures of ship íìnancing

The most expensive cruise ship is the Allure o f the Seơs,

vveighing in at $l.5bn.
Chapter I

1.1 IN T R O D U C T IO N
Although on fìrst impressions unconnected to the day-to-day activities o f a shipbroker or
shipowner, the ship finance market can have a very significant impact on decisions taken in
respect o f the chartering and particularly the sale and purchase o f vessels.
All vessels are aííected by developments in the ship íìnance market to a greater o r lesser
degree, regardless o f whether they are íunded entirely by the owner's equity, third-party equity
or leveraged with one or other form o f debt.
The various debt and equity stakeholders in a particular vessel o r company will all have varying
risk and return requirements or thresholds, and it is these competing íactors that iníluence the
purchase and ongoing operation o f ships.The sources o f debt and equity available to shipping
are discussed in more detail in the following chapters.
There are a number o f similarities betvveen the shipping markets and the ship íìnance market.Just
like the shipping markets.the ship finance market is dhven by supply and demand íundamentals.
There are also a number o f regulatory íactors that iníluence the availability o f financing. Pactors
that determine whether íìnance is available for a particular vessel o r project vary depending
on the assessment undertaken by the íinancier involved. Once a transaction has been agreed
between borrovver and lender it vvill need to be documented. Things do not alvvays go as
planned, particularly when exposed to today's volatile shipping and financial markets. Even the
most rigorously assessed, careíully structured and diligently documented transaction can face
diffìculties.
This book will provide the shipbroker and other interested market participants with an
understanding o f how the ship íinance market is structured and operates, and how decisions
taken vvithin it can have a very significant effect on the vvider shipping markets.

1.2 T H E OBJECTIVES OF LENDERS A N D B O R R O W E R S IN

T H E S H IP P IN G BUSINESS
The principal objectives o f established lenders into the shipping business are to:-
• support their shipping company clients in the development and grovvth o f their business;
• generate sufficient profits from the loan itselí and any ancillary business to meet the return
requirements of their shareholders;
• mínimise the risk o f making a loss through íailing to obtain repayment o f íunds lent;

• ensure adherence to the increasing levels o f regulation, Capital adequacy and legal
requirements to which the lender is subject.
The main objectives o f shipping company borrowers vary depending on the ovvnership and
strategy of the company concerned but generaliy fall into the following categories:-
• obtain high leverage in o rd e rto maximise return on equity.This may be tempered by the
borrower’s desire or requirement to maintain a conservative íinancial structure;
• secure more competitive terms (for example, low pricing, loose covenants, long repayment
profile, minimum security) to maximise returns and reduce the iikelihood o f a deíault.This
objective may be of less importance should the borrovver view the maintenance o f their
relationship with key lenders as a vitai requirement ío rth e íuture.
In situations where there is a strong relationship between borrow er and lenden perhaps built up
over many years and often íorged through the strong personal ties that can become established
betvveen key individuals, there is a greater likelihood o f a consensus being reached that meets
most o f the objectives of both borrovver and lender as outlined above.

Institute of Chartered Shipbrokers

 Peatures of shíp financing

Plexibility is írequently required as a transaction cannot possibly meet all o f the requirements o f
all parties.
One area vvhere conAict often arises is pricing. A strong relationship will often only be maintained
ịf the incumbent lender is able to match the lowest pricing the borrovver is able to secure. In
some cases, lenders have had to accept pricing belovv the level that meets their own return
requirements in o rd e rto maintain a relationship with a particular borrowen
Another key area o f potential conílict surrounds leverage.VVhile some shipping companies wish
to maintain a conservative íìnancial proíile, others wish to maximise leverage to reduce the
amount o f equity they need to commit to a transaction while maximising their return from the
investment.The dovvnside for the lender is that, depending on the position in the shipping cycle,
the provision o f a loan at a high leverage can dramatically increase the risk o f a deíault should
a market correction take place, thereby nulliíying one o f their key objectives - to minimise the
risk o f making a loss. For example, a high (say, 80%) advance ratio lent at or close to a market
peak (as was common during the 2004-8 market boom) will greatly increase the potential risk
o f a transaction going into deíault. Imagine the situation where US$l20m was lent against a
Capesize bulk carher costing US$l50m in June 2008, resulting in a breakeven requirement of
about us$50,000 a day in a market where spot earnings were about US$200,000.The market
correction resulted in the vessel vaiue íaliing to less than us$50m and the earnings less than
u s $ 10,000 - a level unable to Service the loan. N ot all examples are so extreme but this shovvs
the enhanced credit risk accompanying high leverage at times o f market exuberance.

1.3 S H IP P IN G CYCLES
Shipping markets are in the main highly cyclical and, while it is possible to lend or to borrow
sensibly at all stages o f the market cycle, it is also easy for things to go very badly for both
parties if the vvrong transaction is done at the wrong time.
To complicate matters íurthen the financial markets have also proven to be very volatile too as
seen in the íìnancial crisis o f recent years.
The economic recession, now in its seventh yean in major parts o f the vvestern hemisphere and
the ensuing banking/íìnancial and sovereign debt crises, particularly vvithin Europe (which is by
fa r the largest ship finance centre), combined with a Sharp downturn in most shipping markets
to create a períect storm.

Shipping Pinance
C h ap ter I

Institute of Chartered Shipbrokers

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Chapter 2

The current status of the shipping

finance market
m
The most expensive oil-related vessel is a new FPSO
fo r Nigeria costing $3bn.
C hap ter 2

2.1 T H E C U R R E N T S IT U A T IO N
The current situation is one where banks, particulariy in Europe, are Corning towards the end
o f a process where they had to deal with very significant credit impairment' issues as a result
o f the economic recession. Corporate bankruptcies hit unprecedented levels in many countries
and in several countries there are also concerns about the viability o f households which are
struggling under significant debt burdens.
VVhile several banks have returned to proíìt, many have made very signiíìcant losses since 2008
and these losses have eaten deeply into their Capital bases. In many cases, banks in the UK,
Ireland, Germany, Greece and others have had to avail themselves o f government injections o f
equity in order to maintain required Capital ievels. In a number o f cases the bailed-out banks
remain largely State controlled.

2.2 R EG U LATO R Y PRESSURES

This pressure on Capital has been íurther exacerbated by regulatory requirements to increase
the level o f Capital banks’ hold through the introduction o f the Basel IIP rules.
Banks have also faced liquidity pressures.The cost o f borrovving in the interbank market is no
longer close to LIBOR^ and, in many cases, diverges significantly as banks perceive increased
risk in lending to each othenThis means they are more likely to be loss-making on a number o f
their loans.

2.3 EFFECTS O N S H IP P IN A N C E LENDERS’ A P P E T IT E S

These Capital and liquidity pressures have had a huge impact on banks' ability to lend
while this constraint was even more pronounced within the shipping industry because of its
poor períormance.
It is for this reason that many commerciai banks, principally within Europe, have decided to
either scale backtheir ship finance operationso rto vvithdravv from the rnarket altogether.

2.4 S H IP P IN G M A R K E TS
lf the financial markets were in crisis in isolation it would have been bad enough but many o f the
same demand íactors have combined to affect the shipping industry.This was compounded by
an oversupply o f vessels in most shipping sectors.

Credit Impairment is what happens when loans become unviable.This can happen for a
number o f reasons including actions or inactions by the debtor or iníluences outside their
control such as market developments.
Basel III is a comprehensive set o f reíorm measures, developed by the Basel Committee on
Banking Supervision, to strengthen the regulation, supervision and nsk management o f the
banking sectorThese measures aim to:
a) improve the banking sectors ability to absorb shocks arising from íìnancial and
economic stress, whatever the source;
b) improve risk management and governance;
c) strengthen banks’ transparency and disclosures.
The London Interbank Offer Rate.

Institute of Chartered Shipbrokers

 T h e current status of the shipping finance m arket

A newbuildìng bulk carrier on sea trials prior to delivery to its owner

2.4.1 S h ip p in g cycles
Shipping cycles have occurred throughout history and are driven by market íundamentals
affecting the supply o f tonnage and the demand for the transport o f cargoes (in tonne miles).
As each sector (dry bulk, tankers, Container ships and so on) has its own supply and demand
íundamentals it may react differently and not necessarily simultaneously.
In its simplest form the life o f a shipping cycle can be explained as follows.
In a poor market, where there is an oversupply o f vessels, íreight rates are low (as charterers can
choose from a multitude o f ships) as are vessel values (with low earnings opportunities, there
are few vvilling buyers). In most cases, the order book for such ships íalls sharply as ordering a
new ship for delivery into a weak market does not make economic sense.
Once the poor market has persisted for some time the pendulum will swing in íavour of the
shipowner. The supply o f ships is reduced because the order book has been delivered and
not replaced with new contracting vvhile the existing fleet will have lost some ships due to
demolition, likely to be at higher than normal levels in response to the poor market. Levels of
demand may have increased because o f an improving economic environment but, even if this is
not the case, the demand for cargo transportation will need to be met from a smaller fleet of
vessels.This results in higher íreight rates, vvhich make the economics o f operating such vessels
attractive once again, thereby increasing their value among a rising number o f vvilling buyers.
Shipyards will have had a quiet period with few ovvners ordering ships and will probably offer
prices that look attractive in the now booming market, especially as secondhand prices increase.
This will lead to new orders being placed with the order book soon grovving to signiíicant
levels once again.The delivery o f new ships may take up to five years so the eíỉed; o f the new
tonnage entering the market does not happen all at once but rather when it is too late.
The market upswing will eventually slow down as the delivered fleet reaches the levels required
to transport the cargoes required and then, as tonnage continues to be delivered and oversupply
kicks in, íreight rates and then vessel values and nevvbuilding prices will begin to fall once again,
moving the market írom boom to bust.

Shipping Pinance
C h ap ter 2

In the shipping industry these cycles are enhanced by the availability o f shipping finance. In a
boom market vvhere the economics o f a transaction (high earnings, strong values) look good,
ílnance is generally íreely available and, thanks to competition, on advantageous terms. The
contrary is true in a weak market vvhere earnings and values do not appearto make economic
sense and there are few lenders vvilling to advance funds for vessel acquisitions.This cycle o f
funds being available, or n o tto the market, itselí makes the upsvvings higher and the downturns
more severe than vvould otherM/ise be the case.

Case s tu d y
In April 2008 a lender advances 80% o f the purchase price o f a fìve-year-old Capesize
vessel priced at US$l50m - t h a t is, a US$l20m loan.The loan is repayable over 10 years
to zero with the loan front-ended (US$30m repayable in the fìrst year) to take account o f
a us$ 125,000/day time charter secured by the ovvner with a fìrst-class charteren

The loan proceeded according to plan with repayments o f us$7.5m made on each o f
the July 2008 and October 2008 quarterly repayment dates when the market started to
slump badly following the Lehman Brothers' crisis and the ensuing Hnancial crash.

Average spot earnings for Capesize vessels slumped from over us$ 180,000/day in May
2008 to us$4,000/day in November and the first-class charterer was unable to make
íurther charter hire payments. They had re-let the vessel on time charten locking in a
small proíìt o f u s$ 15,000/day in May 2008 and there was a series o f sub-charters in a
daisy chain, ending with an operator who was trading the vessel on the spot market and
promptly ceased trading.
Although the head time charterer was legally bound to pay, they had no means to do
so as all income in relation to the vessel had ceased being received and the vessel was
redelivered to its ovvners.
The vessel was now valued at us$45m against a loan outstanding o f US$l05m,
requiring at least us$50,000/day income to repay compared with a spot market paying
us$4,000/day.
This is a prime example o f a loan being provided at the vvrong point in the cycle on
inappropriate terms and with incorrect analysis o f the underlying contracts.
The average value of a similar ship over the 10 preceding years had been us$5lm (and
that inciuded some very high years) and average one-yearTC rates us$39k (and, again,
that included several boom years).
Unless there was clear evidence o f changes to the structure to the market ịustilying the
2008 earnings and values (and despite increasing Chinese demand for raw materials there
was little other evidence o f the paradigm shift that was much touted at the time), it can be
considered clear that this loan was provided at the vvrong time in the shipping cycle with
vessel values and earnings at three times their recent historic averages.
Such loans were not uncomrnon in the first haif o f 2008 and in many cases the 'can was
kicked down the road' on an interest only'* (or PIK^) basis in the hope that earnings and
values vvould recoven

4 that is no repayments were sought.

5that is interest was not payable and was added to the loan balance.

8 Institute of Chartered Shipbrokers

 T h e current status of the shípping finance m arket

2.5 R E L A T IO N S H IP B E T W E E N S H IP P IN G A N D P IN A N C IA L
M A R K E TS
The relationship betvveen the íìnancial markets and the shipping markets has never been closer
and the boom in many market sectors in the mid-2000s can be attributed as much to the easy
availability o f finance as it can to any increase in demand for shipping o f cargoes.
Many o f the orders placed at shipyards made íìnancial sense only due to the íreely availabie
funds from the debt and equity markets.

2 .5 .1 O v e rs u p p ly o f vessels
VVhile a certain portion o f the orderbook is unlikely everto be delivered, it still remains at high
levels and will take time to be absorbed into the fleet with scrapping required in most sectors
to restore equiiibrium.
While the paucity o f ship finance available from banks was hoped to prevent too many new
orders being placed, until recently, the availability o f private equity resources maintained a high
level o f orders.This flood o f money into the market is now reducing as a number of transactions
íailed to meet the envisaged return requirements and this, combined with increased demolition
of ships, will eventually bring the íleets to more manageable levels where an increase in demand
will have a beneíìcial eííect on earnings and values.

2.5.2 U n a ttr a c tiv e fin a n c in g p ro p o s itio n

As it stands atthe presenttime.the shipping market does not looktoo attractive from a lender's
point o f view with vessels in certain sectors barely able to cover operating expenses, let alone
debt Service. Even if the financial markets had not been experiencing their own crisis, ship
ĩinance was unlikely to be considered an attractive area o f business.
There is a view that taking a counter-cyclical approach to any market, including shipping, can be
beneíìciai in the long run.While this is true and the very few new entrants to the ship íinance
market in the last years are expected to do very well, few decision-makers vvithin íìnancial
institutions are iikely to take this on board.

Shipping Pinance
C h ap ter 2

10 Institute of Chartered Shipbrokers

ệỉ'

Chapter 3

The lender’s perspective in the

ship-fìnancing decision

The most expensive oil tanker is the Jones A c t Aíramax

Liberty Bay built in the USA fo r $l84.7m
Chap ter 3

3 .1 H O W T Y P IC A L LO AN S AR E ASSESSED, S T R U C T U R E D
A N D DOCUM ENTED

The process
In the vast majority o f banks the process from initial contact to drawing funds under an agreed
facility is similar to the following:-
• initial discussions take place betvveen borrower and lender;
• lender carries out credit assessment and structures a transaction which complies with the
bank’s requirements (credit policy) and provides the ovvner with an acceptable íacility. A
number o f indicative^ term sheets may go back and forth betvveen lender and borrovver
until agreement is reached;
• once agreement on indicative terms is reached the lender will prepare his internal credit
paper (in the banks Standard format) seeking approval from the relevant credit authority
vvithin the bank for the transaction agreed with the borrower. Credit papers vary from
institution to institution but are intended to identiíy the specific risks and mitigants o f a
transaction, illustrate the credit assessment that has been undertaken and detail the
reasoning behind the structure agreed;
• usually an amount o f discussion takes place betvveen the lender and their credit team or
credit committee following vvhich a credit approval is obtained.The relevant credit authohty
may require certain amendments to the transaction vvhich the lender will need to discuss
and agree with the borrower;
• a committed offer letter is then issued to the borrower detailing the main terms o f the
íacility that the bank is wiiling to provide them.The difference between the committed offer
letter and the earlier indicative term sheet is that the bank is now committed to provide
the íacility, subịect to acceptabie documentation and other items, and is now effectiveiy ‘on-
risk’;
• the borrovver usually has a period o f time in which to accept the committed ofFer by
signing and returning a copy;
• after acceptance o f the committed offer letter the bank will appoint maritime lavvyers to
draft the íacility and security documentation, based on the agreed terms o f the committed
offer letter (depending on the institution and the complexity o f the transaction the maritime
lavvyers may be involved írom the committed ofĩer letter stage);
• once the documentation is agreed and signed, the íacility is available for dravving'^ subject to
the various conditions precedent® being met.

3.2 T R A N S A C T IO N S T R U C T U R iN G
When discussing a project with a prospective borrower the lender should, within the coníìnes
o f their banks credit policy, structure a transaction to fìt comíortably with the type o f borrower,
vessel, employment and so on, alvvays bearing in mind that their primary concern is to limit hsk
to their bankThe main elements o f a transaction adjusted to arrive at a suitable structure are:

Indicative term sheets are not credit approved but for discussion purposes betvveen lender
and borrower,
That is the borrovver is able to borrow the money.
The conditions that must be met beíore the bank will allow the money to be borrovved.
This could be the provision o f KYC documentation, registration o f the ship mortgage etc.

12 Institute of Chartered Shipbrokers

 T h e lender’s perspective in the ship-financing decision

1. Advance ratio/loan amount

The bank is likely to have a maximum Loan toValue’ (LTV) percentage in credit policy which
is usually very difficult to exceed.Within these coníìnes a lender can consider a higher LTV
in situations where there is a strong corporate guarantee backing the transaction or the
vessel financed is on long-term employment to a strong counterparty.
2. Borrovver/guarantor
In the shipping industry it is most common to have each vessel vvithin a shipping company
owned by a single purpose company (SPC) in order to reduce risks o f sister ship arrest
and other liabilities. Historically, SPCs within a shipping company were entirely separate
from each othen managed by a separate company, and the only way to obtain cross-
collateralisation'® was to have a complicated series o f second (and possibly third and more)
mortgages as security.
Novvadays, most shipping companies include a parent/holding company vvhich owns the
shares in its SPC vessel-owning subsidiaries and it is thereíore easier to link the various
entities as shovvn in the following diagram.

Parent/Holding
Company

SPCl SPC2 SPC3

Vessel 1 Vessel 2 Vessel 3

In most cases, the loan is granted to the SPC (or a number o f SPCs jointly and severally
for multiple vessel financings) and a guarantee taken from the parent/holding company.
On occasion, the loan may be granted to the parent/holding company itselí but, as this
company does not own the vessel(s) being tìnanced, it is necessary to take an upstream
guarantee from the SPC in order to link the borrovver to the asset.

3. Drawdown profile
For a secondhand vessel purchase this is usually very straightfor^ard with the loan to be
dravvn in one amount upon delivery o f the vessel.
For a nevvbuilding vessel this can be more complicated. Assuming the bank in question
provides pre-delivery íìnance (some do not),the lender has to agree exactly how much o f
the loan can be drawn for the shipyard instalments.

9 Loan to value is the percentage o f the loan against the value o f the vessel. For example, a
us$7m loan against a vessel valued at US$IOm would give a Loan toValue o f 70%.
10 Cross-collateralisation is the act o f obtaining security on tw o or more items o f unconnected
security.

Shipping Pinance 13
C hap ter 3

Imagine a shipbuilding contract vvhere the builder requires to be paid in fìve instalments
o f 20% each upon contract signing, Steel cutting, keel laying, launching and delivery o f
the vessel.

The bank has agreed to advance 60% o f the contract price o f the ship. From the lenders
point o f view ít is much less risky if the borrower pays the first tw o 20% instalments from
his own (equity) resources and the bank the remaining three 20% instalments. Another
alternative is that each o f the 20% instalments is íunded 60% by the lender and 40% by
the borrower.This drawdown proíile opens up the bank to the risk that the borrower will
not be able to provide the 40% o f all o f the instalments, íorcing the lender to make up the
difference as to deíault on a shipyard payment wouid mean cancellation o f the shipbuilding
contract and the inability to take security over a completed, delivered ship.
This risk can be reduced if the lender has a strong relationship vvith the borrower and/or
visibility o f their ability to fund their equity instalments.
4, Repayments

The type and structure o f the repayment schedule is undoubtedly key to the viability o f a
loan.There are some reference points the lender may use to ensure their suitability.
First, it should be agreed whether the repayments will be íixed (giving certainty o f
amortisation o f the loan) or variable (enabling the amortisation o f the loan to be matched
to the cash flow o f the vessel). A combination o f the tw o is also possible. Imagine a ship
trading spot in today's low, volatile market. It is unlikely that the vessel would be able to
meet large, íìxed repayment instalments and the borrow er vvould most probabiy preíer
to pay variable amounts depending on the earnings o f the ship (pay as you earn) after
voyage and operating costs have been paid. A compromise is otten reached where a low
level o f íìxed repayment instalments is agreed to with the lender also receiving additional
repayments on a PAYE (or cash-flow sweep) basis should the market períorm better than
anticipated.

If a vessel is operating on fìxed-term employment it makes more sense to apply a íìxed

repayment schedule to the transaction as vessel charter hire should be received by the
borrower in regular fìxed amounts.
Oíten repayments are scheduled to occur on a quarterly basis although there is no
reason why this period cannot be shortened to monthly (perhaps to coincide with the
receipt o f monthly charter hire) or extended to semi-annualiy if the borrower is relatively
sophisticated and operates a centralised treasury function across their group.

In most cases, loans amortise by a fixed amount on each repayment date which generally
means the debt Service obligations o f the borrower reduce over time as the amount o f
interest payabie falls with Ihe reducing loan amountThis fail in debt Service obligatlons is
usually countered by increasing operating costs over time such that the total costs o f the
borrovver remain relatively flat over time.There are cases, hovvevei"; where this repayment
profile may not be appropriate, for example, where the vessei is on a long-term bareboat
charter (or similar). Since ÌR this case increasing operating expenses are not the concern
of the borrovven a ílatter debt Service cost line is typicaliy required.The loan can thereíore
sometimes be repaid on an amortisation basis, much like a home mortgage, with equal
payments to cover Capital and interest. Under this schedule the payrnents cover more
interest and less Capital in the early years so the reduction o f the loan is effectiveiy back
ended, potentially increasing the risk to the lenden Against that, a strong counterparty to
the bareboat charter is usually an adequate mitigant.
We have discussed balloon repayments and loan profiles. It is obviously important for the
lender and borrower to agree to a repayment schedule and tenor that is realistic for the
project but also does not result in a loan term beyond what the bank ĩinds acceptable
either from a risk or a íunding perspective. In this case, a shorter loan term but with a

14 Institute of Chartered Shipbrokers

 T h e lender’s perspective in the ship-fìnancing decision

longer proĩile achieved through the incorporation o f a balloon at maturity could be

the solution.
5. Prepayments
An agreement needs to be reached on how the loan can be prepaid. Should the borrower
wish to voluntary prepay some or all o f the loan it should be determined in what amounts
(for example, minimum us$500,000), on what dates (dates other than loan rollover dates
will incur breakage charges) and at what cost (will the bank seek prepayment fees from the
borrovver fo rth e early repayment o f a loan?).
The situation as regards compulsory prepayments (for example, upon the sale o r total loss
of the íìnanced vessel) needs to be similarly agreed.
6. Pricing, costs and expenses
The main elements o f pricing on a transaction are as follows:-
• the loan margin - this is the amount over and above the chosen interest rate that
the bank will charge for providing the loan. Nowadays banks have sophisticated risk
and pricing models that will determine for a particuiar borrovver and transaction
what margin should be charged to account for not only the risk o f the loan but
also the Capital and liquidity costs the bank must cover in order to make a profìt.
In today's íinancially straitened times this number is considerably higher than it has
been in the past;
• the arrangement fee - this is the fee that the bank charges at commencement o f
the loan ío rth e work involved in putting it in place.As discussed earlier in relation
to syndicated transactions this fee can also compensate for the undei^vriting o f a
transaction;
• the com m itm ent fee - once the bank has issued a committed offer letter fo r a loan
it is obliged to maintain Capital against the loan, notwithstanding that the loan has
not yet been dravvn.The ratio o f Capital to be allocated is 50% o f that o f a drawn
loan íacility so ideally the commitment fee should be equal to 50% o f the loan
margin and should apply from the date o f issuance o f a committed offer letter until
the date the loan is drawn and the margin starts to be paid;
In connection with revolving credit íacilities, the commitment fee is also payable on
committed but undrawn loan amounts.These are usually calculated and invoiced on
interest payment dates.
There can be other fee structures incorporated into transactions but these are the principal
ones used on a day-to-day basis.
In addition to the banks fees and margin.there are other costs and expenses that the bank
w;ll incur as part o f providing the loan and which it will expect to be reimbursed by the
borrovver. These include;-
• legal fees - the bank will appoint a maritime lavvyer to document the íacility and
the lavvyer will probably have to appoint correspondents to cover íoreign law issues
surrounding the domicile o f the borrower,the flag o f the ship, and so forth;
• Insurance consultant - the bank will probably decide to appoint a consultant to
review the proposed Insurance arrangements íorthe vessel to ensure they provide
adequate protection to the ovvner and, by extension, the bank;
• survey costs - the bank may, depending on the age o f the vessel and other
considerations, vvish to have the vessel inspected by an independent surveyor they
have appointed;
• mortgagees interest Insurance (Mll) and mortgagees additional perils Insurance

Shipping Pinance 15
C h ap ter 3

(MAPI) - the bank is likely to wish to take out these policies to protect its loan.
Mll will repay the loan in the event the vessel is lost and the ships own Insurance
policies fail to pay out (for example, due to the shipowner breaching one o f the
Insurance vvarranties). MAPI will repay the loan following an incident (usually
a pollution incident but possibly a passenger liability incident) where the banks
mortgage is ignored by the court or authorities in a certain country.
The loan documentation will also contain general wording that will entitle the lender to seek
reimbursement from the borrovver for any other costs incurred in order to protect the loan.
7, Interest rates and interest periods

Some thought should be given to the interest rates and periods applying to the loan. Most
ship finance loans are in u s dollars and the u s$ LIBOR rate is used as the interest rate in
the documentation.

Other loan currencies (euro, pound, yen and NonA/egian krone are sometimes used) have
indices similarto LIBORthat can be used.

In the current íìnancial crisis vvhere most banks cannot borrovv at anything close to LIBOR,
there has been a shiíl towards loans based on the lending bank's cost o f funds. This is
obviously good forthe bank as ít will cover its costs although it could be expensive ío rth e
borrovver if its lending bank is underperforming.

Hovvever; most loan documentation contains increased cost clausing so that if a lender is
unable to borrow at the rate used in the agreement (usually LIBOR) they can recoup the
increased costs from the borrovver,

A more recent introduction is that o f a LIBOR flo or such that, regardless o f the rate o f
LIBOR, the borrovver will always be required to pay a minimum rate, say, 2%.
The lender and the borrovver may agree to fix the rate o f interest on the loan, either by
way o f the provision of a íixed-rate loan, o r the addition o f an interest rate svvap.There is
merit in considering this to take another risk out o f the transaction, particularly if the vessel
has iong-term fixed employment.These Products are not vvithout their downsides, however,
most notably the possibility that a significant mark to market position" could accumulate,
vvhich will need to be settled if the transaction is cancelled.

3.3 C R E D IT ASSESSM ENT

There have been several acronyms used overthe years to help shipping finance lenders keep in
mind how they should íocus on various íactors when making a credit assessment.
These include the six Cs (character, capacity, Capital, company, conditions and collateral) and
CAMPARI (characten ability, margin, purpose, amount, repayment and Insurance), both o f vvhich
cover similar items that should be considered when assessing a proposal.
These may be useíul ơides-mémoires, but lending decisions in todays financial institutions are far
more complex with grading templates and rating models stipulating, quite íormulaically in some
instances, what needs to be considered and v/hat weighting should be applied to each element.
The following section contains a íairly all-encompassing menu o f the various intricacies o f a
shipping finance transaction that need to be considered.

I I This is essentiălly the difference betvveen the amount o f interest that is to be charged
under the interest rate swap for the duration o f the loan compared with the amount o f
interest that vvould be charged at current interest rates.

16 Institute of Chartered Shipbrokers

 T h e ien d er’s p erspective in the ship-financing decisíon

1. Risks and mitigants to evaluate

Once a transaction is under consideration, the ship iìnance lender should undertake a full
credit assessment o f the transaction to ensure they are confident the proposed financing is
sustainable and oíĩers an attractive solution to their borrovver vvhile simultaneously limiting
the risk to their employer.

The following sections coverthe main risks common in shipping transactions and howthey
should be assessed.
2. Customer analysis

• Type o f borrovver

The type o f borrower being íìnanced is a key consideration for lenders. For
exampie, a large, well-funded company o r group with a large fleet and access to
different types o f funding from multiple sources is likely to present a more attractive
opportunity than a smaller operation with a limited fleet and restricted access to
íìnance from other lenders and/or debt and equity Capital markets.
The latter is, although not certainly, likely to present a greater risk although this can
be mitigated to some extent Perhaps reducingthe leverage ratio and/or iníluencing
the employment o f the vessel(s) íìnanced would provide more comfort to the
lender It should be remembered that íìnancing a company with only one vessel is
inherently higher risk as, if that vessel is off-hire for any reason, then 100% o f the
cash flow ceases to be earned. if there were tw o vessels and One was off-hire, 50%
would cease so there can be a good rationale for íinancing multiple vessels.
• Track record

The borrower's history is o f key importance as clearly, if there is a record o f deíaults,

the lender will be wary from the outset. Lenders will have established a netvvork
o f contacts among other banks, lawyers, brokers and insurers and with modern
communication and networking possibilities it is uncommon fo ra poortrack record
to remain hidden for long, Lenders will be wary o f high levels o f Insurance claims,
excessive litigation and creditors remaining unpaid and they are nowadays routinely
researching the vessel(s) history o f p o rt State control inspections and detentions to
gain a view as to how well the vessel(s) are being managed.
• Experience
Another area o f importance to the lender is the borrower’s experience in operating
and managing the vessel(s) being proposed forfinance.
The best transaction in the vvorld on paper (for example, buying at a market low
point, having employment in place and so on) will still have a great probability o f
deíault if the borrow er has little experience o f operating in the market concerned.
Although a good amount o f experience is transferable betvveen sectors and can
be bought in if not, lenders will be wary o f a sudden change o f direction with
borrowers, for instance, movingírom a long history in dry bulkto the transportation
o f liquid gases.

Shipping Pinance 17
C hap ter 3

ri
■A
wìẤ,lf

Gas carriers are complex and require híghly trained crews.

• Existíng relationship with lender

lf the borrower is already known to the lender they are approaching for finance
then the process can be expected to be much more straightíot^ard, especially in
the CLirrent íìnancial environment. In fact, many lenders are only considehng the
provision of fìnance to existing core clients.
If the Client is not knovvn to the lenden iníormation can be uncovered through the
latters network o f contacts.
3. Vessel analysis
• Type of vessel
This can have a significant bearing on the availability o f íinance for a project or, at
the very least, signiíìcant bearing on vvhat type o f íìnance may be available and/or
what conditions will be imposed by the lenden
For example, if the type o f vessel being financed is a homogeneous design from the
main dry bulk or tanker markets then the lender will be able to conduct a thorough
assessment o f the market ovving to the signifìcant volume o f inĩormation available.
If the vessel is more specialised, such as an LNG carrier o r an offshore construction
vessel.this analysis will be more diíĩìcult ío rth e lender to undertake.
Additionally.the more specialised the vessel.the more limited the pooi o f potential
buyers should something go wrong vvhich is likely to affect the realisable sale price.
VVhile Standard vessels from the main m arket sectors may be considered
for many types o f ovvner, both large and small, with relative relaxed conditions
surrounding the vessels employment, more specialised vesseis will result in more
onerous conditions. Pinancing o f these vessels is likely to require either a long-term
employment contract vvhich amortises the loan down to a zero or low residual
value at maturity, o r recourse to a very signiíìcant entity (guarantor) that vvould be
able to vvithstand a large deíault on the project under consideration.

18 Institute of Chartered Shipbrokers

 T h e len d er’s p erspective in the shíp-financing decision

• History

As with borrowers, through todays iníormation resources and their contact

netvvorks, lenders can easily fìnd out the history o f a particular vessel.
Details concerning lenders would centre on signiíicant Insurance claims, signiíying
major damage to the vessel in the past and high levels o f port State control
detentions, indicating poor maintenance being undertaken.

Previous ovvnership/management will also be revievved as the lenders may have

had concerns about the management abiiity o f certain companies previously.
• Condition
Clearly this is o f key importance to a lender as if the vessel is in poor condition
then the likelihood o f it suffering a breakdovvn and going off-hire, unable to earn
íreight, is far greater Many lenders will consider the purchase o f a below-par vessel
if a detailed plan for bringing it back to a good Standard is proposed.
Unless the vessel is very new and/or known to the lenden it is not uncommon for
an independent survey to be commissioned (at the borrower’s expense) to satisty
the lenderthat the vessel is in good condition.

• Age
Lenders preíer to íìnance newer vessels for the simple reason that they have a
longer-remaining useíul iife ahead o f them should things not turn out as planned
and the loan needs to be restructured o r extended.
There is, o f course.the argum ent that an older vessel will have a lower Capital cost
and thereĩore a better cash flow, enabling more rapid amortisation o f the loan.
There is a happy medium although many lenders will have restrictions on fìnancing
vessels over a certain age (either at commencement or at maturity), Howeventhere
are also some who are happy to íìnance over-age vessels (usually at far higher loan
pricing) as long as the loan does not exceed scrap value. Obviously this is easierto
achieve in todays high scrap price environment o f about us$400/ldt.
• Speed, consumption and emissions
Lenders are beginning to focus on this area in much more detail because o f
persistent high bunker prices and impending IMO emissions regulations.
N o t only the lender but also the borrower should take into consideration the fuel
consumption o f a vessel as one with high consumption is likely to be less attractive
to time charterers and suffer from reduced utilisation as a result. Also, higher fuel
consumption will make any given voyage less remunerative íorthe shipovvner.
Many top-tier charterers, particularly those with headquarters in developed
countries, are becoming far more íocused on the environmental impact o f their
logistics chain, including the sea-transport element. As a result, similar to fuel-
ineíTicient vessels.those with high emissions are likely to be less attractive overtime.
Certain emission-reducing equipment can be retrofitted to vessels although the
economics o f doing this, as opposed to operating a more environmentally íriendly
ship, are not alvvays worthwhile.
• Valuation

As with any free market, the value o f a ship is the amount that someone is willing
to pay for itT his is often dhven by its age, year o f build, design, condition, speed
and consumption among other íactors. Most ienders will require that they obtain a
valuation from their own valuer (commonly a specialist department o f a shipbroking
fìrm o r one o f the new breed o f computer-based valuation tools) vvhich they will

Shipping Pinance 19
C h ap ter 3

use as the basis o f the loan. Previously there were often differences between
valuations provided on behalf o f owners and those provided to lenders. Today,
where transparency and speed o f communication is a fact o f life (and hence recent
sales o f similar vessels can be accessed at the touch o f a button), this is becoming
less o f an issue.The shipowner should be aware though that, in these risk-averse
times, if the lenders valuation is lower than the price paid by the shipovvnen it is
the lender that wiil prevail and the loan wiỊI be based on this valuation (that is,
a maximum percentage o f the lenders valuation, for example, 60%). It is, uniess
perhaps if the vessel is employed on a long-term basis, common fo r the lender to
obtain valuations at least annually during the tenor o f the ioan, and even sometimes
as often as quarterlỵ in o rd e rto checkthe value o f their security and how much it
covers the loan by.
• Class and registry
Most lenders will require that the vessel is at least classiíìed by a rnember o f the
International Association o f Classification Societies (lACS) and in some cases
lenders may have a shortlist o f a handíul o f lACS members that are acceptable.The
rationale íorthis is that by maintaining class with an acceptable classiíìcation society,
the lender can be relatively coníìdent that the vessel providing their security will be
maintained in an acceptable condition.
Líkevvise, lenders will also restrict their lending to vessels registered in acceptable
jurisdictions.These vary from lender to lender but generally vvould include those
registers located in established, developed economies (the EU, N o rth America,
Hong Kong, Singapore, and so on) along with the main flags o f convenience (for
example, Panama, Liberia, the Marshall Islands, and so forth).The reasoning here is
that the lender will need to be comíortabie that the maritime law governing their
mortgage is developed and tried and tested in the event that they need to exercise
their security.
• Insurance
The lender will require that the security vessels main insurances (huil and
machinery, war risks, protection and indernnity) are acceptable.They will require
that the amounts o f the policies are suíĩicient (commonly they will be required to
be greater than i 20% o f the loan amount o r the vessels market value), that the
terms/vvarranties are acceptable (for example, deductibles are reasonable) and that
the undewriting security is sufficiently strong. Often, lenders will appoint external
Insurance consultants to revievv the proposed Insurance arrangements in order to
reduce their risk.
• Employment
The lender’s credit assessment will focus strongly on the proposed emploỵment
arrangements ío rth e vessei(s) concerned.
Many lenders, in the current íìnancial environment, are requiring at least some
duration o f term employment be in place beíore financing the vessel.
If the breakeven level o f the íacility can be shown to be serviceabie by even
histohcally lowfreight rates, then the shipovvner will probably have more success in
persuadìng the lender to allow the vessel to trade in the spot market.
Although lenders are currently very risk-averse, many are also well avvare that
locking a vessel away on low-paying term employment at the bottom o f the market,
íorgoing any upside, does n o t make economic sense fo r either lender o r borrovver.

In times past, it was often the case that employment was proposed whereby the
vessel vvould be chartered to a ‘fìrst-class’ charterer and this was the limit o f the

20 Institute of Chartered Shipbrokers

 T h e lend er’s perspective in the ship-financing decision

analysis o f the charterer concerned - their reputation being sufficient. Since the
beginning o f the current market dovvnturn vvhich resulted in the bankruptcy or
deíault by a number o f charterers previously considered Tirst class’, there has
been increasing focus on the creditworthiness o f these counterparties by both
shipowners and lenders.
There is clearly little point in fìxing a vessel on a long-term time charter, íoregoing
potential strong market upswings in exchange for certainty o f income, when, as
soon as the market enters a downturn, the charterer reneges on their obligations.
W hile reputation is still very important, the creditvvorthiness o f charterers is now
thoroughly researched through a review o f their íìnancial statements and sometimes
by reíeiTÌng to specialist credit reíerence agencies.
4. Transaction analysis

• Transaction type
Shipping íinance transactions can be broken down into three main types as follows:-

i. Corporate unsecured
These transactions are far and few betvveen and available to only the largest,
strongest shipping companies, often with well-established stock-market listings
and/or investment grade ratings.
As the name suggests, these transactions will be advanced on an unsecured
basis to a company and often have little o r no amortisation over the term o f
the loan, the borrower being trusted with operating and renewing their fleet
with little input from their lenders.
The lenders main Controls in this type o f transaction are financial covenants
imposed on the borrower (for example, minimum net worth, maximum
gearing and minimum liquidity) and a negative pledge vvhich will stipulate that
while the borrower is not required to pledge its assets (vessels) to the lenders
providing its unsecured loan íacility, neither is it permitted to pledge them to
any other lenden In this way the lenders can be reasonably comíortable that
the borrovver will alvvays have suffìcient assets to cover its loan obligations in
the event o f a liquidation.
In this type o f transaction the lender has recourse to the borrovver only (not
the vessel(s) or their cash flow) giving 'one way out'.
ii. Corporate secured
This type o f transaction is the most commonly used in shipping finance and is
commonly applied to borrowers o f all sizes and standings.
Typically, a loan is advanced to one o r more single purpose companies, each
ovvning one vessel.These will usually be owned by a group holding company.
The Standard security package will thereíore include the ship mortgage and
assignment o f earnings and insurances plus a corporate guarantee from the
group holding company which will contain íìnancial and other covenants
suíĩicient to provide the lender with assurances.
This type o f transaction gives the lender access to the vessel(s) via the mortgage,
the cash flow (viathe earnings assignment[s]) and the financial resources ofthe
group holding company through their guarantee.that is,‘three ways out'.

Shipping Pinance 21
C h ap ter 3

iii. Cash-flow lending

This type o f transaction, often reíerred to as project íìnancing, is provided
in select cases where there is employment o f sufficiently strong and lengthy
duration to amortise most, if not all, o f the loan.
Take, for example, an LNG carrier on a long-term charter to an investment-
grade energy company for a 10-year period at rates sufficient to amortise the
loan to a manageable balloon,

In this case, despite the fact that the ultimate ovvner o f the ship is likely to be
a large, strong company, the lender may consider lending to the project on a
non-recourse basis, that is, without the beneíìt o f a parent or holding company
guarantee, relying instead on the íìxed cash flow emanating from the charterto
amortise the loan.
A security package for this type o f transaction vvould thereíore include a ship
mortgage and assignment o f earnings and insurances together with a specific
assignment o fth e ships long-term charter;giving the lender‘two ways out'.
Breakeven calculation and comparison

One o f the key measures used by lenders to assess the likely períbrmance o f a
shipping íìnance transaction is to calculate the íacility breakeven and then establish
the likelihood o f the vessel earning suffìcient income from the market to meet this
amount during the life o f the transaction.

The breakeven requirement o f the ship being financed is determined by adding

together th e total debt Service (repaym ent instalments plus interest) for each
year with the forecast operating expenses and any general and administrative/
management costs attributable to the vessel and dividing them by the number o f
likely operating days (allovving fo r off-hire) to achieve a daily breakeven rate.

This will then be compared with historic rates (most probably excluding the peak
years from the recent boom) to see that, if the market períorms as it historically
has, how likely is it that the vessels cash flow will be able to meet all o f its costs.
Please reíer to the breakeven calculation and breakeven comparison sections of
appendix 2 to see these calculations in practice.This is based on an MR product
tanken 10 years old, costing us$ 16.5m, Tinanced with a loan of us$ I Om (6 1% LTV)
repayable in 24 quarterly instalments o f us$250,000 and a balloon at maturity o f
us$4m.

Appendix 3 shows the breakeven comparison in graphical form. It should be noted

that the breakeven level required to Service the loan (and vessel costs) is below the
historical time charter rate in every year and significantly below the average historic
earnings, even after the boom year earnings have been deducted. A lender vvould
considerthis to be a sound iending proposition with the vessel likely to be able to
Service the loan in all normal circumstances.

Loan to value comparison

Although the vessels cash flow should always be the primary íactor when
considering the repayment o f a loan, lenders also require that the íacility is well
secured by the underlying vessel.
Consequently it is important to project íor^ard the likely LTV coverage o f the
loan. While vessel values are clearly volatile and follow the market, the only tw o
certainties are the current vessel value and the approximate value when it is
scrapped. Lenders often therefore proịect the value o f the vessel, depreciated on
a straight line basis, taking an estimate o f its useíul life and expected scrap value.

22 Institute of Chartered Shipbrokers

 T h e lender’s perspectíve in the ship-financing decision

This is demonstrated in the LTV comparison section o f appendix 2. In this scenario,

the vessel has been assumed to have a useíul life o f 20 years and, in order to be
conservative, zero scrap value.
As is the case in appendix 2 (as illustrated graphically in appendix 4). Lenders preíer
to see a continually improving LTV position as the íacility ages.
• Balloon comparison

As most transactions will have a longer profile than term, a balloon instalment will
ahse and need to be repaid at maturity.The ienderwill w a n tto be comíortable that
when the balloon falls due for payment it is likely to be met by either a sale o f the
vessel or refinancing o f the loan. In order to do this, the lender will compare the
amount o f the balloon vvith the value o f vessels o f a similar age to the subject vessel
at loan maturity.This can be seen in the balloon comparison section o f appendix 2
and graphically illustrated in appendix 5.
• Transactions cash-flow projections
Having establíshed that the proposed facility is acceptable in terms o f breakeven,
ongoing LTV and the amount o f the balloon, the lender will prepare cash-flow
projections to show the likely outcome o f the project under various assumptions,
While there are a handíul o f proprietary models on the market that attempt to
proịect íuture vessel earnings and values, it is clearthat a vast number o f conílicting
íactors in the shipping íactors can make such íorecasts outdated very quickly. As
a result, most lenders will prepare their cash-flow projections on base case and
vvorse case bases (sometimes more scenarios are used) in the expectation that the
reality is likely to be somewhere between the two,

Case s tu d y
The following case study included in appendix 2 the base case cash-flow projection has
been based on the average historic time charter rates for a similar vessel with the boom
years (2005-08) excluded, equating to us$ 15,062/day. Using operating expenses (for the
purposes o f this exercise, the opex fìgure is assumed to contain a reserve for dry-docking
and speciai survey costs. Othervvise these would appear on a separate line in the cash
flow in the years they fall due), SG&A expenses and debt Service costs calculated earlien
it can be seen that the cash flow remains positive over the six-year period and cash o f
us$8.75m is accumulated.
In the vvorse case cash-flow projection it has been assumed that the vessel earns
us$ 13,160/day, this being the lowest one-year time charter rate reported (in 2010).
Despite the lower earnings, the cash flow remains positive with us$4.76m accumulated
over the six years.

The cash flow accumulated wili be dealt with as agreed between the lender and
the borrovven It could be that some or all o f it is used to prepay the loan balloon by
way o f a cash sweep repayment, that it is maintained in a bank account pledged to
the lender o rth a t it is allowed to be taken out o f the borrowing vehicle in the form
o f dividends.
5. Borrovver/guarantor analysis

Depending on the type and size, relationship with and knovvledge o f the borrower and/
o r guarantor; the lender wili undertake analysis o f the company in an efíort to become
comfortable with its financial strength.This will include some or all o f the following:-

Shipping Pinance 23
C hap ter 3

• analysis o f financial statements (generally the lender wili want to see the previous
three years) whereby a number o f calculations will be done to establish the gearing,
net w orth and liquidity o f the company;

• íìnancial projections on a group basis (similar to the cash-flow projections

contained in appendix 2 but for all vessels and íìnancings in the group) are likely to
be prepared;
• if the borrovver o r its parent is large enough to be externally rated (by Standard
& Poors, M oodys, and so on) then the lender wiil review the rating reports and
in any case they will put the financial statements o f the borrovver/guarantor and
the details o f the transaction through their internal rating model to arrive at th e ir
internal grade and an estimated probability o f defauỉt (PD). Since the introduction
o f Basel li, all lenders adopting the Basel II íoundation approach have been required
to establish their own internal rating models to establish the PD o f the transactions
they undertake.Those wishing to take advantage o f the potential Capital beneíìts
o f the advanced approach have developed enhanced models which are able not
only to estimate the PD but also the loss given deíault and expected loss on a
transaction.
6. Charterer analysis
As a result o f the recent downturn across most sectors o f the industry and a plethora
o f defaults by charterers as a result, there has been increased focus by shipowners and
their lenders on the íìnancial strength o f charterers. It is no longer suíĩìcient to rely on
the reputation alone o f charterers o r to consider them fìrst class vvithout any íurther due
diligence. In most cases, it is necessary to revievv their financial statements and external
rating reports (if available) and to rate them in the lenders internal model before accepting
them as a suitable counterparty.

24 Institute of Chartered Shipbrokers

 Vtiiiiiiin t’W

Ỷ''ựì

Chapter 4

Loan documentation

The largest vessel aíloat is ShelTs LNG production platíorm

Preludeat 600,000-dw t and costing about $ 12bn.

ÍIBI
C h ap te r 4

4.1 IN T R O D U C T IO N
Once the indicative term sheet has been agreed betvveen borrower and lenden approved by
the lenders credit authority and a committed offer letter issued, the íacility then needs to be
accurately and comprehensively documented.
There are a number o f law íirms around the w orld vvhose partners have extensive experience
in documenting shipping finance transactions.The lender will most certainly appoint their own
maritime íìnance lavvyerto document the transaction (at the cost o f the borrow er as mentioned
earlier) and, depending on the íamiliarity o f the borrower with shipping finance documentation,
it is not uncommon for them to have their own legal representation. The following chapter
includes details o f the more technical legal aspects o f ship registration, mortgages and litigation.

4.2 G O V E R N IN G L A W
Before ít can be agreed to appoint lawyers it will need to be agreed under which law the
transaction will be documented. Regardless o f the location o f the lender o r borrowen English
law is the most widely used owing to the long history and experience in maritime matters and
the depth and breadth o f experience available. O ther governing laws may be preíerable for a
number o f reasons (for example, potential accessing o f us Capital markets o r access to certain
export credit arrangements o r tax structures) and New York, Norvvegian, Prench and Dutch
laws are sometimes seen.
It should be noted that the more unusual the choice o f law the smaller the pool o f available
talent within the legal proíession knowledgeable in maritime law is likely to be, and some aspects
o f that countrys maritime law could be quite untested.

4.3 LO AN AG REEM ENT

The loan agreement is the key document governing the operation o f the loan including all the
obligations, restrictions and requirements o f both the borrow er and the lenden

Case s tu d y
The loan agreement attached in the appendices and used as the case study fo r this section
covers a loan provided to the parenưholding company o f a shipping group. Key sections
within this and ail loan agreements include;-
a) identification o f the parties involved;
b) amount and purpose o f the loan;
c) agreement as to the drawdown o f the loan (including a detailed listo f all
conditions precedent to be met);
d) details o f interest periods, interest rate and margin;
e) details o f agreed repayments and prepayments;
f) a list o f representations and vvarranties that the borrovver coníìrmsto the
lender;
g) the covenants agreed betvveen the lender and borrovver including;-
i) íìnancial covenants (if not included in the corporate guarantee).
Common íinancial covenants include maximum gearing, minimum
liquidity, minimum interest o r debt Service cover ratios, minimum net
worth, and so on;

26 Institute of Chartered Shipbrokers

 Loan docum entation

ii) iníormation covenants - for example, annual financial statements to

be provided to the lender within 180 days o f the year end, quarterly
management accounts within 30 days o f the quarter end, and so on;
iii) vessel covenants - fo r example, vessel to be maintained in good
condition, to have minimum acceptable class, no equipment to be
removed, not to be placed into a shipyard vvithout lenders consent,
and so on;

iv) Insurance covenants - fo r example, vessel to be insured with acceptable

underwriters for an agreed amount (usually minimum 120% o f the
loan outstanding o r the market value, vvhichever is greater);
v) minimum value clause - percentage (for example, 125%) by which
the value o f the vessel must cover the outstanding loan at all times.
Should the ratio drop belovv the agreed percentage the borrovver will
have the option to prepay a portion o f the loan o r provide additional
security to bring the ratio back into compliance;
h) events o f deíault - fo r example, which breaches o f the provisions o f the loan
agreement constitute an event o f deíault and how these can be rectiíìed and
vvithin what period.

The major events o f deíault included in the attached loan agreement appendix
6, vvhich we can use as a case study in this instance, are largely Standard and
include:-

i) non-payment o f amounts when due (o r within a relatively short grace

period - typically tw o -1 0 days) - this is by far the most serious event
o f deíault;
ii) probably the second most important event o f deíault is a breach o f
the minimum value clause (MVC - clause 14.2 in the attached loan
agreement) which requires that the value o f the ship(s) mortgaged to
the lender alvvays exceeds the outstanding amount o f the loan by an
agreed percentage.There are provisions vvithin the clause allovving the
borrovverto rectiíy breaches o f the MVC by either providing additional
acceptable security (usually in the form o f cash o r unencumbered
ships) o r prepaying a suíĩìcient amount o f the loan to bring the ratio
back into compliance.
As you will understand, if the value o f the ship falls such that the MVC
is breached, the market is unlikely to be strong and the ability o f the
borrovver to source additional funds to rectiíy the MVC is likely to be
limited. VVhat the MVC clause does though is to give rise to an event
that ensures dialogue between borrow er and lender which, in the vast
majority o f cases, results in a compromise position with the lender
perhaps waiving the MVC o r agreeing to a lower ratio fo r a period
vvith the borrovver perhaps able to agree to certain enhancements,
perhaps the pledging o f an additional cash deposit to partially rectiíy
the shortíall.

iii) íailure to meet vvaived conditions precedent (that is, conditions

subsequent) vvithin agreed timings;

iv) íailure to maintain title over the asset, disposal o f assets, changes to
shareholdings, íailure to execute required charter assignnnents (for
subsequent charters), íailure to maintain status and a number o f

Shipping Pinance 27
C hap ter 4

negative undertakings (that is, agreement on things that the borrower

will not do;
v) there are also a number o f lessen but nonetheless serious, events o f
deíaults listed vvhich include things such as illegality;
i) notice provisions including where and how the borrovver lender and any other
parties to the document should be contacted;
j) transíer provisions stipulating how and under what circumstances the lender
may transíer (sell) the loan to another party.
It should be noted that even for a relatively straightforward transaction, these
can be very substantial documents. An example is attached as appendix 6.

It is not uncommon for there to be several iterations o f the document as it is negotiated

between the lenden borrower and their iawyers until all parties are happy to sign.

4.4 S E C U R ITY
Depending on the type o f transaction being undertaken (corporate unsecured, secured or cash-
flow financing) some or all o f the following documents will be required to grant the necessary
security to the lender
I. Ship mortgage
This is usually the lenders primary item o f security and thereíore rightly receives a great
deai o f attention. A Marshall Islands fìrst preíerred mortgage is attached as appendix 8
and is used as the case study for this section.The borrovver is likely to have a preíerence
for a particuiar vessel registry although this will need to be agreed well in advance (at the
indicative term sheet stage) with the lendenThere are a huge number o f ship registries
worldwide although there are big differences írorn a legal perspective as to how they
operate.The most common international flags such as Panama, Liberia and the Marshall
Islands have tried and tested laws behind them and are generally acceptabie to lenders.
O ther common flags are UK, Isle of Man, Non/vay, Malta, Cyprus, Singapore and Hong Kong,
It may be necessary for reasons o f cabotage to use other registries but again this should be
agreed in advance with the lenden
The form o f the mortgage also varies fronn registry to registry, For example, the Isle o f Man
and UK registries operate on the basis o f a one page mortgage document containing only
the very basic iníormation o f the vessel, its owner and the mortgagee bankTo accompany
this document it is necessary to have a detailed deed o f covenants, outlining exactly how
the mortgage wiii operate and linking itto the loan agreement.

Case s tu d y
Other registries such as Liberia and the Marshall Islands (attached in the appendices and
used as the case study for this section) have a detailed íornn o f mortgage which effectively
combines the mortgage document and the deed o f covenants into one document.
This piece o f security is by íarthe most important in the shipping finance lender’s armoury,
giving access to the subject o f the Hnancing and the most valuable piece o f security.
You will see from the attached that the mortgage document includes the following key
sections:-
a) A preamble vvhere the parties concerned and the reason for the events giving
rise to the mortgage are clearly identiíìed;

28 Institute of Chartered Shipbrokers

 Loan docum entation

b) a section expiaining why the mortgage is being granted (in this case to secure
a loan being granted to the borrower - borrower and owner diíĩer in this
instance as the borrower is the parent/holding company o f the group o f which
the ownerforms one subsidiary);

c) payment covenants, clearly explaining who has a requirement to make

payments;

d) a covenant section which largely reads through to the covenants in the other
íìnance documents (in this case the loan agreement - see previous case study)
but also includes the requirement (applicable to many ship registries) that a
certificate, evidencing the fact that the vessel is mortgaged, is placed in the
ships accommodation;

e) a section giving the security trustee'^ (on behalí o f the lender) the right to
do vvhatever is necessary to protect, maintain, insure and so on, the ship if
required;

í) a section on eníorcement clearly stating the rights granted to the security

trustee (on behalí o f the lender) in the event o f a deíault under the loan
agreement and subsequent enĩorcement;

g) a section dealing with how the proceeds o f a vessel sale will be applied;

h) a power o f attorney is included (and otten incorporated into ship mortgages)

which gives the security trustee (on behalí o f the lender) the ability to sign anỵ
documents required as if they were the ownenThis is important in the case
where relations between the lender and the owner have broken down and
the latter reíuses to sign documents required by the lender;

i) one important clause is that ( 13.1 in this instance) dealing with the
total amount secured by the mortgage. It is vital, for obvious reasons,
that the amount o f the mortgage be suíĩicient to cover the loan
outstanding plus interest due (and a considerable amount may have
accrued by the time the mortgage is exercised) and any and all other
costs the lender is likely to incur,

4.5 E X ER C ISIN G A S H IP M O RTG AG E

Through the granting o f the mortgage to the lendenthe shipowner effectivelỵ provides a route
to the vessel itself in the event that the borrower is unable to meet their obligations under
the loan.

Should the borrovver deíault on their obligations under the loan, the lender must issue a
notice o f deíault (giving a set time for the deíault to be rectiíied) following vvhich, assuming no
rectiíìcation, an acceleration notice must be served which states that the loan is now due for
repayment in its entirety vvithin a very short space o f time (usually one to two days).

12 In a Standard bilateral loan the role o f security trustee vvould not exist. In a transaction
with potentially more than one lender, o ther clearly defined roles are required.The security
trustee (usually one o f the lendíng banks) is appointed to take secuhty on behalí o f all o f
the lenders and act on their instructions.

Shipping Pinance 29
Chap ter 4

Assuming the loan is not repaid as required in the acceleration notice, the lender will be in a
position to exercise their security, including the mortgage if desired.
W ith the help o f their solicitors and sometimes third-party advisers, the lender will approach
the admiralty court (or equívalent) in the iurisdiction vvhere the vessel is located.
It may well be the case that the lender waits for the vessel to enter a jurisdiction where
mortgagees receive favourable treatment (in terms o f various creditors ranking behind them
in order o f priority and in terms o f the expediency o f the legal process) on if this looks unlikely,
the lender becomes mortgagee in possession, contacting the Master and requesting he sail the
ship to the required port (usually against a commitment to pay outstanding wages and so forth).
Mortgagees in possession do face certain liabilities as they become the de facto ovvner o f the
ship so this is the last option for many lenders.
In many cases.the vessel will already be arrested by other (usually unsecured) creditors and the
lender will have the option o f joining the arrest vvhere the vessel is positioned or settling with
the creditor(s) concerned such that the arrest is released and the vessel can be moved to a
more íavourable jurisdiction and rearrested.
The admiralty court (or equivalent) will usually require the auction o f the ship after a period of
time to allow creditors to fiie their claims.
Following the auction (írequently the mortgagee bank will fund the winning bid from a pre-
arranged buyer in order not to lose control o f the ship o r to allovv it to be sold to o cheaply) the
admiralty marshall (or equivaient) will prepare a list of creditors in the order in which they rank.
In practically all ịurisdictions court costs, local port charges and crew vvages rank íirst and
íoremost and are deducted from the sale proceeds.
In mortgagee-íriendly junsdictions (UK [and dependencies], Netherlands, Singapore, USA and
so on) the first mortgagee (nearly alvvays the íìnancíng bank) will come next followed by lower
ranking mortgage-secured creditors (if any) and then unsecured creditors such as bunker
suppliers, victuallers, insurers and shipbrokers. Rarely is there anything remaining to satisíy these
unsecured creditors.
In less mortgagee-íriendly jurisdictions (for example, South Aírica, certain Latin American
countries) certain unsecured creditors rank ahead o f the mortgagee. It is thereíore vitally
important for the lender to ensure the vessel is arrested in a good (from their point o f view)
jurisdiction on if the arrest has already occurred in a less than satisíactory location, make eíĩorts
to move the ship to somewhere more suitable.

Case s tu d y
In 2 0 1I , foliowing two orthree years o f low vessel utilisation.the Client o f a bank eventuaily
ran out o f liquid funds and vvas unable to meet urgent creditor payments to agents, bunker
suppliers, victuallers and the bank and admitted as such in vvritten communication (knovvn
in the ship finance business as‘handing backthe keys').
By the tirne the bank became aware o f the situation the creditor position on the secured
(four-year-old) ship in isolation had accumulated to about u s$l.5 m excluding overdue
Capital and interest due but including signifìcant levels o f unpaid crew wages.

A t the time the bank was owed about u s$ 16m and the vessel (in good condition on a
vvilling seller-willing buyer basis) was vvorth a similar amount despite a weak market
The ship in question (there were several in the fleet) had been arrested by an agent in
Spain on foot o f an unpaid us$80k invoice.
Spain is not an unreasonable jurisdiction in terms ofthe first mortgagees ranking compared
with other creditors (for example.the arresting agent vvould rank afterthe bank) Dut it was

30 Institute of Chartered Shipbrokers

 Loan docum entation

knovvn from phor experience and speaking to Spanish lawyers that it vvould take a lengthy
period o f time for the vessel to be auctioned - estimates were in the 12 - 18-month range.
Clearly the bank did not want to fund the cost o f maintaining the vessei (insurance, crew,
maintenance, bunkers, port costs, victualling, and so on) for such an extended period as
they vvould have to do after joining the arrest.The estimated cost o f this was put in the
us$ 1.5m-2.5m range and in addition the vessel wouid be a year o r tw o older and worth
less at the time o f the sale.
All decisions in cases such as these need to be made very quickly in o rd erto prevent a bad
situation becoming worse and it was very likely that other creditors, upon hearing o f the
shipovvners troubles, would probably also join the arrest to try to protect their position.
Having quickly deduced that the best option was to move the vessel out o f Spanish vvaters,
the bank, in conjunction vvith their English'^ and Spanish'"' lavvyers, began a negotiation with
the arresting agent Agreement was reached quickly in that the agents bill would be settled
in full by the bank following which the agent vvould instruct its lavvyers to confirm to the
judge that the arrest could be liữed.

This was done vvithin tw o days beíore other creditors could react and the arrest lifted
just beíore the court's end o f business on a Priday aíternoon (thereby removing the
opportunity for other arrests to be placed on the ship).
Clearly, banks are not abie nor qualified to manage ships so, simultaneously with the agent
negotiations, the bank held discussions with a íriendly ship manager to enable the ship to
be moved once the arrest was lifted.
Owing to the short timescale it was not possible for the chosen ship manager to fly in his/
her own crew so negotiations vvere required with the incumbent crew who had not been
paid for some time and were on the verge o f arresting the vessel themselves.
The bank was required to provide indemnities to the crew that their outstanding wages
would be settled and also offered them a bonus to assist with the relocation o f the ship to
a more attractive location.
Once all these agreements had been reached.temporary Insurance cover put in place and
the vessel bunkered and victualled, it departed the Spanish port for Gibraltar
Foliowing English law, Gibraltar is well known as a jurisdiction where not only do creditors
rank in an order that is attractive to secured creditors but that has a reputation for speedy
resolution o f disputes.
Following arrangements between the banks English and Gibraltan lavvyers and the admiralty
marshall the vessel was arrested immediately upon arrivat at anchorage in Gibraltar as a
result o f a payment deíault under the loan agreement
In Gibraltar (and certain other English-based ịurisdictions) there is a fast-track process
enabling an almost immediate judicial sale as opposed to vvaiting 90 days for an auction.
In this case the bank intended to continue financing the ship which was to be owned by a
íriendly ovvner who would manage and trade it until a market recovery allowed for a sale
to be achieved that covered most, if not all, o f the bank's outstanding loan.
The vessel was valued (as required by the Gibraltan admiralty court) by a third-party
ship valuer at US$l5.5m and the judge advised that the bank had a buyer vvilling to pay
us$ 16m.

I 3 The loan agreement being governed by English law

14 The vessel being arrested in Spain by the Spanish courts

Shipping Pinance 31
Chap ter 4

As the purchase price was higher than the vessel’s market value the judge granted the
ịudicial saie to the bank’s chosen buyer.
The vessel then undenA/ent a period o f upgrading w ork (it is rare to fìnd a vessel, no
matter how young, that is vvell-maintained following an enforcement as the money is
commonly unavailable for good levels o f maintenance), change o f name, flag, and so on,
beíore recommencing trading under its new ovvnership.
The new buyer then had to pay the us$ 16m to the court - these funds obviously having
been provided by the bank. As you vvill note.the bank now had us$32m outstanding.
The vessel was advertised in the shipping press (as is a requirement o f Gibraltar and
other English-based jurisdictions) with a deadline o f 90 days set for creditors to present
their claims.

This deadline passed and the admiralty judge prepared the ranking o f liens o f the
various creditors.

Crew, the court costs and local port charges vvere deducted fìrst (in fact, the bank had
already settled all crew payments in the knovvledge they would have prior ranking in any
event) and the remaining fìgure o f close to us$ 16m was then paid to the bank in partial
settlement o f their mortgage/repayment o f their loan. As the amount received by the bank
was insuffìcient to cover all o f the outstanding loan there were no funds available but the
vessel, having been through a judicial sales process, was free o f liens.

2. Assignment o f earnings

It is usual for the lender to require a general assignment o f earnings from the borrovven
effectively entitling them to the earnings o f the vessel and stipulating that they shouid be
paid into the vessels earnings account with the iender.
If the vessel is on period employment for any signiíìcant duration (for example, more than
12 months) it is common for there to be a speciTic assignment o f the charter concerned.
In such instances it is common practice íorthe chartererto be sent a notice o f assignment
(notiíying them that the charter is assigned to the lender) and request to return an
acknowledgement o f the notice to confirm that they are avvare o f it and will abide by the
terms of it.
3. Assignment o f insurances
Similariythe lendervviil require an assignment o fth e vessel’s insurances from the borrovver,
entitling them to the proceeds o f any Insurance claims.
To avoid the lender having to be approached in connection vvith every Insurance claim
there is usually a threshold (for example, us$500,000) belov/ which Insurance proceeds
will flow directly to the borrower
As with the specific assignment o f earnings it is necessary for the insurers (hul! and
machinery, war and the p&l ciub) to be served with a notice o f assignment and requested
to acknowledge such to the lenden Along with the acknovvledgment, the lender will require
that the insurers provide them with a ietter o f undertaking in which they agree to advise
the lender if the Insurance is to be cancelled for any reason, if premiums have not been
paid, and so on.

Additionally, the insurer may be requested to include the lender as an assured on the
policy and will certainly be asked to add a loss payable clause to the policy.This clause will
stipulate that any Insurance proceeds over the agreed threshold will be paid directly to the
lender rather than the borrovven

32 Institute of Chartered Shipbrokers

 Loan docum entation

Commonly, there will be one document covering both the Insurance and earnings
assignments.
4. Guarantee
Assuming the borrower is a single purpose company ovvned by a group holding company
(in a corporate secured type o f transaction) there will be a guarantee document, confirming
the guarantors obligations tovvards the lender.
This document will include various covenants as per the loan agreement, restricting and
requiring certain things o f the guarantor.
In the event that the loan is to the group holding/parent company (as is the situation in our
case study above) then it is common not only íorthe SPC subsidiary to provide a mortgage
to the bank in support o f the loan but also a guarantee o f the borrower’s liabilities (this is
termed an 'upstream' guarantee).

It is in this document that the íìnancial covenants that the lender relies on are to be íound ịf
the guarantee is provided by a parenưholding company - othenA^ise they will be in the loan
agreement as thís is the document to vvhich the parenưholding company is a party.
5. Share pledges
It is likely that the lender will require a pledge over the shares o f the borrower and this
document is the mechanism by which this is achieved.
The purpose o f the share pledge is to allovv the lender an alternative way o f exercising
their security, by taking over the company owning the ship rather than having to enforce
the mortgage.
This can have advantages to the lenden for example, it is quicker and easier to achieve and
can be done without affecting any underlying chartering arrangements (vvhich often have a
termination provision should the ownership o f the vessel change during the charter).
6. Account pledges
The lender vvill usually require that the borrower open one or more bank accounts with
them.These are likely to include:-
a) an earnings (or operating) account into vvhich all charter hire is to be received and
fronn which all costs including voyage and opex costs and debt Service obligations
are to be debited. It is often a requirement that a minimum balance (US$250,000-
us$500,000) is maintained in this account at all times;
b) a retention account is also common vvhereby, on a monthly basis, one-third o f
the next quarterly (or one-sixth o f the next semi-annual) instalment and interest
payment, is transíerred from the above-mentioned earnings account in order that
by the end o f the quarter (or semi-annual period) suffìcient funds are held in the
account to meet debt Service obligations;
c) a drydocking account may be required whereby a monthly transíer is made such
that over a two-and-a-half and fìve-year period, sufficient funds are accumulated to
meet the expected cost o f íorthcoming intermediate and special surveys. This is
effectively a sinking fund where cash is accumulated over a period o f time to meet
anticipated costs in the íuture - in this case, scheduled intermediate and special
surveys.
All o f these accounts will be required to be pledged to the lender

Shipping Pinance 33
C h ap te r 4

A ship being constructed at the builders yard,

7. Nevvbuilding security
W hiie the above list o f documents applies to vessels aiready delivered and trading there are
speciíìc pieces o f security that the lenderwill require in reiation to newbuilding transactions.
a) Assignment o f shipbuilding contract - this will be required by the lender (in place
o f a mortgage on a delivered ship) to ensure that, should the borrovver be unable
to take delivery o f the vessel for any reason, they can eíĩectively step into their
shoes and ensure the completion o f the ship.The lender vvill also be looking at the
obligations o f the shipbuilder (for example, compensation for delay in deliverỵ, and
so forth). It is important that, if a borrow er intends to seek finance for a nevvbuilding,
they approach their lender at the stage o f negotiating the nevvbuilding contract so
that any requirements o f the lender and/or their lawyers can be incorporated into
the document beíore it is signed.
b) Similarly, the lender will reqiiire an assignment o f the refund guarantees issued by
the shipbuilders bank to the buyer (borrower), Again, it is vitally important to seek
agreement o f the lender/their lavvyers to the form o f the reíund guarantee beíore
it is signed in order to ensure it is acceptable security to the lender. An additionai
point to bear in mind is that not all reíund guarantors (banks) are considered
an acceptable risk and it is important to get the approvai o f the lender beíore
accepting a bank as the refund guarantor

34 Institute of Chartered Shipbrokers

Chapter 5

Legal aspects relating to ship

íìnance
'ĩ
The most expensive ship aíloat is the aircraít carrier
uss Gerald F Ò r d a t $ i 3bn.
C hap ter 5

5.1 S H IP R E G IS T R A T IO N

5. i . I R e q u ire m e n ts fo r th e r e g is tra tio n o f a B ritis h ship

The registration o f a British ship is an entitlement and not an obligation. For merchant ships,
pleasure vessels and bareboat charter ships (part I and part IV o f the register) applications may
be made by:

1. British citizens or persons who are nationals o f a member State other than the United
Kingdom and are established in the United Kingdom (that is, vvithin the meaning o f article
52 o f the ECTreaty) (Treaty establishing the European Economic Community) (Rome, 25
March 1957) andTreaty on European Union (Maastricht, 7 Pebruary l992)Title II art G(l));
2. British DependentTerritories citizens;
3. British overseas citizens;
4. persons who underthe British Nationality A ct 1981 are British subjects;
5. persons who under the Hong Kong (British Nationality) O rder 1986 are Bhtishnationals
(overseas);
6. corporate bodies incorporated in a member State;
7. corporate bodies incorporated in any relevant British possession and having their principal
place o f business in the United Kingdom or in any such possession; and
8. economic interest groupings duly íormed and registered in the United Kingdom
(in pursuance o f EC Council Regulation 2 137/85).
A person who is not so quaiified to be the ovvner o f a ship registered on part I o fth e register
may nevertheless be one o f the ovvners o f such ship if:
1. a majority interest (that is, over 33/64 shares) in the ship is ovvned by personswho are so
qualified; and
2. the ship is registered on part I o f the register.
Part II o fth e register provides for registration applications forfishịng boats.

5 .1.2 Residence re q u ire m e n ts

When none o f the qualiíìed ovvners is resident in the UK, a representative person must be
appointed who may be either an individual resident in the UK, or a company incorporated in
one o fth e European Economic Area (EEA) countries with a place o f business in the UK.
If more than one owner is resident in the UK, one o f them must be appointed as the managing
owner to enable the registry to correspond with one party.This must be one o f the owners in
the majority interest.

The managing ovvner is the agent for all the other owners.This is a commerciai (rather than
legal) expression and the managing owner may not, in fact, be the ship's managen In practice.the
managing ovvner also acts as a point o f contact for the registry in the UK.
These requirements o f registration are important as it establishes the genuine link between the
State and the ovvner. Some nations have higher requirements than others establishing a strong
genuine link, vvhereas other states have very weak genuine links.
O therthan in relation to requirements for entry into the UK tonnage tax regime.there appear
to be no requirements regarding the management o f ships registered in parts I and IV o f the
register from vvithin the UK.

36 Institute of Chartered Shipbrokers

 Legal aspects relating to ship finance

5 .1.3 Flag s ta te s - re g is te rìn g in d íffe r e n t c o u n trie s

Some decades ago certain countries offered their national fiag to ships o f other nations and
allowed a registry undertheir laws, laying down no requirements regarding beneficial ownership
o r control other than stipulating that a nominal ovvning company be created for registration
purposes. No genuine link between the country o f registration and the country o f real
ovvnership is requested o r expected.
The original motive o f shipowners to seek registry under flags o f other nations was to avoid
heavy taxes imposed under their home countrys laws o r other stringent regulations aimed at
shipowners.The system grew immensely in popularity since W orld W ar II when the unsubsidised
fleets o f the nations o f the vvestern world found it hard to trade competitively in world markets
against state-ovvned or controlled íleets o f the Soviet bloc.
Also, the domestic law o f a shipowner's country could íorce them to employ exclusively
seaíarers o f their own nationality.This could be absurdly expensive and have a negative eíĩect on
the proíìtability o f the ship. Some countries still insist on this.
Britain takes a moderate view and does not insist on tying British nationals to ílying the British
ílag.The countries that offer their registries without strings to shipovvner nationals o f any other
nation are.to mention a few, Panama, Liberia, Honduras and Costa Rica.
The system will continue as iong as international law recognises the right o f each sovereign State
to determine, free o f outside iníluence, on what terms and conditions it will grant its nationality/
flag to foreign-owned merchant ships.
It should be noted that in times o f war, actual ovvnership is one o f the main tests o f enemy
character and so open registry ships, when the State o f actual ownership is a belligerent, would
be regarded as enemy ships by the other belligerents.Thereíore, the international rule that the
country o f registration has the right to protect by controlling or requisitioning its registered
vessels would be varied and the State o f real and effective ownership/control wouỉd exercise
the rights o f protection. Owners who have their ships registered in open registries can continue
to trade during time o f conAict and embargoes.
International opinion has exerted great pressure on open flag states to eníorce effective
ịurisdiction and control over ships flying their flags, and particularly to maintain reasonably high
standards in the saíety regulations to be observed by such ships.
Initially, open registries were used by the u s merchant vessels who flew the Portuguese flag
to avoid the British fleet. British ships later flew different flags o f obscure German principalities
during the Napoleon shipping blockade. In 1920 the first open registries were created. Panama
was used for u s ships, allowing them to avoid boiler and hull inspections. Honduras was created
to permit the US-based United Fruit Company an inexpensive means o f transporting bananas
and the Liberian flag was the creation o f íorm er u s secretary o f State, Edward Stettinius, who
wanted a neutral fleet o f ships in the event o f Soviet aggression. Open registries now account
for 50% o f world tonnage, with the Bahamas, Liberia, the Marshall Islands and Panama all on the
vvhite list o f the Paris MOU o r p o rt State control.
This demonstrates the signiíìcant changes in the maritime industry and the vast improvements
made to open registries
Since the late I980s the traditional registries have been challenged by the emergence o f
other categories o f ship registry that could be said to be somewhere between traditional
and open registry. An example is the offshore flag such as the Isle o f Man. By offering
ovvners the employment o f crevvs at rates ruling in their country o f origin, and by also
offering a tax concession to national crews, they aim to entice íoreign-registered British
tonnage away from their foreign registry, presenting a threat to traditional and nevvly emerging
independent registries.

Shipping Pinance 37
Chap ter 5

5.2 MORTGAGES
In Downsview V Pirst City Corp [ 1993] AC 295 at 3 1i , Lord Templeman simpiy detìned a
mortgage as ‘a moitgage whether legal or equitable, is security for repayment o f a debtThe securíty
may be constituted by a conveyơnce, assignment or demise or by a charge on any interest in real or
personal property.'
Most ships are bought or built with the assistance of finance secured on the ship itself.This is
usually arranged through a mortgage.
A mortgage is the creation o f a charge over property by the person borrovving the funds (the
mortgagor) in íavour o f the lender o f the money (the mortgagee).
The Merchant Shipping Act 1995 and the Merchant Shipping (Registration o f Ships) Regulations
1993 govern the granting and registration o f mortgages o f ships under UK law. Under this
legislation it is possible to mortgage any and all o f the 64 shares in a ship.
It is unlikely that a bank vvould lend to a shipowner unless the mortgage could be taken over a
ship.This is not possible unless the ship is properly registered in a way that permits the mortgage
to be registered too. All ships registered under part I o f the registry can be mortgaged.
To register a mortgage the mortgagor signs a deed in the form set down by the Registrar
General o f Shipping and Seamen. The deed is then registered with the Registry of Shipping
against the ships registry. It is possible to have a number o f mortgages against a ship.
These mortgages will have a rank in priority according to the time at vvhich each mortgage
was registered.
A mortgage can be discharged o r released by executing the discharge section on the deed and
lodging it with the registry o rth e registry may accept a letterfrom the mortgagonThe mortgage
will then be removed. Any remaining mortgages will move up in the ranking. It is possible to find
out if a ship has any mortgages registered against it by requesting a transcript o f the registry.
Registering a mortgage in this way provides the mortgagee with no more than a bare legal
mortgage, Usually the mortgagee will want more than this and will take a deed o f covenant
from the mortgagor with fu rth e r security.The deed o f covenant is a private document which
will usually include clauses allovving the mortgagee to be paid income earned from the ship and
to be named on the ships Insurance. The deed of covenant will also indude clauses requiring
the shipownerto keep the ship properiy maintained, insured and so on.
Pailure to register a mortgage does not render the mortgage invalid and an unregistered
mortgage can be eníorced against a buyen even if they had no notice o f it (The Shizelle [ 1992] 2
Lioyd's Rep 444).
The mortgagee will have a right to sell the ship vvhich exists both at law and is likely to appear in
the deed o f covenantThe bank vvili need to give the shipowner a demand which complies with
the terms o f the mortgage agreement.
Should the shipovvner not respond to the demand, the mortgagee may take over controi o f the
ship provided thatthere is an express pow erto do this in the mortgage documentThis is called
'entry into possession’. The rnot'tgagee may aiso arrange for a private sale o f the ship or the
arrest and court sale o f the ship,
The banks right to arrange a private sale exists at common lavv- but is more usuaily found in the
mortgage documentVVhen a bank advertises a ship for sale this will obviousiy be a distress sale
and has various disadvantages; any other creditors may weli seek security by arresting the ship
which wiil effectively stop the commercial sale o f the ship until those bills are m et Also,the bank
has a duty to sell for the best price reasonably obtaínable. ị ị is possibie that the shipowner might
be obstructive about providing physical possession o f the ship to the bank
lf it is not possible to arrange a commercial sale, the bank may exercise its right to arrest the
ship and sell it through the court. A court sale will pass a clean title to the buyer as all prior

38 Institute of Chartered Shipbrokers

 Legal aspects relating to ship finance

claims on the ship will be extinguished and transíerred to the proceeds.The shipowner's co-
operation is unnecessary for a court sale.The bank does not need to settle accounts with any
other creditors and the proceeds o f the sale will be distributed to the creditors in accordance
with an order o f priorities. Mortgages rank quite highly in these priorities.
Banks can arrange with a shipownerto receive íreight o r hire and this can be agreed in vvhatever
terms suit the parties at the time.

5.3 E Q U IT A B L E MORTGAGES
A mortgage not made in the prescribed statutory form, for example, a íoreign mortgage, is not
capable o f registration and thereíore, by peculiarity o f English law, is not a legal mortgage but an
equitable mortgage only.
An equitable mortgage is one in which the mortgagee has merely received an equitable interest.
Equitable mortgages can arise:
• on an unregistered British ship or a share in such a ship;
• on íoreign vessels;

• on uníìnished vessels.

An equitable mortgage can be created by a deposit o f the legal deeds o f a ship o r it may be
made by an agreement to create a legal mortgage in consideration o f a loan being made and
would exist until that legal mortgage is in place.
In terms o f priority, equitable mortgages rank between themselves in order o f their creation. It
is important to note that a mortgage is valid from the date o f creation, not date o f registration.
Hovveventhe rank o f priorities will be determined by the date o f registration,
They always give way to statutory registered mortgages, even those created after an equitable
mortgage. An equitable mortgage is not enforceable against a buyer o f a ship who takes
possession vvithout notice o f the mortgage. Registered mortgages are always good against a
buyen even if the buyer knew nothing about it.
There is no obligation to register a mortgage. However, the significant beneíìt obtained from
registering is that the mortgage concerned will rank for priority in íront o f eariier unregistered
mortgages, later registered or unregistered mortgages, unregistered debentures created earlier
and additional advances on a mortgage registered earlier under whose agreement present and
future advances by the lender were covered.
Registration is notice to all the world and, although failure to register does not invalidate the
mortgage, it does oblige the lender to yield to later registered encumbrances. VVhat is vital to
remember is that it is the date o f registration that is important and which sets the order o f
priorities and not the date when the mortgage was created.

5.4 A D M IR A L T Y JU R IS D IC T IO N
Admiralty jurisdiction refers to the rights o f those courts dealing with matters relating to
shipping, to entertain a claim against either a ship o r other maritime property or against a
shipovvner in their personal status as such. For the purpose o f this chapter, all reíerences will
relate to English law.

It should be emphasised that admiralty law is not a system o f law wholly divorced and separated
from other areas o f lavv.The essential principles o f the law o f to rt and contract form the basis
o f much admiralty law.
Howeven there is a separate and distinct body o f admiralty legislation under a series o f Merchant
Shipping Acts commencing in the I9th century and culminating in The Merchant Shipping Act
1995, vvhich Consolidated many o f the earlier acts.

Shipping Pinance 39
Chap ter 5

The rights o f the courts to deal with maritime matters are set out in The Senior Courts Act
1981. It is important to distinguish betvveen the rules about the hearing o f the case, in other
vvords, the procedural law and the law applying to the claim itselí, vvhich is the substantive law.
The Senior Courts Act 19 8 1 concerns procedural law. Procedural law is almost completely
codified in comparison with the common law and statute lavv system that applied to the
substantive law o f the dispute.
Section 20 - 24 ofThe Senior Courts A ct 1981 reíers to admiralty actions either in personam
or in rem.The types o f claim o r dispute vvithin this jurisdiction are set out and deíìned in section
20(2) o f the Act.
The Civil Procedure Rules (CPR) 1998 and 2 0 13 and Practice Directions also apply to procedure
fo r making o r deíending a claim either in rem o r in personơm.

The 1981 Act dravvs a distinction betvveen two types o f action vvhich may be invoked in
admiralty proceedings.
• The action in personam (against the person); and

• The action in rem (against the thing).

5.5 T H E IN PERSONAM A C T IO N
This is the procedure by which one party issues and serves a claim form upon the party whom
they vvish to sue, the deíendant.This is a simple procedure where the deíendant lives in the
iurisdiction, nameiy in England and Wales. Hovveven serving a claim form on a deíendant who
resides outside the jurisdiction can be diffìcult.There are rules governing the Service o f a claim
form outside the jurisdiction and in many cases this may not even be practical or possible.
Purther, even if the claim íorm is successíully served on a defendant in another country it may, in
reality, be impossible to compel response or appearance in court.

5.6 T H E IN R E M PR O C E D U R E
The in rem procedure provides a useful alternative form o f action to the in personam procedure
for maritime and aviation disputes.The procedure is available to anyone who may have suíĩered
harm, loss o r damage as a result o f the action o f a vessel as stated by Section 742 o f the
Merchant Shipping Act 1894,
In essence.the in rem procedure enables the claimant to issue and serve their claim íorm on the
res or the vessel itselí. It is important to understand that the vessel itself is not the only res or
thing against which the action may be taken. For the purposes o f admiralty claims res is taken to
mean maritime property which could be the cargo, íreight or proceeds o f sale.
The in rem procedure has the practical effect o f permitting the arrest o f the vessel that is the
subject matter o f the action.The ship is arrested and prevented from leaving the jurisdiction in
exactly the same way as an arrested person would be.
The procedure governing the application o f the in rem procedure is íound within sections
20--24 ofThe Senior Courts A ct 1981,
Section 20 provides for the admiralty jurisdiction o f the High C ourt and section 20(2) provides
the circumstances vvhich are governed by admiralty jurisdiction. Section 21 provides for the
mode o f exercise o f admiralty jurisdiction. Section 20(1) provides that an action in personam
may be brought in all cases within section 20(2). Articles 2, 3,4 and 5 o f section 21, provide as
to when an action in rem may be broughtThis is in respect o f nearly all the claims vvithin section
20(2). Basically, it can be said that the right exists in respect o f most claims for damages arising in
maritime disputes. Some claims, however; are eníorceabie only by an action in personam.

40 Institute of Chartered Shipbrokers

 Legal asp ects relating to ship finance

Although the in rem procedure personiíìes the ship, it must be remembered that the real
deíendant is the person who would be liable in personam as regards the claim.Therefore, the
in rem procedure is additional to, and not instead o f the in personam action.The person who
would be liable in personơm is the relevant person as stated in section 21 (4)(b), and may be the
ovvner o r the charterer by demise.The idea behind the in rem action is to make the person or
persons present themselves in order for an in personam claim to be made.
An important and practical effect which is consequent upon the instigation o f an admiralty
action in rem is the issue o f priorities.The term priorities as used here refers to the standing
order (the pecking order) o f various creditors as against the íunds in court produced by the sale
o f the vessel. W here the sale produces a sum suffìcient to satisíy the claims o f all creditors then
no problem will exist.

The issue o f priorities becomes important when the sum produced is insufficient to meet the
claims o f all creditors.The basic priorities rule is that a creditors right to claim on the fund is
dependent upon the nature o f their claim.

Under English law, claims that attract maritime liens are: the damage lien, the salvage lien and
crew's accrued wages, Masters wages and disbursements.
There are, however, other maritime claims, vvhich are assigned the status o f a maritime lien by
the law o f the country in vvhich they arose o r the contract was made. As a ship moves from
one jurisdiction to another, there is a risk that the priority o f a mortgagee may be aíĩected.This
raises a conĩlict o f laws’ problem when the court has to determine the validity o f the íoreign lien
beíore it determines priorities o f claims for the distribution o f the proceeds o f the sale o f a shíp.
English law, and the laws o f countries following it, recognise the priority o f a mortgage over
other statutory rights in rem. but not over a maritime lien.

One-ship companies protect from vvidespread asset seizures.

Shipping Pinance 41
C h ap ter 5

5.7 USE OF T H E O N E -S H IP C O M P A N Y T O P R E VEN T SH IP

AR R EST
In The Looiersgrơcht [1995] 2 Lloyds Rep 41 I it was clear that the use o f a one-ship company
is a legitimate strategy for protecting various assets against arrest for maritime claims. Such a
corporate structure, comprising a parent company and numerous subsidiaries, vvhere the parent
company is one separate entity as well as the subsidiaries, is permitted once there is no genuine
intention to create a sham, fraud or íagade. For a claimant to be successful, it must be proven
that there is a distinct connection betvveen the maritime claim, the ship and the owner o f that
ship. In The Eschersheim [1976] 2 Lloyds Rep I, at 7 Lord Diplock presented this position as
follows:
7t is clear that to be liable to ơrrest ơ ship must not only be the property o f the defendant to the
action but must also be identiỊiable ơs the ship in connection with which the claim made in the
ơction arose (or a sister ship o f that ship). The nơture o f the connection between the ship and the
clơim must hơve been intended to be the same ơs is expressed in the corresponding phrơse in the
Convention; the particular ship in respect o f which the mơrítime claim arose.'
The one-ship company makes it diffìcult to identiíy who is indeed the beneficial ownen For
a ship to be arrested the person w ho is liable in personam must not merely have been in
possession or control o f the ship but must have been the owner or the charterer lf ownership
in the ship or shares in the ship changes among different one-ship companies then it becomes
diffìcult to successíully arrest the offending ship.This was the position in The Aventicum [1978]
I Lloyds Repl84, at 189 which was reaíĩirmed by Lord Donaldson in The Evpo Agnic [1988] 2
Lloyd'sRep4l I a t4 l5 .
The plaintiffs' real case is thơt Mr. Evangelos Pothitos, who describes himself as a Greek shipowner,
or his company, Pothitos Shipping Co. S.A., is the reơl ovvner of both ships and indeed o f all the ships
in the Pothitos fleet. This involves the proposition that ứie registrations are shams. I am as realistic
as most Judges who hơve served in the Commerdơl Couit but I really do not see the commerdal
advantage o f the creation of sham registered ownerships. Mr. Pothitos no doubt has a legitimate
interest in running these ships, induding the two wiứi which we are concerned, as 0 Ịleet, but he cơn
do this by running ơ series o f genuine one-ship shipowning companies as a group.’
Therefore Lord Donaldson reíused to pierce the corporate veil, proving that in combination, the
use o f the one-ship company and the 1952 Arrest Convention is a potent íormula against the
arrest o f ships or other sister ships.This is simply achieved by transíerring ships among subsidiary
companies beíore a claim is filed.This transaction, hovvever, must be at arm's length and without
an attempt to commit a íraud as discussed in The Saudi Prince [ 1982] 2 Lioyd’s Rep 255.
The use o f a one-ship company as a means o f protecting ships from arrest has proved to be a
valuable incentive to shipowners in their choice o f corporate structure.

5.8 A R B IT R A T IO N
Usually one party will appoint an arbitrator, give notice o f the appointment and commencement
o f the arbitration to the other party and request that the party appoints H.S own arbitrator
vvithin 14 days. Sometimes the parties agree on a sole arbitrator or the arbitration clause
provides for a soie arbitrator
Where the tribunal consists o f two arbitrators they may be empovvered to appoint a third
arbitrator to join the tribunal or to appoint an umpire should the two o f them fail to agree on
the decision. Where the other party íails to respond or ignores the request for appointment
of an arbitrator there may be provision in the clause for the appointed arbitrator to become
the sole arbitraton lf there is no provision then an application will need to be made to the High
Court for either an arbitrator to be appointed for the other side or for a sole arbitrator to
be appointed.

42 Institute of Chartered Shipbrokers

 Legai aspects relating to ship íinance

Once the tríbunal has been constituted, the claimant will serve claims submissions on the other
side and the tribunal.These submissions will include details of the claim and otten supporting
evidence and documents.The respondent will then draít and serve deíence submissions, again
often with evidence. If the respondent considers it has a claim against the claimant it will serve
deíence and counterclaim submissions. The next step is a reply to deíence (and defence to
counterclaim, if appropriate).The usual rule is that the reply should not include any new argument
but sometimes this is ignored and this will prompt another round o rtw o o f submissions.
When the exchange of submissions is complete, the pleadings are closed and disclosure o f
evidence takes place. Sometimes evidence will be provided with the submissions but this will
depend on the complexity o f the case and the amount o f evidence.
Most arbitration is decided on documents only without verbal submissions at a hearing by
agreement betvveen the parties. Sometimes the issues are suffìciently complex that the
advantage o f verbal submissions and the opportunity to cross-examine witnesses make a
hearing necessary.

The award will be published to the parties some time afterthe hearing or aiterthe submissions
have been closed where the arbitration is on documents alone. Avvards are usually coníidential
unless parties agree to make them public.This high degree o f coníìdentiality makes arbitration
very attractive for shipping dispute resolution.

Shipping Pinance 43
Chap ter 5

44 Institute of Chartered Shipbrokers

Chapter 6

Equity as a source of íìnance in the

shipping business

The largest offshore ship is the pipelaying and crane

ship Pioneering spirit at 477m LO A and 124m beam,
costing $ 1.7bn.
C h ap te r 6

6.1 O W N E R ’ S E Q U IT Y
In its simplest form, equity is simply cash funds used by a shipownen Although the global
economy and the shipping markets are currently going through a very diffìcult period there
remain shipowners, be th e / high net vvorth individuals (or íamilies) or sizeable corporate entities,
with access to liquid funds with which they are able to purchase one or more vessels vvithout
reliance on other sources o f íìnance.
There are several beneíìts to being able to purchase a vessel with cash resources. One o f the
principal advantages is the ability to act quickly and with certainty. As with many other asset
classes, sellers o f ships often have a preference for dealing with buyers vvho are able to pay for
the subject vessel mostly in cash.This avoids any uncertainty that may arise when a sale is agreed
between buyer and seller ‘subject to finance' with the seller then reliant on the buyers ability
to successfully conclude a transaction with their chosen íìnance provider Similarities can be
dravvn vvith the residential property market vvhere cash buyers are usually preíerred overthose
yet to secure mortgage finance. Another key beneíìt is that o f ílexibility.This can be especially
important in situations such as vessel auctions where a cash buyer can easily increase their bid if
desired without needing to seek the approval o f their lender if an initial price level is exceeded.
Purther beneíìts include the ability to continue operations unrestricted by the covenants and
conditions often included in íinancing arrangements, particularly in bank loans.
Until recently, it was difficult for shipovvners to attract external equity (private or public), mainly
as a result o f conílicting objectives. Providers o f external equity were historically keen to exert
a level o f control over the company in which they were investing whereas shipovvners were
reluctant to cede any level o f control, having been used to acting rapidly, often on little more
than gut íeeling. Following the turn o f the century it became more common to see shipowners
team up with external investors, and just prior to and during the 2004-08 boom several
companies were able to expand rapidly because o f the tìnancial muscle provided by external
equity.This was commonly injected in the fìrst instance through a private placement with the
company listing on a stock exchange (commonly in the US) thereafter, enabling the original
parties to recoup some o f their initial investment
There is a degree o f reluctance still for long-established shipovvners to cede as much control as
is required to make the partnership with external equity work, but many ovvners have become
more pragmatic in recent years as the benetìts o f becoming a largen stronger entity with the aid
o f external equity can be more readiiy evidenced. It has also become more acceptable, within
the limits allowable beíore conílicts o f interest arise, for shipowners to have a larger platíorm
in conjunction with external equity but to also retain a private shipping company, perhaps in an
unconnected or non-competing area,
The volatility in the market which had previously made the shipping industry unattractive to
traditional providers o f external equity (for example, pension and investment íunds) became
hugely attractive to those working in managed private equity (PE) and hedge funds who thrive
on volatility and see it as a good way to profit (buy low, sell high, short sell as necessary and
so on).
O ther issues which put off traditional equity providers such as secrecy and SPC ownership of
assets is taken in their stride by the PE and hedge íunds as they very often use similar structures
in the day-to-day operation o f other investments.
The following sections detail the attributes o f private and public equity as well as details on the
various stock exchanges where shipping companies commonly listtheir shares.

6.2 P R IV ATE E Q U IT Y
Private equity can be deíined as equity Capital that is not quoted on a public stock exchange.
Investments are made directly into private companies by íunds and individual investors. Private

46 Institute of Chartered Shipbrokers

 Equity as a source of finance in the shipping business

equity firms are typically structured as partnerships where the investors act as the limited
partners and provide the bulk o f the cash financing.
The size o f the private equity market has grovvn signiíìcantly since the 1970s and is probably
most well known for leveraged buyouts (LBOs) vvhere large amounts o f debt are sourced
alongside the private equity to fund a large acquisition. These acquisitions are often, but not
always, o f listed companies vvhich are then de-listed and taken private.The new private equity
ovvners then endeavourto improve the íìnancial results and prospects o f the acquired company
with the aim o f reselling the company to another íirm or cashing out through an initial public
offering (IPO). In the shipping industry, large private equity players have invested heavily in
vessels in addition to acquiring shipping companies and ports vvhile they also purchased shipping
loan books from banks.

Opening o f trading for an IPO on the NewYork Stock Exchange is signalled with a bell.

Returns sought by private equity íìrms vary from fund to fund but tend to be significant at
15%-2S%+. It is the volatility o f the shipping markets that has attracted private equity to the
industry, initially on a limited basis in the mid-2000s when booming shipping markets led to a
number o f companies being íornned to acquire tonnage and then cash out via an IPO. More
recently, interest has been íuelled by the very signiíicant recession in both the shipping and
financial markets, leading to distressed transactions and the availability o f vessels and companies
at historically low prices, giving an expectation o f the ability to profit during better times in
the íuture.
A t the beginning o f the most recent recession in late 2008, several private equity fìrms
began scouring the market for distressed transactions. Many were disappointed to encounter
intransigence from vvithin the sector; especially the banks controlling many o f the vessels
concerned, which were generally unvvilling to dispose o f assets at the prices vvhich the private
equity íirms were hoping to pay.

Since the onset o f the recession the private equity industry has become far better educated
about the shipping sector and its peculiarities, gained a vvider understanding o f the size and

Shipping Pinance 47
Chap ter 6

timing o f potential returns and o f the many risks involved which make the shipping industry
unlike any other area o f business.

A recent survey showed that around 30 private equity transactions have been concluded since
the onset o f the recession with the vast majority o f these (80%) agreed within the past three
years. As the shipping industry continues in the doldrums it can be expected that private equity
interest will be maintained with more fìrms entering or increasing their investment in the sector.

6.2.1 In v e s tm e n t s tru c tu re
Private equity investment in the industry has involved several structures butthe joint venture (JV)
with an existing shipping company o r management team is proving to be the most acceptable
to both parties involved.
Typically an agreement will be reached with an existing shipowner with a proven track record
o f operating vessels successíully. A new JV company is established vvith the majority o f equity
contributed by the private equity fund, most commonly with an investment also from the
shipovvner concerned who thereaíter acts as manager o f the vessels acquired.
The shipowner's investment in the project, although írequently small at I0%-I5%, is important
as it gives the private equity investor coníìdence that any conílicts o f interest arising from the
management o f the vessels by the shipowner are largely mitigated as both parties' interests are
aligned with respect to the success o f the JV.
Clearly, as the private equity fund is investing the lions share o f the equity, it will want maịority
control o f the JV through the number o f board appointments and/or control o f the decision-
making process. For a private shipowner; used to making decisions quickly and vvithout reíerence
to other parties.this can initially be unusual although it has proven n o tto be insurmountable.
Other areas that need to be agreed between the parties and documented in a comprehensive
JV agreement include;-
• rights o f the JV to replace the m anager in certain circumstances (for example, non-
performance);
• decisions that can be made by the manager (typically operational issues) and those that
need approval o f the JV (such as the acquisition or sale o f vessels or the entering into o f
iong-term employment contracts);
• distribution o f proceeds - will these be pro rata to each party's investment, designed
to provide the private equity fund with a certain levei o f return first or structured to
incentivise the managerto boost proíìtability as much as possible?
• how will competition issues be dealt with? W hat if the shipovvner/manager has a fleet o f
competing vessels?This is commonly resolved by the shipowner granting fìrst right o f reíusal
on vessel acquisitions and term employment to the JV;
• if one o f the JV partners needs to sell part o r all o f their investment in the JV, how wilị this
be controlled? Prequently, the remaining partner is given the first, nght o f reíusal to acquire
the departing party’s interests in order that they may control who they are co-investing
with;
• does the JV have the ability to issue additional equity and, if so, what rights do the existing
shareholders have? Often the parties will require rights allovving them to join any additional
equity issuance in o rd e rto maintain their percentage shareholding.

6.2.2 O u tlo o k
It is clear that private equity investors are becoming more knowledgeable about the shipping
industry and their presence in the market is likely to continue to grow.

48 Institute of Chartered Shipbrokers

 Equìty as a source of finance in the shipping busíness

As and when the shipping markets improve, the involvement o f private equity is expected to
lead to increased levels o f merger and acquisition and IPO activity as the funds seek to realise
their returns through either trade sales o r public listings o f the JVs in which they have invested.
On the other hand,the risk o f a prolonged dovvnturn in the dry bulk market, for instance, is that
it may result in a premature liquidation o f private equity investors, íurther depressing valuations.

6.3 P U B LIC E Q U IT Y
As opposed to investments made directly in private companies, public equity can bedefined as
shares that are quoted on a stock exchange and tradeable betvveen third parties.
Apart from a collection o f large shipping companies that have historically been listed on stock
exchanges.the shipping industry and the public equity markets were not seen as very compatible
until recent years.
There are many reasons íorthis but the major ones can be considered as:-
• levels o f transparency required as a pre-requisite for a public listing;

• corporate governance requirements and perceived ceding o f control;

• lack o f analyst coverage o f the sector leading to poorer share períormance.
Over the past 10 years the shipping industry has accessed the public equity markets on more
occasions than ever and many shipovvners have become familiar and more accepting o f the
transparency and corporate governance requirements o f the financial regulators concerned.
As more companies have become listed and a critical mass has begun to form, centred on
certain stock exchanges, analyst coverage has begun to improve.This enables potential investors
to garner an independent view of the risk and revvard o f investing in a particular share and to
íorm rational expectations on the likely íuture períormance o f their investment.
Unlike private equity where there are funds o f all sizes available to consider small as well as large
investments, public equity normally requires that a company seeks to list a very sizeable number
o f shares, usually in excess o f US$IOOm and often many multiples oíthis.
The primary reason for this is the significant costs involved in arranging an IPO - the first sale of
stock by a private company to the public.
Compliance with the multitude of rules, regulations and laws surrounding the public issuance of
shares, compared with the under-regulated private equity industry, requires the input o f a team
o f specialists to ensure all pre-conditions are met.
While the process to list a shipping company on a stock exchange is now íamiliar, there is
still a very high level o f work and due diligence involved and the combination o f lawyers and
accountants used to prepare the IPO, combined with the investment bankers required to pre-
seli the shares to investors, means that costs can run to several million dollars.

Once the groundwork has been completed and the iPO is ready for sale, a roadshow is usually
undertaken, arranged by the appointed investment bank, where the principals and management
o f the company issuing the shares visit and present to potential investors.
It is crucial that this is only undertaken once full due diligence is completed, potential questions
evaluated and any conílicts o f interest o r company specific peculiarities are comprehensively
dealt with to ensure that those presenting the company are able to deliver convincing pitches/
arguments with regards to all aspects o f the companys business.
As vvith any investment promoted to investors, be they private or public, it is crucial that an
attractive investment opportunity is proposed.

Shipping Pinance 49
C hap ter 6

For example, it is much easier to sell shares in a company vvhere the equity raised will be used
to acquire and expand a proíìtable fleet o f vessels, rather than one where equity is being raised
principally to retire a large burden o f bank debt.
During the boom in the íìnancial and shipping markets of the mid-2000s, a signitìcant number of
companies issued shares through IPOs and became listed on stock exchanges.
In those times o f irrational exuberance (to quote Alan Greenspan, previous chairman o f the
Pederal Reserve in the US) with a wall o f liquidity chasing investments in a shipping market that
seemed to defy the laws o f gravity, it was far easier to issue public shares in a company than it is
in todays straitened times.
During the boom many companies were íormed solely for the purpose o f obtaining a listing,
with vessels often identified but not yet acquired vvhich, when combined vvith íreely available
bank íìnance, meant that a principal could establish a company with a fleet of vessels for little or
no investment.
Several o f these companies were subsequently discovered to have ill-thought-out business
models and have since ceased to exist in any meaningíul way, leaving the shareholders incurring
significant losses.
There were also many good companies with well-thought-out business models listed during this
period and the majority o f these continue to operate today.

6.3.1 S to c k exchanges
There are a multitude of stock exchanges around the vvorld with most countries having one (or
more in some cases) o f their own.
Principally for reasons of wider analyst coverage, listed shipping companies have gravitated to a
small number o f stock exchanges.
There are some notable exceptions where companies are listed on a stock exchange tbr
historical reasons (such as Compagnie Maritime Belge on NYSE Euronext - previously the
Brussels stock exchange) or for access to investors from their country o f origin (such as d'Amico
International Shipping on the Milan stock exchange).
The biggest incidence o f listed shipping companies is to be found in NewYork, split betvveen
the tw o exchanges of the New York Stock Exchange and NASDAQ. The New York market
was by far the largest recipient of companies issuing public equity during the mid-2000s. As
a result, a cluster has developed to Service these companies including market analysts, legal
and accounting fìrms, and investment and commercial banks. O f the 200 or so publicly-quoted
shipping companies, nearly 25% are listed in NevvYork.
NoHA/ay is also popular although companies securing listings on the Oslo Bors tend to be either
domestic Norwegian or ofFshore industry-focused, or both.
Singapore and Hong Kong are growing in popularity, particularly with mainland Chinese
companies that are seeking a listing outside the Peoples Republic o f China.
Aside írom these top four countries vvhich account for nearly 50% o f all public-quoted
companies, there are many other stock exchanges where companies are quoted, often linked to
the nationality o f the country o f domicile.
Much effort has been íocused by certain areas, most notably Singapore and the emirate o f
Dubai, on attracting íoreign companies not only to locate in their areas but also to list on their
stock exchanges.
Singapore has been particularly successíul in attracting íoreign companies with the business-
íriendly environment key among the attractions o f the city-state.

50 Institute of Chartered Shipbrokers

 Equity as a source of finance in the shipping business

Payout ratios
In the high shipping and íìnancial markets o f the tnid-2000s it was not uncommon for companies
to market their iPOs on the basis o f a full payout dividend ratio. Essentially, this means that
all o f the companys earnings per share were to be paid out in dividends. In an environment
where vessels were earning íreight rates never seen before,the dividends paid were significant.
There was also a trend at the peak o f the market for such companies to increase the level of
dividends by íìnancing their vessels by way o f non-amortising bank loans.This was a new, and
íortunately short-lived, development running contrary to the long-held vvisdom that in shipping
cash is king and that reserves should be accumulated to enable a company to survive the
inevitable downturn.
Other companies adopted a less aggressive partial payout ratio where some earnings were
retained vvithin the company and the remainder paid out in dividends.
Growth stock companies were less prevaient during the boom vvhere all earnings were retained
by and reinvested vvithin the company, achieving growth over time with an expectation o f an
improving share price.
The recession caused many dividend policies to be revised with a paucity o f earnings to be
distributed, and in many cases, those companies with insuffìcient cash reserves or retained
earnings were íorced to restructure their balance sheets with the original shareholders facing
either signiíìcant dilution o f their equity or it being vviped out altogether.

6.3.2 M a ịo r sh a re h o ld e rs
Following a successful IPO, many companies retain a major shareholding from the original
owners. Examples ofthis are the various publicly-quoted companies owned by John Predriksen of
Noway. Although some investors become nervous when faced with such a major shareholding
it can also have beneíìts as seen in 2012 when companies associated with John Predriksen
injected equity o f us$500m into Prontline Ltd.
There are other examples o f shareholders undertaking similar activities but then there are also
a number o f cases where this has not been possible.The restructuring oíTorm, also in 2 0 12, was
notable due to the íorbearance granted to the company by its bankers and shipovvners (who
chartered vessels to the company) in exchange for a very significant equity position, diluting the
original shareholders.TheTorm restructuring was also notable because it took place outside us
Chapter I I bankruptcy protection, uniike a number o f its peers such as Genmar; Genco, Eagle
Bulk and OSG who all vvent through the Chapter I I reorganisation process.

6.3.3 S a rb a n e s -O x le y
Following large-scale corporate and accounting scandals such as Enron and VVorldCom, the
Sarbanes-Oxley Act was passed into íederal law in the us in 2002, around the time that shipping
companies were looking to list following the first signs o f a market recovery,

Paul Sarbanes, senator from Maryland and Michael Oxley, us House o f Representatives.

Shipping Pinance 5I
Chap ter 6

The Act covers a number o f issues arising from the earlier scandals but for a shipping company
(or any other company looking to list in the USA, in fact) the following are the key elements.
• A uditor independence: Tìtle II establishes standards for external auditor independence, to
litnit conílicts o f interest. It also addresses new auditor approval requirements, audit partner
rotation, and auditor reporting requirements. It restricts auditing companies from providing
non-audit services (fo r example, Consulting) ío r th e same clients.

• Corporate responsibility: Title III mandates that senior executives take individual
responsibility for the accuracy and completeness o f corporate financial reports. It deíìnes
the interaction o f external auditors and corporate audit committees, and speciíìes the
responsibility o f corporate offìcers for the accuracy and validity o f corporate íìnancial
reports. It enumerates speciíìc limits on the behaviour o f corporate offìcers and describes
speciíìc forfeitures o f benefits and civil penalties for non-compliance. For example,
section 302 requires that the companys principal officers (typically the chief executive
officer and chieí íìnancial offìcer) certiíy and approve the integrity o f their company íìnancial
reports quarterly. In short, it is very possible that a CFO or CEO could be jailed if íound to
have signed off on incorrect íìnancial iníormation,
• Enhanced íìnancial disclosure: Title IV describes enhanced reporting requirements for
financial transactions, including off-balance-sheet transactions, proforma íigures and stock
transactions o f corporate oíTicers. It requires internal Controls for assuring the accuracy
o f íìnanciai reports and disclosures, and mandates both audits and reports on those
Controls. It also requires timely reporting o f material changes in íìnancial condition and
specific enhanced reviews by the Securities and Exchange Commission (SEC) or its agents
o f corporate reports.
W ith Sarbanes-Oxley now up and running for over a decade there is a well-tuned industry
involving an army o f experienced consultants who are able to implement and audit all the
various Controls needed to compiy vvith the legislation. The Act results in signifìcantly higher
levels o f papervvork and audit trails but, like all such bureaucracy, it has become commonplace
and an accepted cost of doing business.

6.3.4 T ypes o f shares

O rdinary shares/common stock

The most common class o f share íand these are the ones typically listed in the íìnancial press)
are ordinary shares or common stock as they are reíerred to in the USA. As a unit of ovvnership,
common stocktypicaily carries voting rights that can be exercised in corporate decisions.
When a company is íìrst listed, the issuance o f these first public shares (there are likely to be
private shareholders who are listing or selling their shares) is termed an initial public oíĩering.
Subsequent issues o f shares/stock to enabie the company to expand or to repay debt are
termed follow-on oíĩerings and may be similar to the IPO with the launch o f a prospectus
or may be a controlied A tThe Market (ATM) offering where shares are sold at the prevailing
market share price.

A rights issue is the oíĩering o f rights to existing shareholders to buỵ additional shares at a set
price vvithin an agreed period. It can be useful where there is diíTiculty in selling the companys
shares to outside investors and current shareholders are required to inject íurther funds.

Preíerence shares/preíerred stock

Preíerence shares (preíerred stock in the USA) differ from common stock in that they typically
do not carry voting rights but are legally entitled to receive a certain level o f dividend payments

52 Institute of Chartered Shipbrokers

 Equity as a source of fínance in the shippìng business

beíore any dividends can be issued to other shareholders. In the event o f liquidation.the holders
of preíerence shares are paid out beíore common stock holders.
The dividends on preíerence shares may be cumulative in that unpaid dividends are accrued
and all must be paid beíore any dividends can be paid to common stock holders.
Preíerence shares may also be participating in that in addition to receivingthe preíerred dividend
mentioned above, they also share with the common stock in any remaining deal proceeds.
Participating preíerence shares are generally íavoured by the private equity industry.

Convertible preíerence shares/convertible preíerred stock

Convertible preíerred stock is preferred stock that includes an option for the holder to
convert the preĩerred shares into a íìxed number o f common shares, usually any time after a
predetermined date.

Partly paid shares

Very uncommon these days, partly paid shares in a company are ones where only a partial
payment (or deposit) has been made, with the expectation that, as the company requires more
íunds, calls are made one a time until the shares are fully paid and the calls cease.This is not very
different from the uncalled Capital portion o f an investment in a Non/vegian KS scheme.

Case s tu d y
In 2009, Navios Maritime Holdings Inc, a Greece-based, US-listed company well versed in
the debt and equity Capital markets, issued convertible preíerence shares on the following
terms:-
Issuer: Navios Maritime Holdings Inc.
Securities: Mandatorily convertible preíerred stock.
Amount o f securities: $ 165.22m ( 16,522 shares).
Maturity: $49.57m o f preíerred (4,956.6 shares) mandatorily convert on fìfth
anniversary $ I 15.65m o f preíerred ( I 1,565.4 shares) mandatorily convert on I Oth
anniversary.
Conversion: Optional conversion holders may convert preíerred shares into
common shares at any time beíore maturity at a conversion price o f $ 14.00 per
common share.
Mandatory conversion: < lf not converted beíore maturity, the preĩerred shares
convert into common shares at a conversion price o f $ 10.00 per common share
on the fìfth (30%) and I Oth (70%) anniversary o f issuance < Following the third
anniversary o f issuance, if the common stock closing price is at least $20.00 per
share for 10 consecutive business days, then the outstanding preíerred shares
automatically convert at a conversion price o f $ 14.00 per common share. Potential
dilution I 1.8m common shares (at $ 14.00) to 16.5m common shares (at $ 10.00).
Liquidation preíerence/ranking $ 165.22m preíerred are senior to common stock, but
junior to debt obligations.
Dividends 2.0% per annum ($3.30m), payable quarterly.
Attached as appendix 7 is the presentation Navios issued at the time o f the equity raise in
2009. It can be seen from slide 6 that the beneíìts for the company and existing common

Shipping Pinance 53
Chap ter 6

stock holders resulting from the issue o f these convertible preíerence shares looked to be
signiíicant.
In December 2 0 10, some 18 months following the issue, the holder o f the stock reached
agreement with Navios for it to buy back the shares.The following is a press release from
the company at that time:-
PIRAEUS, Greece, Dec. 22, 2 0 10 /PRNewswire via COMTEX/ -
Navios Maritime Holdings Inc. (“ Navios Holdings” ) (NYSE: NM) a global, vertically
integrated seaborne shipping and logistics company, announced today that it has agreed
to purchase $131.3 million o f certain series o f the 2% Mandatorily Convertible Preferred
Stock (“ Preíerred Stock") previously issued in connection with the acquisition o f Capesize
vessels.
Navios Holdings will pay $49.2 million in cash for $131.3 million o f Preíerred Stock,
reílecting a 62.5% discount to the face amount. No dividend payment will be made on
such stock for the íourth quarter o f 2 0 10, and it is anticipated that the purchase will be
completed in 2 0 10.
The holder o f the Preíerred Stock was entitled to receive an annual dividend o f $2.6
million, payable quarterly, until such stock was converted into common stock Upon
maturity o f such stock, in general, the holder would have received up to 13,132,000 shares
o f common stock.
Angeliki Prangou, Chairman and CEO o f Navios Holdings stated,''We are pleased with this
transaction, as it shows our continued ability to transact with our commercial partners in a
manner accretive to our stakeholders.VVe were able to provide the seller needed liquidity
by purchasing our equity at an effective price o f $3.75 per share, vvhich is about 27%
beiovv the current market price.''
Ms. Prangou continued,'Through this transaction, we have reduced the number o f shares
outstanding as well as the $2.6 million annual dividend obligation on the Preíerred Stock.
W e continue to have ample liquidity to progress our business plans.”

6.4 S P E C IA L PURPO SE A C Q U IS IT IO N C O M PAN IES (SPACS)

Traditionally used to acquire technology companies, these have also been used on occasion for
the acquisition o f shipping companies.
Essentially, a company is íormed, and shares are issued and listed on a stock exchange with the
primary purpose o f being used to acquire an existing company.
SPACs have been used by Navios (Navios sponsored the SPACs) among a handĩul o f others to
acquire target companies.

54 Institute of Chartered Shipbrokers

Chapter 7

Differences betvveen types of debt

and equity

The most expensive LNG carrier is the Zơrga,

a ‘Q -m ax’ vessel o f 266,433 cu. metres cargo capacity
and is valued at $236.5m.
C hap ter 7

7.1 IN T R O D U C T IO N
As opposed to dividends payable on shares (or stock) vvhich are only payable in the event
that the company produces sufRcient proíìts, interest payable on debt Instruments (bonds and
loans) is a non-voluntary payment (fìxed expense). Pailing to pay would cause the most serious
type o f event o f deíault non-payment, which could allow the lenderto accelerate the loan and
eníorce their security. Such options do not apply to holders o f shares who are not guaranteed a
dividend and whose value can go down as well as up.

7.2 S E N IO R B A N K D E B T
Senior bank debt is so called as it ranks senior to other íìnancial obligations o f the borrovven In
certain circumstances this seniority can be structural - th a t is, the íacility is documented in such
a way as to make it senior to other obligations'^ - but more commonly in ship íinance, seniority
is achieved by taking a fìrst priority mortgage on the financed ship and this automatically ranks
seniorto most other obligations.

7.2.1 M a rk e t p a rtic ip a n ts
Until the íìnancial crisis which followed the Lehman Brothers' collapse in 2008,there were many
providers o f senior bank debt to the shipping industry.
In the period 2004-8 transactions were getting ever larger as companies expanded rapidly and
the price o f new and secondhand vessels soared.
Historically, the providers o f senior bank debt have been the commercial banks and, since the
1990s, with the withdrawal o f us banks, those lenders providing íìnance to the international
industry had become predominantly European.
German banks expanded very significantly in the ship íìnance market with their portíolios
boosted Rot only by international ship tìnance but also the support o f the domestic KG (limited
partnership) industry vvhich íocused mainly on the Container secton A t the peak o f the market
the largest o f these banks had portíolios o f loans to the shipping industry approaching us$50bn.
This is a very large íigure by anỵ measure and represented a signifìcant percentage o f those
banks’ overall balance sheets.
O ther ieading providers were Scandinavian, predominantly Noi^egian, banks but these
lenders focused not only on building ever larger portíolios o f ioans but becoming arrangers
o f syndicated transactions, earning significant fee income as a result. By the mid-l990s the
tw o largest Norwegian lenders were by far and away the ieading mandated lead arrangers
o f transactions.
O ther signiíìcant providers o f finance on an international basis were Dutch, Prench, some
Japanese, UK and tw o notable North American banks.
W ithin key shipping centres domestic banks piayed a crucial role in supporting the local shipping
industry. For example, practically every Greek bank had a portíolio o f ioans, some very sizeable,
dedicated to the Greek shipping industry. Japanese shipowners were well served by Japanese
banks and Singaporean and Hong Kong banks provided ship finance to players in the Asian
markets. In recent ỵears the very sizeabie Chinese banks have become signiíìcant supporters of
the rapidly expanding Chinese shipping secton

15 For example, a loan to two joint and several borrovvers including the group holding
company and a subsidiary that earns íreight income is structurally senior to another loan
vvhere the group holding company is the only borrovvenThis is because earnings from the
subsidiary can be used to repay the first loan but oniy any excess earnings left over vvouid
be available to be dividended up to the group holding company to repay the second loan.

56 Institute of Chartered Shipbrokers

 Dífferences between types of debt and equìty

Hong Kong banks play an important role in shipping íinance for Asian customers.

Since the start o f the financial crisis and the recession in the majority o f shipping markets, the
number o f lenders actively writing new business has reduced significantly. Asian lenders appear
to be less affected than their western counterparts and, although lending in reduced volume,
continue to support shipowners in their region.
Stress-testing and new, highen Capital requirements imposed on many European banks have
made Capital intensive ship finance far less attractive.This has been compounded by the weak
State o f th e industry itselí

Many lenders have stopped lending into the industry altogether; some are lending smaller
amounts to key relationship clients only or in specific sectors (offshore being one bright spot).
Others have openly expressed their desire to exit the business altogether through the sale o f
parts or all o f their portíolios.

The result is that the traditional ship Tinance business has been decimated with half a dozen key
players now lending into the market, giving them the ability to select only the most attractive
transactions from a risk-reward point o f view.

7.2.2 L en din g p olicìes

Every bank has its own lending policies and, while they mostly contain similar components, there
are various intricacies that certain banks have and common restrictions are detailed belovv:-
• exclusion o f certain geographical regions;

• exclusion o f certain vessel types or sectors;

• restrictions on financing ships over a certain age;
• exclusions o f vessels ílying certain flags;

• restrictions on the percentage íìnance that can be granted.

An owner seeking finance would do well to research the ship íìnance market if not already
known to them, possibly by engaging a suitably experienced tìnancial consultant o r broker, in

Shipping Pinance 57
C h ap ter 7

order to narrow down the list o f potential íìnanciers that could have an interest in the project
for which finance is sought.

7.2.3 P ro v ís io n o f ia rg e r loa n a m o u n ts
Although many banks in the mid-2000s were providing very sizeable loans (US$ 100m+ in some
cases) on a bilateral basis, it is common for lenders to join together in a syndicate or club.
This has the twin beneíìts o f being able to provide very significant amounts o f íìnance to a
Client (a num ber o f us$ I bn+ transactions have been co m p le te d) and also to enable banks
to diversiíy their risk. For example, risk is far reduced with five us$20m loans to fìve diíĩerent
clients than would be the case if us$ I OOm was advanced to one Client.
For smaller transactions, banks may decide to ciub together and it is not uncommon for a
us$l 50m loan to be provided by three lenders. In this scenario each lender vvould have equal
rights and responsibilities, earn the same fees and margin and share equally in the security. One
bank would need to be appointed as the íacility agent and the security agent forthe lenders but
otherv^ise all vvould play an equal role.
Syndicated loans tend to be larger and many o f the participants períorm dilĩerent roles.There
vvould be an arranger (often more than one) of the transaction responsible for structuring
the loan and reaching a negotiated agreement with the borrovverThe íacility vvould often be
undenA/ritten, for example, one or more underwriters would commit to the borrovver that
they would provide all o f the funds required, selling participations to other participant lenders
to reduce their riskThe arrangers and undervvriters are commonly the same institution. It can
be that there are several undenA/riting levels with participations reducing in a cascade efíect as
lenders are brought into the transaction for smaller amounts. Clearly the undervvriters are taking
a larger risk in that they vvould be unable to sell down their position and they are rewarded for
this by way o f undervvriting fees.

Case s tu d y
In this example, the tead undenA/riter receives a fee o f 1.5% on the us$200m they are
underwriting, us$ I OOm is then sold to a sub-underwriter who receives a fee o f 1,0%.The
sub-underwriter then sells tw o us$25m participations to lenders and pays them a fee of
05%.
The lead undervvriter is taking the largest risk and receives fees o í us$2m (US$200m X
1.5% less us$ I OOm X 1.0% paid to the sub-underwriter).
The sub-underwriter receives fees o f us$750,000 for the risk they are taking (US$ I OOm X
l.0% less us$50m X 0.5%).

The lenders receive participation fees totalling us$250,000 (US$50m X 0.5%).

It can be seen that being an arranger and underwriter o f a syndicated transaction can
be very rernưnerative and it tends to be these lead banks who also beneíit from the
borrower’s ancillary business in the form o f cash management, deposits, hedging and so on.

58 Institute of Chartered Shipbrokers

Chapter 8 ................................. .
T^Ĩ;ÌÌ°^nuVed'õ=hipP'ng
Chap ter 8

8.1 TYPES OF SEN IO R B A N K LO A N S

8 . 1. 1 A m o rtís ín g te r m loans
These are the most straightforward and common types o f senior bank finance, provided by all
lenders throughout the w orld.A percentage o f a vessels value is provided in the form o f a loan
and the shipowner agrees to repay the loan over a period o f time in regular instalments.typically
quarterly. Appendix I , used to explain the benefìts o f leverage earlien shows a typical repayment
schedule whereby the loan is repaid in 20 equal quarterly instalments. It is possible to agree
different repayment instalments. For example, if the loan is entered into when the vessel is on a
íìxed time charter at high rates, it may be agreed between the parties to increase the amount
o f the instaiments for the period o f the time charter and reduce those thereaften reducing the
amount the vessel needs to earn and thereby reducing the risk o f the transaction. Conversely, if
the loan is entered into at a time o f low rates, as is the case today, it may be agreed to reduce
the amount o f the instalments during the íìrst year o r two, possibly even to zero ịf necessary,
and increase the instalments therealĩer when the market is expected to recoven
it is oíten the case that a vessel needs to be financed over a longer period o f time than the
lender is willing to grant. In these instances a loan is otten structured such that it repays in
instalments, leaving a balloon repayment at maturity. Imagine the scenario where financing o f
US$IOm is required over a lO-year pehod but the lender is only willing to grant a five-year
loan.This is an issue írequently faced as the projected earnings o f a vessel may only be suffìcient
to repay the loan over 10 years. A loan with the íollovving repayment schedule is agreed with
the bank:-

Q u a rte r O pening D ra w d o w n Repayment Closing

Balance Balance
0 - 10,000,000 - 10,000,000
1 r 10,000,000 - 250,000 9,750,000
2 9,750,000 250,000 9,500,000
3 9,500,000 - 250,000 9,250,000
4 9,250,000 _ 250,000 9,000,000
j ...

5 9,000,000 250,000 8,750,000

6 8,750,000 - 250,000 8,500,000
7 8,500,000 1 250,000 8,250,000
"8 8,250.000 250^000 8,000,000
9 8,000,000 250,000 7,750,000
10 7750T000 - 250,000 7,500,000
11 7,500,000 - 250,000 7,250,000
12 7,250,000 - 250,000 7,000,000
13 7,000,000 ' 250,000 6,750,000
14 6,750,000 - 250,000 6,500,000
1.............. ......... ......
15 6,500,000 250,000 6,250,000
16 6,250,000 - 250,000 6,000,000
17 6,000,000 - 250,000 5,750,000
18 5,750,000 - 250,000 5,500,000
19 5,500,000 - 250,000 5,250,000
20 5,250,000 - ị 5,250,000 -

60 Institute of Chartered Shipbrokers

 Types of loan used in shipping finance

It can be seen that the loan is repaid in 20 equal quarterly instalments o f us$250,000 but that
the final instalment also includes a us$5m balloon instalment that is repayable together with the
íìnal quarterly instalment.
This structure meets the main requirements o f both parties. The shipovvner obtains a loan with
a 10-year profile, albeit one that is curtailed at the end o f the fifth yean and the lender receives
repayment vvithin the required fìve years, albeit with the risk o f a signiíicant balloon repayment
at maturity. In instances such as these, the shipowner will, well in advance o f maturity, seek ways
o f repaying the balloon instalment and this is typically done by reíìnancing the balloon over a
further period, for example, five more years in this example, with the same or another lenden or,
in some cases, through the sale o f the íìnanced vessel.
A bullet loan would exist when there were no scheduled repayments throughout the life o f the
loan and the full amount fell due fo r repayment at maturity. As vessels are depreciating assets,
bullet loans are uncommon in shipping and, if they are advanced at all, it is usually only at a low
loan to value to ensure the vessel should still be worth more than the loan at maturity.
Bonds are typically repaid with a bullet instalment and revolving credit facilities may also be
structured this way. Such íacilities are generally only granted to large, corporate entities vvhich
wiil use such íunding and the cash flow arising from their business for fleet renevval throughout
the term.

8 . 1.2 R e vo lvin g c r e d it fa c ilítie s

These are generally larger loans, íìnancing multiple vessels (or even shipping company
acquisitions) provided to more sophisticated borrowers who can use them as part o f their
overall cash management system.
In the amortising term loan described above, the loan is repaid in íìxed, equal quarterly
instalments vvhich is straightforA/vard and simple but does not reílect the realities o f a shipping
companys cash flow vvhere íreights can be received irregularly, dependent on the vessels
trading pattern, and similarly, payments in respect o f crew wages, Insurance premia, brokerage
commissions, drydockings and so forth, are made on both regular and irregular timetables.
In a revolving credit íacility, a limit is agreed between the borrower and lender that is the
maximum amount that can be outstanding at any one time. It is common for this limit to reduce
overtime as would be the case with an amortising term loan.
Any amounts repaid may be re-borrowed to the extent that the agreed limit is not exceeded.
Another advantage o f such a íacility is that interest is only paid on the amount borrovved. Any
amounts available but undrawn are charged a commitment fee (which the lender requires to
meet the cost o f the Capital provided against committed íacilities) but this is significantly cheaper
The following table shovvs the operation o f such a íacility over a 12-month period.

Month Opening Opening Drawdown Repayment Closing Closing Available

Limit Balance Balance Limit Limit
0 5,000,000 - 5,000,000 - 5,000,000 5,000.000 -

1 1 5,000,000 5,000,000 50,000 250,000 4,800,000 5,000,000 200,000

2 5,000,000 4,800,000 250,000 210,000 4,840,000 5,000,000 160,000
3 5,000,000 4,840,000 50,000 300,000 4,590,000 4,750.000 160,000
4 4,750,000 4,590,000 175,000 180,000 4,585,000 4,750,000 165,000
5 4,750,000 4,585,000 50,000 265,000 4,370,000 4,750,000 380,000
6 4,750,000 4,370,000 130,000 - 4,500,000 4,500,000 -

'7 4,500,000" 4,500,000 50,000 527,000 ' 4.023.000 4,500,000 477,000

8 4.500,000 4,023,000 50,000 172,000 3,901,000 4,500,000 599,000

Shipping Pinance 61
C hap ter 8

4,500,000 3,901,000 50,000 479,000 3,472,000 4,250.000 778,000

4,250,000 3,472,000 778,000 4.250,000 4,250,000
4,250,000 4,250,000 50,000 250,000 4,050,000 4,250,000 200,000
4,250,000 4,050,000 317,000 367,000 4,000,000 4,000,000

It can be seen that repayments are made on an irregular basis as income is received from
íreights and so forth. It can also be seen that dravvdovvns can be made up to the íacility limit at
any time and this means that costs can be paid for as they fall due.You will note that the balance
o f the loan remains at all times vvithin the íacility limit.
The very largest shipping companies (and large corporate borrowers in general) make use o f
revolving credit íacilities and, for the very best names, these can in some cases borrow on an
unsecured basis with the lenders relying on structural seniority.These íaciiities may also have
little or no amortisation, the lenders relying on the borrovver to manage their (otten large) fleet
in terms o f replacing ageing ships and so on, to ensure it remains o f greater value and earnings
capacity than the fìnancing requires,

8.1.3 B rid g in g ioans

Less common in the current íìnancial environmentthese loans were commonplace in the heady
days o f the mid-2000s when companies were assembling íleets o f vessels for the purposes of
raising equity through IPOs (or bond issues). Bridging loans are also used to fiil the gap between
the agreement o f a shipping M&A deal and formal long-term financing.
In these loans, a lender vvould provide a borrovver (with a good chance o f raising funds through
the planned IPO or bond issue) a short-term loan to enable them to acquire the vessels
required.
They generally have few conditions other than the requirement that the loan be repaid in one
amount at maturity (typically 6 -12 months) from the proceeds o f the íundraising exercise.

As with the other types of senior debt they are generally secured with a mortgage on the
vessel(s) concerned.

8.1.4 H u n tín g licences

Again, out o f favour in the current environment, these types o f loans were relatively popular in
the írothy market o f the mid-2000s.
These ioans generally operate along the lines o f amortising term loans but to finance vessels as
yet unidentiíìed.
For example, a shipowner may take the decision to expand in the Panamax dry bulk market by
adding two íurther vessels to their fleet
in order to take advantage o f a rapidly moving market they would have a signiĩicant advantage in
their negotiations with sellers if they already had íìnancing in place.
A loan is agreed with the bank vvhere it commits to ĩinance a certain percentage o f the vessel’s
purchase price vvithoutthe beneíìt o f knowing exactly what vessei will be acquired and ultimately
providing security for its loan.
Naturally the bank will require some control overthe vessel to be acquired so it is normal for a
series o f parameters to be agreed which may include items such as the following:-
• maximum age;

• limited list o f shipbuilders;

62 Institute of Chartered Shipbrokers

 Types of loan used in shipping finance

• vessel to be special survey passed;

• vessel to have been classed by an lACS member with speciíic class notations.
By reíining the permitted parameters the lender can retain a good element of controi.

8.2 JU N IO R D E B T A N D M E Z Z A N IN E D E B T
Junior (or subordinated) debt is debt that has a lovver priority than another senior debt claim
on the same asset o r property. For example, junior debt may be secured with a second priority
mortgage (second lien) on a ship where a first priority mortgage (íìrst lien) has already been
granted to secure a senior loan facility. In the event that the íacility goes into deíault, security
is eníorced and the security vessel is sold, any proceeds will go first to the holder o f the íìrst
priority mortgage and only then will any remaining íunds go to repay the junior loan.
Junior debt is often also subordinated in terms ofcash flow with a vessels earnings used to repay
senior íacilities íìrst in accordance with their agreed repayment schedule, with any remaining
funds used to amortise the ịunior íacility.
Mezzanine debt is very similar to junior debt in that it is subordinated in terms o f security
and often also cash flow to senior íacilities. Its name comes from the fact that it is the layer
o f financing in a financial structure that sits betvveen senior debt and equity.The diíĩerence is
that mezzanine debt gives the lender the ability to share partly in the equity o f the transaction.
These are knovvn as warrants or, more usually in ship íìnance transactions, an equity kicker. For
example, the mezzanine lender may have negotiated a 10% equity kicker such that at maturity
o f the financing the equity remaining in the transaction is calculated (by deducting the total
amount o f debt from the value o r sale price o f the ship) and 10% o f this is then paid as a fee to
the mezzanine lender together with repayment o fth e mezzanine loan,
Being subordinated, the risks for a junior or mezzanine lender are higher than those íaced by a
senior lender and these loans are thereíore priced considerably higher- commonly two to four
times, depending on the actual risks perceived.
Despite the higher costs o f such debt, they can still be worthwhile instruments as they increase
the leverage on a transaction, boosting the shipowner’s return as demonstrated earỊier where
the beneíìts o f leverage were assessed.
A typical structure may involve a senior loan, secured by a íirst priority mortgage overthe vessel
of 70%, a mezzanine loan o f an additional I s% (bringing the total leverage to 85%), secured by
a second priority mortgage overthe vessel and incorporating a 10% equity kicker completed by
the shipowner’s equity contribution o f 15% of the vessel's purchase price.

8.3 E X P O R T C R E D IT A G E N C IE S
An export credit agency (ECA) is a private or quasi-governmental institution that acts as an
intermediary between national governments and exporters to issue export íinancing.
The export financing can be in the form o f credit (loans) or Insurance and/or guarantees
(whereby loans obtained from a commercial bank are guaranteed or insured by the ECA).
The most important ECAs in relation to shipping are those that exist in the world's largest
shipbuilding nations o f China, South Korea and Japan and whose mandate includes the support
o f the export o f ships built in those countries.

These are:-
• the Export Import Bank o f China (CEXIM);
• the Export-lmport Bank o f Korea (KEXIM);
• Japan Bank for International Cooperation (JBIC).

Shipping Pinance 63
C hap ter 8

Other countries all generally have an ECA o f their own.

The terms under which these ECAs are able to provide support to their shipbuilding industries
are strictly governed by rules set down by the OECD'* in their'Agreement Respecting Normal
Competitive Conditions in the Commercial Shipbuilding and Repair Industry’ vvhich is designed
to create a level playing fìeld among the w orld’s shipbuilding nations.
Current key terms permitted by the agreement are:-
• maximum tenor: 12 years;

• maximum percentage fìnance: 80%;

• commercial interest rates are to be charged.

As can be imagined in the current íìnancial crisis where ship finance from normal commercial
banks is very hard to find,these ECAs are becoming ever more important

N ot only are the terms shovvn above very attractive in the current climate but the fact that they
can provide íìnance in significant amounts is very important and goes some way to replace the
lending that is no longer available from the commercial banks.
CEXIM has been particularly active in providing íìnance to íoreign purchasers o f Chinese-built
ships and have a stated target o f increasing their lending in this area.
As mentioned above, as well as providing export financing in the form o f loans, guarantees or
Insurance may also be provided,

In these cases, loans are obtained from coinmercial banks and guaranteed by the ECA banks
listed previously or insured by ECA Insurance companies established íorthis purpose. Although
loans directly from the ECA banks are currently more popular owing to the paucity o f loans
available from commercial banks, ECA insurance-backed transactions should not be overiooked.
The main ECA insurers for China, South Korea and Japan are:-
• China Export and Credit Insurance Corporation (SINOSURE);
• KoreaTrade Insurance Corporation (KSURE);
• Nippon Export and Investment Insurance (NEXI).

8.4 SELLER’ S C R E D IT
In certain circumstances where a cash-rich seller wishes to seil a vessel to a buyer unable to
raise finance, the seller may consider providing credit to the buyer themselves.
This can take the form o f a ioan from seller to buyer on similar terms to that available from a
commercial bank (that is, a certain percentage íìnance repayable in instalments over an agreed
term at an agreed interest rate) or a more structured bareboat hire purchase arrangement
(BBHP) or demise charter. Under such an arrangement, the buyer vvould pay monthiy bareboat
hire payments to the sellen obtaining titie to (ovvnership of) the vessel following the final
payment. The amount o f bareboat hire to be paid would be calculated in such a way as to
ensure the buyer paid to the seiler the full purchase price of the vessel over time together with
all agreed costs for providing the íìnancing.

16 Organisation for Economic Co-operation and Development

64 Institute of Chartered Shipbrokers

 Typ es of loan used in shipping finance

8.5 YA R D C R E D IT
In the recent past it was sometimes possible to obtain part o f the cost o f a newbuilding from
the yard o f construction. Pinance was provided, often on a subordinated basis to the senior
bank loan, on arm’s length commercial terms where the yard saw merit in doing so in o rd e rto
conclude a transaction.
This was most common with South Korean shipyards, keen to build or maintain market share.
The current poor financial health o f many o f the w orld’s shipyards, coupled with the more
readily available íìnance from ECAs, mean that this type o f íinance is not as common as it once
was.

8.6 E Q U IP M E N T M A N U P A C T U R E R P IN A N C IN G
Certain equipment manuíacturers are able to provide fìnancing under certain conditions.
This can range from some engine manufacturers providing íìnancing íorthe cost o f replacement
main engines (often in conjunction with export credit íìnancing) to other engine manuíacturers
providing íìnancing for the whole vessel on terms similar to those available from commercial
banks, usually on condition that the íìnanced vessel uses their engines.
N ot ail equipment manuíacturers provide all o r some o f the íinancing required to acquire a
ship but this can be a useíul form o f financing if the manufacturer’s requirements can be
complied with.

8.7 PRIVATE P LA C E M E N TS
Although íorming a small part o f the overall mix o f available íinance, private placements should
be considered as they may be a useíul replacement source o f íìnance íorthe diminishing number
of commercial banks.
Not to be coníused with the private placement o f equity.the private placement o f debt involves
the sale o f an issue o f debt to a single buyer o r to a limited number o f buyers vvithout a public
offering.The placement is generally conducted by an investment banker who acts as an agent in
bringing together the seller and the buyer(s).
Needless to say, this source o f íinancing is only open to top tier companies with strong and
transparent balance sheets that the buyers can readily assess.
Buyers include predominantly us pension funds which can accept a lower return in exchange
for a lovver risk investment.

Shipping Pinance 65
Chap ter 8

66 Institute of Chartered Shipbrokers

 R*H>a ' - . ‘X
r ■ẨtWÍTr-V -: \

^ Ì^ Ẽ Í

|Ị? ^

'' ' k

Chapter 9

Debt íìnancing and the bond

markets

The most expensive Container ship is the 19, lOO-teu

CSCL Globe, costing $463m.
Chap ter 9

There are several types o f bond but the following are the main types o f interest to shipping.

9.1 H IG H Y IE L D B O N D S ( I 4 4 A ISSUES)
Commonly referred to as junk bonds because o f their sub-investment grade ratings, these
were very popular in the late l990s.They can be secured with ship mortgages o r sometimes
unsecured, are often o f lO-year duration and rarely include any amortisation o f the principal
amount. In addition.they have incurrence covenants'^ ratherthan maintenance covenants vvhich
can be easierto comply with.The pricing o r coupon paid on the bonds varies but is generally in
the 8%- 12% range vvhich can be considered attractive, especiaily in light o f the non-amortising
nature o f the bond.These are issued in the USA (under Rule 144a o f the Securities Act'®) and
are tradeable betvveen institutions. Despite a number o f high proíìle deíaults in the late I990s
these are still being issued today.The fees and expenses involved mean that these instruments
are only viable for transactions o f us$ I OOm and up and thereíore remain restricted to sizeable
shipping companies.

9.2 N O R W E G IA N B O N D S
In addition to the us high yield bond market, there is also a market in Non/vay.This market is
smaller although, because o f N owegian involvement in shipping, can be attractive. Differences
to us high yield bonds are a shorter tenor (up to seven years as opposed to 10), smaller
amounts (from us$20m) are possible, no external rating is required,the bonds are listed on the
Oslo Stock Exchange which increases tradeability, and they can be put in place quickly (two to
six weeks). Issuers do not have to be Nofwegian and many international shipping companies
have issued Norwegian bonds.

Norwegian stock exchange, the Borse,

17 An incurrence covenant dictates criteria that must be met at the time o f a specific event.
18 This allows bonds to be issued to, and traded among, quaiiíied institutional buyers without
having to comply with the full range o f protections that apply to retail investors,

68 Institute of Chartered Shipbrokers

 D eb t financing and the bond m arkets

9.3 T iT L E X I B O N D S
These are issued by u s commercial banks but guaranteed by the u s government. The
programme is managed by the us Maritime Administration (Marad) and designed to modernise
the us merchant marine and us shipyards.The terms are very attractive with tenors o f up to
25 years and, due to the us government guarantee, low pricing. However, they are only really
o f use to shipovvners constructing vessels fo r the us Jones Act cabotage trades as, despite the
attractiveness o f the íìnancing, vessels built in the USA are prohibitively expensive, costing many
multiples o f a ship built elsewhere and are thereíore uncompetitive in the international market.

9.4 C O N V E R T IB L E B O N D S
Predominantly issued in the USA, these are eíỉectively debt instruments (bonds) with warrants
(access to equity) attached.

W ith similar conditions to high yield bonds, convertible bonds also offerthe investorthe rightto
convert their holding into equity at maturity.
This optionality is attractive to certain investors who like the idea that they have received a
(albeit low) coupon throughout the term o f the bond and then at maturity, if the share price of
the company is trading above the option price built into the bond, they can convert their debt
instrument into shares making a proíìt in the process. Conversely, ifthe share price ofthe company
istrading belowthe option pricethey are not forced to convert into shares.thereby making a loss,
but can call fo rth e issuing company to redeem the bond at par. O f course.the bond can only be
converted into equity and not vice versa. Porthe shipownen such a bond can be attractive as it
allows a potential íuture increase in equity without an immediate dilution o f existing shareholders.

Clearly, these bonds can only be issued by publicly-quoted companies and, as with us high yield
bonds, in sizeable amounts.

Shipping Pinance 69
Chapter 9

PinanceAsia
Hanjin Shipping issues $150 million CB
By Anetle Jữn8S0 n 18 July 2011

The Korean Container and bulk shipping company takes advantage of a

rebound in its share price to raise Capital, but tríggers a 7.3% sell-off in its
stock.

The shipping indusừy'8 near-term outlook remalns questionable amld slowing economic growtfi and a debt detault in
Europ« not qulta off ttie table yet, but alter a rebound ín its share price durìng ttie past two weeks Korea'8 Hanjln
Shipping saw a chance to raíse new Capital from a convertible bond Issue on WBdnesday.

ttie downside protection and a decent coupon, investors were comtortable buying atthese levels, allovving the
company to raise $ 150 million from a five-year deal wt1h a three-year put ttiat was príced at the inveator-Mendly end of
terms. In secondary market trading yesterday ttie CB was bid slightly above par at 100.125.

Exlstlng shareholders reacted negatively to tfie deal, drtving the share prtce down 7.3% yesterday to erase all the gains
made duríng the past fòur days. The potential dllution won't be too great, glven ttiat Hanjin has a marlcet capitalisation of
about $1.9 billion, butthe company already has about$3 bíllíon ofdebt and investors mighthave been disappointed ttiat
Ithas added fijrtherto its llabilities.

But Hanjln, whích operates Container ships as well bulk caniers and oil-and-gas tankers, is qulte a volatile stock, and
yesterday s sell-off doesn’t necessanly stand outfrom the usual tradíng patlem. Before ttie deal, ttie share piice had
risen 21 % from a 12-month low of W20,450 on June 20, but durlng ttie past 13 sessions it had also fallen more ttian 5%
on two occasions.

The bonds, vvhlch were arranged by J.p. Morgan, were oOéred wilh a coupon and yield ranging from 3.5% to 4% and a
conversion price between 20% and 25% over Wednesday's dosing pilce of W24.700. Hiey also iéature an issuer call
atter three yeare, 8ubject to a three-year hurdle.

v\#iile suHỉcient In volume, the đemand W38 price sensltive and as noted both ữie coupon and Ihe premium were flxed at
ttie investor-friendly end, resultlng in a 4% coupon and a 20% premium. This gave a converelon prlce ofW29.640 — a
level that Hanjin was trading at as recentty as earty May. The share price hit a 2011 high above W40,000 in eatly
January and has since fóllen 45%. induding yesterday’3 drop.

Desplte the sector gloom, analysts are generally posltíve on the stock at current leveis wi1h 21 of #16 30 peopie covering
it recommenđing investors to buy. Only three advise selling. The average 12-m onti target price is W36,681. or 24%
above the inltlal converslon prlce.

However, at the flnal terms ttìe implied volatillty worked out at 27%, suggesting ữie deal wasn’t that cheap. As wftfi many
olher Korean CBs, the bonds also cannot be cónvertsd fbr the Srel 12 mónttis. The 180-day histortc volatHliy l8 about
37%.

The deal was comtbrtably covered, according to a source. although notabty ttie bookrunners diđn’t immediately exerdse
ttie $50 mllllon up8ize option. In terms of volume, the majority of Ihe demand came from outright investors in Europe,
alttìough looking at ữie number of orders. hedge funds outwelghed outrtghts by about Ihree to two — even though there
was only a smaií amount of borrow available in the market. In ăll, ciose to 60 ínvestors submitted orders.

Hanjin doesn t have any ọutstandlng bonds and aside firom a converttble bond issued by feilow Korean Container and
bulk shlpplng company STX Pan o ^ a n . wtìich has only about one-and-a-half years lett until matuilty and Ì8 qulte llliquid,
there weren't really any peers to value it against. STX Pan Ocean’8 CB Is tradlng at a spread over Libor of about 850bp.

Most investors were saíd to have used a credit spread of about 650bp to 700bp and ttie implled vol of 27% Ì8 based on
ttie wide end of ttiat range, and a stock borrow cóst of 5%. Even though ttiere was a small number of shares avaiiable for
lending in ttie market, the cost was saíd to be relatively high at 4%. The bond Hoor vvorked out at 90%.

Investors wlll get compensated fbr all dividends.

Hanjln dldn’t spedlý any use of proceeds, saying only that ttie money witl go tovvards general corporate puiposes.
Hovvever, ít says on its vvebsite ữiat it will continue to enlarge its te e t and acquire more temiinals as It puraues its goal of
becoming a "global logistlcs leader. The company currently has about 200 shlps and 13 termlnals around ttie wor1d.

70 Institute of Chartered Shipbrokers

 Debt financing and the bond m arkets

Case s tu d y
The above article from Pinance Asia relatesto a convertible bond issued by Hanjin Shipping
in 201 I.

This case study shows that, despite the relatively low coupon, the issue was attractive to
investors as the combination o f the coupon and the conversion premium were at the
investor-íriendly end o f the spectrum. Despite this, existing shareholders vvere displeased
and the company's share price dropped after the issue.This was less to do with concerns
about their dilution at conversion (Hanjin had a large market Capitalisation at the time) but
more about íears o f increasing debt levels (as, until conversion, the instrument is counted
as debt).

Shipping Pinance 71
C hap ter 9

W i

ịí

<' •

72 Institute of Chartered Shipbrokers

 Chapter 10

Other forms of íìnance

__
p The most expensive casualty was the ill-fated cruise Ị 'ỉ
.V ship Costa Concordia w hose salvage cost insurers
abòut$!.87bn.
C h ap tcr 10

Aside from the main and vvidely used debt and equity products available.there are certain niche
products that can, in certain circumstances, provide useful sources o f ship finance.

10.1 S E C U R IT IS A T IO N
This product, well known in aircraíl íinance, has been little used in ship íinance although one
notable transaction was conciuded shortly beíore the financial crisis.
A leading Container line operator wanted to raise tìnance for 12 newbuilding Container ships
costing us$800m.
A special purpose vehicle was íormed to purchase the ships which would then be chartered
back to the liner company on long-term charters.
The company then issued notes for us$255m and had these notes externally rated A A A owing
to the fact they had ĩirst call on the entire us$800m vaiue o f the vessels and an Insurance
company guarantee.
This enabled the company to attract investment grade investors who were willing to accept a
very low return on their investment because o f its very high quality.
Next, a syndicate o f ship íìnance banks provided a us$245m term loan on normal commercial
terms, safe in the knowledge that, although they were subordinated to the A AA note investors,
the total debtto vvhich they were exposed aggregated only 62% finance (total debt o f us$499m
divided by total security value o f us$800m).
The ílnal us$300m was provided by way o f unsecured bonds issued by the liner company
although it was originally intended to come from an IPO o f the special purpose vehicle (SPV)
ovvner o f the ships.
Regrettably, this was the one and only signiíìcant transaction concluded before the financial
and shipping market crises commenced although it is very possible that this structure will be
reinvigorated when things improve.
Naturally, this product is only relevant to very large, high quality transactions.

10.2 LE A S IN G
There are a number o f leasing schemes and structures applicable to shipping as covered in the
foilowing sections.

10.2.1 T a x leasíng
Until recently.tax leasingwas prevalent in the shipping industry through a num beroí jurisdictions
including the UK, Japan, Prance, Spain, the USA, and so on.
Essentially, a lessor (often large financial institutions vvishing to shelter taxable proíits) vvould
purchase a vessel and obtain Capital aliovvances for doing so,

The beneíit o f these capita! allowances was then largely passed on to the lessee o f the asset
through lovver lease rentals.
Although often complicated to unwind and thereíore o f use only to shipowners wishing to
retain control o f a vessel for a significant period o f time, the beneíìts associated with such tax
leases could result in a net present value saving to the shipovvner o f anywhere betw een 1% and
20%, depending on the iurisdiction concerned.
The UK was the most active jurisdiction for tax leases until the Revenue authorities changed the
regulations surroundingthe industry in 2006. From then on the Capital allowances were granted
to the lessee rather than the lessor which eíĩectively removed most o f the beneíìts of leasing
a ship.

74 Institute of Chartered Shipbrokers

 o th e r form s of finance

Since the íìnancial crisis and most, especially European, governments’ íocus on boosting tax
revenue, most, if not all, tax leasing advantages have been removed and many existing
structures unvvound.

Purthermore, most tax lease structures derived the highest level o f beneíìts when combined
with bank debt - that is, the lessor would acquire the vessels with the aid o f a commercial loan
- often with high leverage.

10.2.2 S h ipp ing fu n d s /le a s in g co m p an ies

A number oĩthese specialist companies exist and their original business model was to purchase
ships from shipowners and then lease (or, more accurately, bareboat charter) them back to
the same company for a period o f time.This type o f lease classiíìed as an operating iease'’ as
opposed to the Tinance leases® common in the tax leasing industry.The beneíìt o f these sale
and leaseback transactions to the shipowner is that they can realise the value of their vessel but
yet retain control o f it for a period o f time. From the leasing companys point o f view, it makes
a return on the transaction (15% internal rate o f return is relatively common) and, having title
to the ship already, it can re-employ it elsevvhere if the lessee deíaults on the bareboat charter
The majority o f these lessors were structured with equity from investors and vvould then
borrow commercial bank tìnance to allow the acquisition o f the vessel from the shipowner
The withdrawal o f a large number o f commercial banks from ship íìnance in recent years has
made this far more difficult to achieve, particularly as those banks remaining in the industry
prefer and are able to build direct relationships with top tier shipowners rather than to enter
into more structured project-type transactions such as these.
As a result, many o f these lessors have had to adjust their business model either byusing equity
to buy and operate ships outright or by lending directly on a short-term basis to shipovvners in
speciíìc situations.

10.2.3 Isla m ic leasing

Sharia law prohibits the charging o f interest on money over time. As a straightíot^ard loan
cannot thereíore be granted, Islamic finance is naturally suited to leasing.
There are certain key differences in an Islamic leasing (ljarah) structure to any other type o f
lease. One o f the most noticeable is the requirement that the Islamic íìnancier (lessor) must
maintain a true ownership interest in the asset. Clearly, in relation to a ship.this brings significant
risks that lessors in other structures do not face.
A commonly used way to isolate the Isiamic tìnancier from these risks is for a bankruptcy
remote single purpose company to be established to own and lease out the assetThis company
is then íunded bỵ the Islamic financiers with an investment ratherthan a loan and agrees to use
the íunds to buy the ship in question.
In o rd e rto move the responsibility o f maintaining, insuring and othervvise looking afterthe ship
to the lessee from the lessor, a servicing agent agreement is usually entered into under vvhich
the servicing agent (that is, the lessee) agrees to períorm these services. Sharia law requires the
servicing agent to be paid for providing these services and generally any fee charged for these
services is matched by an increase in lease rentals payable to the lessor - effectively netting
these off.

19 An operating lease is one vvhere the lease is o f a shorter term than the useíul life o f the
ship and vvhere title to the ship does not pass to the lessee at maturity o f the lease.
20 A finance lease is o f longer duration and the title o f the ship passes to the lessee at maturity
of the lease.

Shipping Pinance 75
Chapter 10

As with other lease structures, through the addition o f a further layer of leases above the fìnal
lesson it is possible to utilise commercial bank íinance in conjunction with an Islamic lease.

10.3 K O M M A N D IT G E S E L L S C H A P T (K G ) P IN A N C IN G
Thís German structure was hugely popular throughout the 1990s and right up to the shipping
and íìnancial crisis o f 2008. It was originally accompanied by significant tax benefits for investors
(now no longer in existence) which the German government permitted in o rd e rto protect and
enlarge the German shipping industry.
The KG is a limited partnership betvveen a number o f investors (passingly reíerred to as
the doctors and dentists) who are limited partners and the general partnen which is a
limited company.
Unlike a true partnership, in a limited partnership the investors are only liable for the amount of
their investment.
The KG market in Germany is well known to retail investors and sophisticated sales teams are
employed by the issuing houses, in conjunction with the German banks, to sell shares in KG to
them.
The attraction o f KGs to investors has changed over the years but it is currently that all profits
from the operation o f the ship financed by the KG, including the Capital gain on any sale, are
paid to the investors in the form o f dividends and the only tax deducted is the German tonnage
tax^' payable by the owning company. Clearly, in the boom market o f the mid-2000s, when very
signitìcant proíìts were being generated, this was very advantageous to the investors.
The German government for its part allovvs these tax beneíìts to flow to the investors as
one o f the requirements o f the KG scheme is that the vessel ovvned by the KG is managed in
Germany, providing employment and strengthening the German shipping industry.
There are beneíìts to leverage and the usual ratio o f debt to equity in a KG financing is 70;30.

Unlike the Norwegian KS detailed below, the traditional timetable for putting together a KG is
as follows:-
• the issuing house structuring the transaction orders a vessel at a shipyard^^ having held
discussions with the general partner and manager (often connected parties) and potential
charterers;
• the issuing house obtains íìnancing írom a bank (usually German) for a bridging loan to
íìnance the construction o f the vessel. In the mid-2000s this usuaily invoived payments to
the yard o f five stage payments o f 20% each.The issuing house would provide the bank
with a placement guarantee - essentialiy guaranteeing that they vvould be able to raise the
equity required to take delivery o f the ship;
• cioser to delivery, when it was easier to show investors the complete proịect, the issuing
house vvould approach investors and raise the necessary equity (traditionally 30% o f the
proịect cost). Bv this stage the bank had commonly advanced 80% of the purchase price
and would have agreed to íìnance 70% o f the proịect cost following delivery.

This process worked for a number o f years and was highly successíui with many billion dollars
raised, resulting in Germ anys elevation to the biggest ovvner of Container ships“ in the world.

2 1 Tonnage tax is a flat-rate tax that is charged relative to the tonnage 0 '’ the vessel ovvned as
opposed to normal Corporation tax that is paid on profits generated by the vessel.
22 Historically this had to be a German shipyard but now can be anywhere.
23 KG íìnanced other vessel types but the Container ship market was where they excelled.

76 Institute of Chartered Shipbrokers

 o th e r form s of tinance

Uníortunately, the slump in the vvorld economy driven by the íìnancial crisis had a huge impact
on the Container ship market and particularly on the values o f Container ships.

This resulted in very significant problems for the banks and issuing houses involved in the KG
secton Because market practice resulted in the bank providing a bridging loan well in advance o f
any equity being raised.the situation explained in the followìng example arose many times.

a) A bank advances 4 X 20% instalments totalling u s$4 0 m for a vessel contracted at u s$5 0 m ;

b) the value o f the vessel íalls from us$50m to us$25m creating negative equity o f us$25m
from delivery;
c) the issuing house is unable to raise equity as no investor vvants to invest in such a negative
position;

d) the bank could cali on the placement guarantee issued by the issuing house but many o f
these have been issued with total value o f many times the worth o f the issuing house so
they are effectively worthless;
e) the bank has no choice but to íìnance the íìnal 20% instalment otherwise it has no asset to
secure its loan.
As the KG market is such a significant part o f the German shipping and ship íinance industry,
the above situation, combined with the fact that many established KGs with investors in place
and vessels on the vvater are also suffering and requiring Capital injections from their investors to
keep going, means that this market is effectively closed for the íoreseeable íuture.

10.4 K O M M A N D IT T S E L S K A B (K S ) P IN A N C IN G
This NorM^egian structure, similar to the KG in a number o f ways, was very popular in the 1980s
when very signitìcant tax beneíìts were available but, after a few years in the doldrums, it has re-
emerged as a viable financing scheme in recent years.
Like the German KG, the KS is a limited partnership with one general partnen Typicaliy, the
investors in a KS would be fewer in number with larger participations.
A major difference is that in a KS, the equity is raised at commencement o f the project, this
being íacilitated to some extent by the fact that KS íìnancings tend to focus on secondhand,
ratherthan newbuilding vessels.
Another difference is the concept o f uncalled Capital. The KS limited partners contribute their
initial investment to the project (typically 15% o f the project cost) but then are also required to
commit a similar amount in uncalled Capital. Should the project proceed according to plan, the
uncalled Capital will not need to be contributed but, if the KS requires additional íunding, then
these amounts are called, In most cases.the bank providing the íinancing to the project will take
an assignment o f the uncalied Capital.

Shipping Pinance 77
Chap ter 10

78 Institute of Chartered Shipbrokers

Chapter I I

Signifìcance of the debt-equity

structure for a shipping company

The largest LNG fleet belongs to Q atar Gas Transportation

Co. w ith 54 ships values at m ore than $1 Ibn.
Chap ter I I

I l.l BA SE L C O M M IT T E E
The Basel Committee is the international body that produces regulations under vvhich the
w orld’s banks must operate and was ĩormed in 1974.

The original rules, requiring the banks to maintain a fìxed amount o f Capital against loans and
other assets, were amended in 2004 with the introduction o f Basel II vvhich sought to bring
the regulations up to date with the products oíĩered and risks faced by banks at that time. A
key element o f these reíorms was the introduction o f íoundation, standardised and advanced
approaches with the latter allowing the banks to maintain signiíìcantly reduced amounts o f
Capital against certain risks.

Clearly, these were unable to prevent the global íìnancial crisis which started with the sub-prime
loans debacle in 2007 and deteriorated with the bankruptcy o f Lehman in 2008 only a few
short years after the introduction o f the revised regulations.
In 2010-1 I, Basel III was introduced with its implementation due across the vvorld over the
Corning tw o to three years. This will signiíìcantly increase the Capital and liquidity banks are
req uired to m aintain and, as a result, pricing charged by lenders is expected to increase (Capital
costs money to maintain).This is especially likely to be the case for large, iong-term loans, exactly
the type o f fìnance prevalent in the shipping industry. Time will tell but the move tovvards
alternative sources o f íìnance could be prescient, especially when us dollar interest rates begin
to climb from their current historic low point.

I 1.2 B E N E P IT S OF LEVER AG E
Despite the many beneíìts o f financing a vessel with 100% owner’s equity there is one notable
drawback, that o f the lower return on investment that wili result.This is more easily explained in
the following example.
A shipovvner has the choice to purchase a secondhandvessel from themarket with either (a)
100% cash equity, (b) a conservative 50% LTV loano r (c) amore aggressive 80% LTV loan.
'he following assumptions are used in the calculations;-
the vessel costs us$ I Om;
th e vessel is sold fo r us$5m in five ye ars'tim e;
the vessel earns a time charter equivaient o f us$ 12,500/day throughout the fìve years;
operating expenses are us$5,000/day initially and escalate by 2.5% per annum;

the 50% and 80% loans are repaid in 20 equai quarterly instalmen^ overthe fìve years;
the interest rate on the 50% loan is 5%;
the interest rate on the 80% loan is 7.5%^''.

24 The rate is higher as the greater leverage presents a more significait risk to the lenden

80 Institute of Chartered Shipbrokers

 Significance of the debt-eq u ity stru ctu re fo r a shípping com pany

The following outcomes result^^:-

Initìal Cash flo w Vessel Net Return on IRR

Equity Proceeds Sale Proceeds Investment
Investment Proceeds
No 10, 000,000 12,282,200 5,000,000 7,282,200 73% 18%
Leverage
50% 5,000,000 6,625,950 5,000,000 6,625,950 133% 26%
Leverage
,
2 000,000 2,707,200 5,000,000 5,707,200 285% 39%
Leverage

The benefits o f leverage on the subject transaction can be seen to be signiíicant with higher
leverage increasing the owner's return. N o t taken into account here are other issues such as
opportunity cost. For example.the shipowner in question could invest the us$8m equity saved
in the 80% leverage scenario in other investments. If left on deposit, these funds could earn
interest but, if used to acquire four additional sister ships, the advantages in terms o f building a
substantial fleet and earning substantial returns could be signifìcant. O f course, leverage is not
vvithout its risks including those o f íalling charter rates and ship values.

25 The spre.adsheets used in the calculation o f these íigures can be seen in Appendix I .

Shipping Pinance 81
C hap ter I I

82 Institute of Chartered Shipbrokers

 1 3

■:

0M

The most expensive oil clean-up operation was the

Deepwater Horizon, estimated at $54bn.
Appendices Contents

Appendices Contents
Appendix 1 Typical repayment schedule 85

Appendix 2 Single vessel cash flow 89

Appendix 3 Breakeven comparison 93

Appendix 4 LTV comparison 93

Appendix 5 Balloon comparison 94

Appendix 6 Loan agreement 95

Appendix 7 Navios Maritime Holdings lnc,'Fleet and

company update',June 23, 2009 145

Appendix 8 Marshall Islands Mortgage 157

84 Institute of Chartered Shipbrokers

 Appendix I Typical repayment schedule

0% LEVERAGE
LO AN B O O K
Interest 0.0%
Quarter Opening Drawdown Repayment Closing Interest
Balance Balance
0 - - - - -

1 - - - - -

2 - - - - -

3 - - - - -

4 - - - - -

5 - - - - -

6 - - - - -

7 - - - - -

8 - - - - -

9 - - - - -

10 - - - - -

11 - - - - -

12 - - - -

13 - - - - -

14 - - - -

15 - - - - -

16 - - - - -

17 - - - - -

18 - - - - -

19 i
- - - - -

20 - - - - -

DEBT SERVICE SUMMARY

Year 1 2 3 4 5
Interest - - - - -

Capital - - - - -

Total - - - - -

OPERATING EXPENSEASSUMPTIONS
Year 1 2 3 4 5
Daily Operating Expense 5,000 5,125 5,253 5,384 5,519
Annual Operating 1,825,000 1,870,625 1 , 9 1 7 , 3 9 1 1,965,325 2,014,459
Expense
CASH FLOW
Year 1 2 3 4 5
Daily TCE 12,500 12,500 12,500 12,500 12.500
AnnualTCE Income 4,375,000 4,375,000 4,375,000 4,375,000 4,375,000
Annual Operating 1,825,000 1,870,625 1,917,391 1,965,325 2,014,459
Expense
Operating Cash ftow 2,550,000 2,504,375 2,457,609 2,409,675 2.360,541
Interest - - - - -

Capital - - - - -

Net Cash flow 2,550,000 2,504,375 2,457,609 2,409,675 2,360,541

Cumulative Cash flow '2,550,000 5,054,375 7,51 1,984 9,921,659 12,282,200

Shipping Pinance 85
Appendíx I Typical repayment schedule

50% LEVERAGE
LOAN BOOK
Interest 5.0%
Quarter Opening Drawdown Repayment Closing Interest
Balance Balance
0 - 5,000,000 - 5,000,000 -
1 5,000,000 - 250,000 4,750,000 62,500
2 4,750,000 - 250,000 4,500,000 59,375
3 4,500,000 - 250,000 4,250,000 56.250
4 4,250,000 - 250,000 4,000,000 53,125
5 4,000,000 - 250,000 3,750,000 50,000
6 3,750,000 - 250,000 3,500,000 46,875
7 3,500,000 ị 250,000 3,250,000 43,750
8 3,250,000 - 250,000 3,000,000 40,625
9 3,000,000 - '250.000 2,750,000 37,500
10 2,750,000 - 250,000 2,500,000 34,375
11 2,500,000 - 250,000 2,250,000 31,250
12 2,250,000 - 250,000 2,000,000 28,125
13 2,000,000 - 250,000 1,750,000 25,000
14 1,750,000 - 250,000 1,500,000 21,875
15 1,500,000 - 250,000 1,250,000 i 8,750
16 1,250,000 - 250,000 1,000,000 15,625
17 1,000,000 - 250,000 750,000 12,500
18 750,000 - 250,000 500,000 9,375
19 500,000 250,000 250,000 6.250
20 250,000 - 250,000 - 3,125
DEBT SERVICE SUMMARY ị
Year 1 2 3 4 5
Interest 231,250 181,250 131,250 81,250 31,250
Capital 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Total 1,231,250 1,181,250 1,131,250 1,081,250 1.031,250
OPERATING EXPENSEASSUMPTIONS Ị
Year 1 2 3 4 5
Daily Operating Expense 5,000 5,125 5,253 5,384 5519
Annual Operating 1,825,000 1,870,625 1,917,391 1,965,325 2,014,459
Expense
CASH FLOW 1
Year 1 2 3 4 5
Daily TCE 12,500 12,500 12,500 12,500 [?.,500 •
AnnualTCE Income 4,375,000 4,375,000 4,375,000 4,375,000 4375,000
Annual Operating 1,825,000 1,870,625 1,9! 7,391 1,965,325 2014,459
Expense
Operating Cash flow 2,550,000 2,504,375 2,457,609 2,409,675 2360,541
Interest 231,250 181,250 13 1,250 81,250 31,250
Capital 1,000,000 1,000,000 1,000,000 1,000,000 1000,000
Net Cash flow 1,318,750 1,323,125 1,326,359 1,328,425 1329,291
Cumulative Cash flow 1,318,750 2,641,875 3,968,234 5,296,659 6625,950

86 Institute of Chartered Shipbrokers

 Appendix I Typicai repayment schedule

80% LEVER AG E
LOAN BOOK
Interest 7.5%
Quarter Opening Drawdown Repayment Closing Interest
Balance Balance
0 - 8,000,000 - 8,000,000 -
1 8,000,000 - 400,000 7,600,000 150,000
2 7,600,000 - 400,000 7,200,000 142,500
3 7,200,000 - 400,000 6,800,000 135,000
4 6,800,000 - 400,000 6,400,000 127,500
5 6,400,000 - 400,000 6,000,000 120,000
6 6,000,000 - 400,000 5,600,000 112,500
7 5,600,000 - 400,000 5,200,000 105,000
8 5,200,000 - 400,000 4,800,000 97,500
9 4,800.000 - 400,000 4,400,000 90,000
10 4,400,000 - 400,000 4,000,000 82,500
11 4,000,000 - 400,000 3,600,000 75,000
12 3,600,000 - 400,000 3,200,000 67,500
13 3,200,000 - 400,000 2,800,000 60,000
14 2,800,000 - 400,000 2,400,000 52,500
15 2,400,000 - 400,000 2,000,000 45,000
16 2,000,000 - 400,000 1,600,000 37,500
17 1,600,000 - 400,000 1,200,000 30,000
18 1.200,000 - 400,000 800,000 22,500
19 800,000 - 400,000 400,000 15,000
20 400,000 - 400,000 - 7,500
DEBT SERVICE SUMMARY
Year 1 2 3 4 5
Interest 555.000 435,000 175,000 195,000 75,000
Capital 1,600,000 1,600,000 1,600,000 i ,600,000 1,600,000
Total 2,155,000 2,035,000 'Ĩ,9Ĩ5,000 1,795,000 1,675,000
OPERATING EXPENSEASSUMPTIONS
Year 1 2 3 4 5
Daily Operating Expense 5,000 5,125 5,253 5,384 5,519
Annual Operating 1,825,000 1,870,625 1,917,391 1,965,325 2,014,459
Expense
CASHF LOW
Year 1 2 3 4 5
Daily TCE 12,500 12,500 12,500 12,500 12,500
AnnualTCE Income 4,375,000 4,375,000 4,375,000 4,375,000 4,375,000
Annual Operating 1,825,000 1,870,625 1,917,391 1,965,325 2,014,459
Expense
Operating Cash flow 2.550.000 2,504,375 2,457,609 2,409,675 2,360,541
Interest 555,000 435,000 315,000 195,000 75,000
Capital 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000
Net Cash flow 395,000 469,375 542,609 614,675 685,541
Cumulative Cash flow 395,000 864,375 1,406,984 2,021,659 2,707,200

Shipping Pinance 87
Appendix I Typical repayment schedule

IRR C A L C U L A T IO N S

88 Institute of Chartered Shipbrokers

 Appendix 2 Single vessel cash flow

SIN G LE VESSEL C AS H F L O W
LOAN BOOK
USD LIBOR 0.25%
Margin 3,00%
All in Rate 3.25%
Quarterly Opening Drawdown Repayment Closing Interest Annual Annual
Period Bailance Balance Interest Repayment
0 - 10,000,000 10,000,000 -
1 10,000,000 - 250,000 9,750,000 81,250
2 9,750,000 250,000 9,500,000 79,219
3 9,500,000 _ 250,000 9,250,000 77,188
4 9,250,000 250,000 9,000,000 75,156 312,813 1,000,000
5 9,000,000 - 250,000 8,750,000 73,125
6 8,750,000 - 250,000 8,500,000 71,094
7 8,500,000 - 250,000 8,250.000 69,063
8 8,250,000 - 250,000 8,000,000 67,031 280,31 3 1,000,000
9 8,000,000 - 250,000 7,750,000 165,000
10 7,750,000 - 250,000 7,500,000 62,969
11 7,500,000 - 250,000 7,250,000 60,938
12 7,250,000 - 250,000 7,000,000 58,906 247,813 1,000,000
13 7,000,000 - 250,000 6,750,000 56,875
14 6,750,000 - 250,000 6,500,000 54,844
15 6,500,000 - 250,000 6,250,000 52,81 3
16 6,250,000 - 250,000 6,000,000 50,781 215,313 1,000,000
17 6,000,000 ' - 250,000 5,750,000 48,750
18 5,750,000 - 250,000 5,500,000 46,719
19 5,500,000 - 250,000 5,250,000 44,688
20 5,250,000 - 250,000 5,000,000 42,656 182,813 1,000,000
21 5,000,000 - 250,000 4,750,000 40,625
22 4,750,000 - 250,000 4,500,000 38,594
23 4,500,000 - 250,000 4,250,000 36,563
24 4,250,000 - 250,000 4,000,000 34,53 1 150,313 1,000,000
DEBT SERVICE SUMMARY
Year 1 Year 2 Year 3 Year4 Year 5 Year 6
Interest 312,813 280,31 3 247,81 3 215,313 182,813 150,313
Repayment 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Total Debt 1,312,813 1,280,313 1,247,81 3 1,215,313 1,182,813 1,150,313
Service
OPERATING EXPENSEASSUMPTIONS
Annual 2,50%
Escalation
Year 1 Year 2 Year3 Year4 Year 5 Year 6
Daily Opex 6,000 6,i50 6,304 6,461 6,623 6,788
Annual 2,190,000 2,244,750 2,300,869 2,358,390 2,417,350 2,477,784
Opex
Annual 250,000 250,000 250,000 250,000 250,000 250,000
SG&A Costs
Total Opex 2,440,000 2,494,750 2,550,869 2,608,390 2,667,350 2,727,784
&SG&Ả

Shipping Pinance 89
Appendix 2 Single vessel cash flow

BREAKEVEN C A LC uư vriO N
Operating 350
Days
Year 1 Year2 Year3 Year4 YearS Year 6
Debt 1,312,813 1,280,313 1,247,813 1,215,313 1,182,813 1,150,313
Service
Opex & 2,440,000 2,494,750 2,550,869 2,608,390 2,667,350 2,727,784
SG&A
Total 3,752,813 3,775,063 3,798,681 3,823,703 3,850,163 3,878,096
Daily 10.722 10,786 10,853 10,925 11,000 11,080
Breakeven
Average 10,895
Breakeven
BREAKEVEN COMPARISON
2001 2002 2003 2004 2005 2006 2007
Historic 1 18,870 i 3,325 14,720 18,994 26,029 27,000 25,904
YearTC
Rate
Average 10,895 10,895 10,895 10,895 10,895 10,895 10,895
Breakeven
Average i 15,062 15,062 15,062 15,062 15,062 15,062 15,062
Historic
(excl 2005-
8)
LOANTOVALUE COMPARISON
(Vessel depreciơted straÌRht line to zero at 25 ỵears)
Start Year 1 Year2 Year 3 Year4 Year 5 Year 6
Vessel Vaiue 16,500,000 15,400,000 14,300,000 13,200,000 12,100,000 11,000,000 9,900.000
Loan 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000
Outstanding
LTV 61% 58% 56% 53% 50% 45% 40%
Security 165% 171% 179% 189% 202% 220% 248%
Cover
BALLOON COMPARISO N
2001 2002 2003 2004 2005 2006 2007
16-Year-Old 12,000,000 10,500,000 11.000,000 20,000,000 23,000,000 27,000,000 28,000,000
Vessel Value
Balloon 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
LTV 33% 38% 36% 20% 17% 15% 14%
Security 300% 263% 275% 500% 575% 675% 700%
Cover

90 Institute of Chartered Shipbrokers

 Appendix 2 Single vessel cash flow

BASE CASE CASH FLOW PROJECTION

(Earnings = Average Historíc Timechơrter Rates with boom yeơrs excluded)
Year 1 Year 2 Year3 Year 4 Year 5 Year 6
Daily 15,062 15,062 15,062 15,062 15,062 15,062
Earnings
Annual 5,271,661 5,271,661 5,271,661 5,271,661 5,271,661 5,271,661
Earnings
Annual 2,440,000 2,494,750 2,550,869 2,608,390 2,667,350 2,727,784
Opex &
SG&A
Operating 2,831,661 2,776,9 11 2,720,792 2,663,271 2,604,3 11 2,543,877
Cash flow
Interest 312,813 280,31 3 247,813 215,313 182,813 150,313
Interest 9.1 9.9 11.0 12,4 14.2 16.9
Cover Ratio
Repayment 1,000,000 1,000,000 1,000,000 1,000,000 1,000.000 1,000,000
Debt 2,2 2.2 2,2 2.2 2,2 2.2
Service
Cover Ratio
Net Cash 1,5 18,849 1,496,599 1,472,980 1,447,958 1,421,498 1,393,565
flow
Cumulative 1,518,849 3,015,447 4,488,427 5,936,385 7,357,884 8,751,448
Cash flow
VVORSE CASE CASH FLOW PROJECTION
(Earnings = /ovvest Average Historíc Timechơrter Rates)
Year 1 Year2 Year 3 Year4 YearS Year 6
Daily 13,160 13,160 13,160 13,160 13,160 13,160
Earnings
Annual 4,606,000 4,606,000 4,606,000 4,606,000 4,606,000 4,606,000
Earnings
Annual 2,440,000 2,494,750 2,550,869 2,608,390 2,667,350 2,727,784
Opex &
SG&A
Operating 2,1 66,000 2,1 1i ,250 2,055,1 3 1 1,997,610 1,938,650 1,878,216
cásh flow
Interest 312,813 280,313 247,813 215,313 182,813 150,313
Interest 6.9 7,5 8.3 9.3 10.6 12.5
Cover Ratio
Repayment 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Debt 1.6 ỉ.6 1,6 1.6 1,6 1,6
Service
Cover Ratio
Net Cash 853,188 830,938 807,319 782,297 755,837 727,904
flow
Cumulative 853,188 1,684,125 2,491,444 3,273,741 4,029,578 4,757,482
Cash flow

Shipping Pinance 91
Appendìx 2 Singie vessel cash flow

92 Institute of Chartered Shipbrokers

 Appendỉx 3-5

A p p e n d ix 3

Breakeven comparison
Historic one-yearT C rate Average breakeven Average historic (excl 2005-8)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

A p p e n d ix 4

LTV comparison (millions)

Start Year I Year2 Year3 Y ear4 YearS Year 6

Shipping Pinance 93
Appendix 3-5

A p p e n d ix 5

Balloon comparison
l6-year-old vessel value Baíloon

94 Institute of Chartered Shipbrokers

 Appendix 6 Loan agreement

Date

A S H IP P IN G C O M P A N Y S.A.
as Borrovver

- and -

T H E B A N K O F S H IP P IN G L T D
as Lender

LO AN AG R EEM EN T

relating to a loan ía c ility o f us$25,000,000

to fmance m.v. “ Capesize”

Shipping Pinance 95
Appendix 6 Loan agreement

IN D E X

Clause Page

1 INTERPRETATIO N 1

2 P A C IL IT Y 10

3 DRAW DOW N 11

4 INTEREST 11

5 INTEREST PERIODS 12

6 D E P A Ư LT IN T E R E S T 12

7 R E P AY M E N T A N D P R EPAYM EN T 13

8 C O NDITIO NS PRECEDENT 15

9 R E P R E S E N T A T IO N S A N D W A R R A N T 1 E S 15

10 G ENER AL U N D E R TA K IN G S 17

1I CORPORATE U N D E R TA K IN G S 20

12 INSURANCE 21

13 SHIP C O VEN AN TS 24

14 SECURITY COVER 27

15 PAYM ENTS A N D C A LC U L A T IO N S 28

16 A P P LIC A TIO N 0 F RECEIPTS 29

17 A P P LIC A TIO N O P E A R N ÍN G S 29

18 EVENTS OF D E P A U LT 30

19 FEES A N D EXPENSES 33

20 IN D E M N ITIE S 34

21 NO SET-OFF OR T A X D E D U C TIO N 36

22 IL L E G A L IT Y , ETC 37

23 INCREASED COSTS 38

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 Appendix 6 Loan agreement

24 SET-OFF 39

25 TRANSPERS A N D CHANGES IN LE N D IN G OFFICE 39

26 V A R IA T IO N S A N D WA1VERS 40

27 NOTICES 40

28 SUPPLEM ENTAL 42

29 L A W A N D lU R IS D IC T IO N 42

SCHEDULE 1 D R A W D O W N N O TIC E 44

S C H E D U LE 2 C O N D ITIO N PRECEDENT DO CUM EN TS 45

E X E C U TIO N PAGE 47

Shipping Pinance 97
A p p e n d íx 6 Loan agreement

T H IS A G R E E M E N T is made on 2004

BETVVEEN

(1) A SHLPPING C O M P A N Y S.A. a company incorporated in the Cayman Islands whose

registered office is at Business Park, George Tow n, Grand Cayman the Cayman Islands
(the “ B orrovver” ); and

(2) T H E B A N K O F S H IP P IN G L T D acting through its o ffice at Head O ffice, London,

England (the “ L e n d e r” ).

BACKGROUND

(A ) The Lender has agreed to make available to the B orro w er a loan fa c ility o f $25,000,000
for the purpose o f financing 68% o f the Contract Price o f the capesize dry b ulk carrier
m.v. “ Capesize” currently under construction by the B uild e r and to be purchased by the
Borrower.

(B ) The Lender has agreed to enter into interest rate swap transactions w ith the Borrower
from time to time to hedge the B o ư o w e r’ s exposure under this Agreem ent to interest rate
íluctuations.

IT IS A G R E E D as follows:

1 IN T E R P R E T A T IO N

1.1 D e finitions. Subject to Clause 1.5, in this Agreement:

“ A ccount B an k” means T H E B A N K OF S H IPP IN G L T D acting through its o ffice at

Head O ffice, London, England;

“ A ccount S ecurity Deed” means a deed or deeds creating security in respect o f the
Earnings Account, in such íbrm as the Lender may reasonably approve or require;

“ A pp ro ve d M a n a g e r” means A Shipmanager S.A., a company incorporated in Liberia

whose registered office is at 80 Broad Street, M o n ro via, Liberia or any other company
which the Lender may approve from tim e to tim e as the a manager o f the Ship;

“ A v a ila b ility P eriod” means the period com m encing on the date o f this Agreement and
ending on:

(a) 30 September 2004 (o r such later date as the Lender may agree w ith the Borrower);
or

(b) i f earlier, the D raw dow n Date or the date on w h ich the Lender’ s obligation to make
the Loan is cancelled or terminated;

“ B u ild e r” means V ery Heavy Industries Co., Ltd., a company incorporated in the
Republic o f Korea whose registeređ o ffice is at Ulsan, Korea;

“ Business Day” means a day on w h ich banks are open in Piraeus^ London and D u b lin
and, in respect o f a day on w hich a payment is required to be made under a Pinance
Document, also in New Y o rk C ity;

“ C o n íìrm a tio n ” and “ E a rly T e rm in a tio n D ate” , in relation to any continuing

Designated Transaction, have the meanings given in the Master Agreement;

98 Institute of Chartered Shipbrokers

 Appendix 6 Loan agreement

“ C o n tra c t P rice ” means $36,500,000 in accordance w ith the terms and conditions o f the
S hipbuilding Contract;

“ C o n tra c tu a l C u rre n c y ” has the meaning given in Clause 20.5;

“ Deed o f C o ve n a n t” means a deed o f covenant over the Ship collateral to the Mortgage,
in such form as the Lender may approve or require;

“ Designated T ra n s a c tio n ” means a Transaction which fu lfils the follo w in g

requirements:

(a) it is entered into by the B orrow er pursuant to the Master Agreement; and

(b) its purpose is the hedging o f the B o ư o w e r’ s exposure under this Agreement to
íluctuations in L IB O R arising from the íunding o f the Loan (or any part thereoí)
fo r a period expirin g no later than the fin a l Repayment Date;

“ D o lla rs ” and means the la w fu l currency fo r the time being o f the United States o f
Am erica;

“ D ra w d o w n D ate” means the date requested by the Borrower for the Loan to be made, or
(as the context requires) the date on w hich the Loan is actually made;

“ D ra w d o w n N o tice ” means a notice in the fo m i set out in Schedule 1 (or in any other
form w hich the Lender approves or reasonably requires);

“ E a rn in g s ” means all moneys Nvhatsoever vvhich are now, or later become, payable
(actually or contingently) to the B orrow er and w h ich arise oưt o f the use or operation o f
the Ship, in clu ding (but not lim ite d to):

(a) all freight, hire and passage moneys, compensation payable to the Borrower in the
event o f requisition o f the Ship fo r hire, remuneration fo r salvage and tovvage
services, demurrage and detention moneys and damages for breach (or payments
fo r variation or term ination) o f any charterparty or other contract fo r the
em ploym ent o f the Ship;

(b) a ll moneys w h ich are at any tim e payable under Insurances in respect o f loss o f
earnings; and

(c) i f and whenever the Ship is em ployed on terms whereby any moneys falling
w ith in paragraphs (a) or (b) are pooled or shared w ith any other person, that
proportion o f the net receipts o f the relevant pooling or sharing aưangement
w h ich is attributable to the Ship;

“ E a rn in g s A c c o u n t” means an account in the name o f the Borrower w ith the Account

Bank designated “ A Shipping Company SA - Earnings Account” and w ith account
number 00000001, or any other account (w ith that or another office o f the Account Bank
or w ith a bank or financial in stitutio n other than the Account Bank) w hich is designated
by the Lender as the Earnings A ccount fo r the purposes o f this Agreement;

“ E n v iro n m e n ta l C la im ” means:

(a) any claim by any govem m ental, ju d ic ia l or regulatory authority w hich arises out
o f an E nvironm ental Incident or w h ich relates to any Environmental Law; or

(b) any claim by any other person w hich relates to an Environmental,

Shipping Pinance 99
Appendix 6 Loan agreement

in both cases in excess o f us$750,000 and “ cla im ” means a claim fo r damages,

compensation, fines, penalties or any other payment o f any kind, vvhether or not sim ilar to
the foregoing; an order or direction to take, or not to take, certain action or to desist from
or suspend certain action; and any form o f enforcement or regulatory action, including the
arrest or attachment o f any asset;

“ E n viro n m e n ta l In c id e n t” means:

(a) any release o f Environm entally Sensitive Material from the Ship; or

(b) any incident in which Environm entally Sensitive M aterial is released from a
vessel other than the Ship and w hich involves a collision between the Ship and
such other vessel or some other incident o f navigation or operation, in either case,
in connection w ith which the Ship is actually liable to be arrested, attached,
detained or injuncted and/or the Ship and/or the Borrower and/or any operator or
manager o f the Ship is at fault or othenvise liable to any legal or adm inistrative
action; or

(c) any other incident in which Environm entally Sensitive M aterial is released
othenvise than from the Ship and in connection w ith w hich the Ship is actually
liable to be aưested and/or where the Borrower and/or any operator or manager o f
the Ship is at fault or othervvise liable to any legal or adm inistrative action;

“ E n v iro n m e n ta l L a w ” means any law relating to pollution or protection o f the

environment, to the carriage o f Envirorim entally Sensitive M aterial or to actual or
threatened releases o f Envirorim entally Sensitive Material;

“ E n v iro n m e n ta lly Sensitive M a te ria l” means o il, o il Products and any other substance
(including any chemical, gas or other hazardous or noxious substance) w hich is (or is
capable o f being or becoming) polluting, toxic or hazardous;

“ E vent o f D e ĩa u lt” means any o fth e events or circumstances described in Clause 18.1;

“ Kinance Docum ents” means:

(a) this Agreement;

(b) the Mortgage;

(c) the Deed o f Covenant;

(d) the General Assignment;

(e) the Guarantee;

(f) the Account Security Deed;

(g) the Master Agreement;

(h) the Master Agreement Security Deed; and

(i) any other document (\vhether creating a Security Interest or not) which is
executed at any time by the B oưow er or any other person as security fo r any
amount payable to the Lender under this Agreement or any o f the othẽr
documents referred to in this definition;

‘T in a n c ia l Indebtedness” means, in relation to a person (the “ d e b to r” ), a lia b ility o f the

debtor:

100 Institute of Chartered Shipbrokers

 Appendix 6 Loan agreement

(a) fo r principal, interest or any other sum payable in respect o f any moneys
boưoxved or raised by the debtor;

(b) under any loan stock, bond, note or other security issued by the debtor;

(c) under any acceptance credit, guarantee or letter o f credit fa cility made available to
the debtõr;

(d) under a fmancial lease, a defeưed purchase consideration arrangement or any

other agreement having the commercial effect o f a boưow ing or raising o f money
by the debtor;

(e) under any foreign exchange transaction, any interest or cuưency swap or any
other kin d o f derivative transaction entered into by the debtor or, i f the agreement
under w hich any such transaction is entered into requires netting o f mutual
lia b ilitie s, the lia b ility o f the debtor fo r the net amount; or

(f) under a guarantee, indem nity or sim ilar obligation entered into by the debtor in
respect o f a lia b ility o f another person which w ould fall vvithin (a) to (e) i f the
refẽrences to the debtor referred to the other person;

“ G eneral A ssig nm en t” means a general assignment o f the Earnings, the Insurances and
any R equisition Compensation, in such form as the Lender may reasonably approve or
require;

“ G ua ra n te e ” means the guarantee o f the obligations o f the Borrower, in such form as the
Lender may approve or require;

“ G u a ra n to r” means A Guarantee Corp., a company incorporated in the Republic o f the

Marshall Islands, whose registered o ffice is at Trust Company Complex, Ajeltake Road,
Ajeltake Island, M ajuro, Marshall Islands;

“ Insu ra n ces” means:

(a) all policies and contracts o f Insurance, including entries o f the Ship in any
protection and indem nity or war risks association, which are effected in respect o f
the Ship, her Eamings or othenvise in relation to her; and

(b) all rights and other assets relating to, or derived from , any o f the foregoing,
in clu ding any rights to a return o f a premium;

“ In te re st P e rio d ” means a period determined in accordance w ith Clause 5;

“ IS M C ode” means the Intemational Safety Management Code (including the guidelines
on its im plem entation), adopted by the International M aritim e Organisation Assembly as
Resolutions A.741 (18) and A.788 (19), as the same may be amended or supplemented
from tim e to tim e (and the terms “ saíety m anagem ent system” , “ Safety M anagem ent
C e rtiíĩc a te ” and “ D ocum ent o f C o m p lia n ce ” have the same meanings as are given to
them in the IS M Code);

“ L e n d e r” means The Bank o f Shipping Ltd, acting through its head office at London,
England (o r through another branch n otifie d to the Borrovver under Clause 25.5) or its
successor or assign;

“ L IB O R ” means, fo r an Interest Period:

(a) the rate per annum equal to the offered quotation fo r deposits in Dollars fo r a
period equal to, or as near as possible equal to, the relevant Interest Period w hich

Shipping Pinance 101

Appendix 6 Loan agreement

appears on Telerate Page 3750 at or about 11.00 a.m. (London time) on the
second Business Day prior to the commencement o f that Interest Period (and, for
the purposes o f this Agreement, "Telerate Page 3750" means the display
designated as "Page 3750" on the Telerate Service or such other page as may
replace Page 3750 on that Service fo r the purpose o f displaying rates comparable
to that rate) or on such other Service as may be nominated by the British Bankers’
Association as the inform ation vendor fo r the purpose o f displaying the B ritish
Bankers’ Association Interest Settlement Rates fo r Dollars; or

(b) i f no rate is quoted on Telerate Page 3750, the rate per annum determined by the
Lender to be the rate per annum w hich leading banks in the London Interbank
Market offer fo r deposits in D ollars in the London Interbank Market at or about
11.00 a.m. (London tim e) on the second Business Day prior to the
commencement o f that Interest Period fo r a period equal to that Interest Period
and for delivery on the first Business Day o f it;

“ Loan” means the principal amount fo r the time being outstanding under this Agreement;

“ M a jo r C a su alty” means any casualty to the Ship in respect o f w hich the claim or the
aggregate o f the claims against alỉ insurers, before adjustment fo r any relevant ữanchise
or deductible, exceeds $1,000,000 or the equivalent in any other currency;

“ M a rg in ” means zero point eight seven five per cent. (0.875%) per annum;

“ M a ste r A greem ent” means the master agreement (on the 1992 IS D A (M ulticurrency -
Crossborder) form ) and the schedule thereto made or to be made between the Borrower
and the Lender and includes all Designated Transactions from time to time entered into
and Confưmations from tim e to time exchanged under the master agreement and the
schedule thereto;

“ M a ster A greem ent S e cu rity Deed” means a deed containing, inter alia, a charge in
respect o f the Master Agreement, in such form as the Lender may approve or require;

“ M o rtg ag e ” means the first p rio rity statutory Isle o f Man ship mortgage on the Ship, in
such form as the Lender may approve or require;

“ N e g otia tio ii P eriod” has the meaning given in Clause 4.6;

“ P aym ent C u rre n c y ” has the meaning given in Clause 20.4;

“ P erm itted S ecurity Interests” means:

(a) Security Interests created by the Pinance Documents;

(b) liens fo r unpaid master’ s and cre w ’ s wages in accordance w ith usual m aritim e
practice;

(c) liens fo r salvage;

(d) liens arising by operation o f law fo r not more than 2 m onths’ prepaid hire under
any charter in relation to the Ship not prohibited by this Agreement;

(e) liens fo r master’ s disbursements incurred in the ordinary course o f trading and
any other lien arising by operation o f law or othenvise in the ordinary course o f
the operation, repair or maintenance o f the Ship, provided such liens do not secure
amounts more than 60 days overdue (unless the overdue amount is being
contested by the Boưovver in good faith by appropriate steps) and subject, in the
case o f liens fo r repair or maintenance, to Clause 13.12(f);

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 Appendix 6 Loan agreement

(f) encumbrance created in favour o f a p la in tiff or defendant in any proceedings or

arbitration as security for costs and expenses where the Borrower is actively
prosecuting or defending such proceedings or arbitration in good faith; and

(g) encumbrances arising by operation o f law in respect o f taxes w hich are not
overdue fo r payment or in respect o f taxes being contested in good faith by
appropriate steps and in respect o f w hich appropriate reserves have been made;

“ P e rtin e n t D ocum ent” means:

(a) any Pinance Document;

(b) any policy or contract o f Insurance contemplated by or refeưed to in Clause 12 or

any other provision o f this Agreement or another Pinance Document;

(c) any other document contemplated by or refeưed to in any Pinance Document; and

(d) any document which has been or is at any tim e sent by or to the Lender in
contemplation o f or in connection w ith any Pinance Document or any policy,
contract or document fallin g vvithin paragraphs (b) or (c);

“ P e rtin e n t J u ris d ic tio n ” , in relation to a company, means:

(a) England and Wales;

(b) the country under the laws o f w hich the company is incorporated or formed;

(c) a country in which the com pany’ s Central management and control is or has
recently been exercised;

(d) a country in which the overall net income o f the company is subject to
Corporation tax, income tax or any sim ilar tax;

(e) a country in w hich assets o f the company (other than securities issued by, or loans
to, related companies) having a substantial value are situated, in vvhich the
company maintains a permanent place o f business, or in which a Security Interest
created by the company must or should be registered in order to ensure its va lid ity
or p riority; and

(f) a country the courts o f w hich have ju risd ictio n to make a w inding up,
administration or sim ilar order in relation to the company or which would have
such ju risdiction i f their assistance were requested by the courts o f a country
refeưed to in paragraphs (b) or (c);

“ P e rtin e n t M a tte r” means:

(a) any transaction or matter contemplated by, arising out of, or in connection w ith a
Pertinent Document; or

(b) any statement relating to a Pertinent Document or to a transaction or matter

fallin g w ith in paragraph (a);

and covers any such transaction, matter or statement, \vhether entered into, arising or
made at any time before the signing o f this Agreement or on or at any time after that
signing;

“ R epaym ent Date” means a date on w hich a repayment is required to be made under
Clause 7;

Shipping Pinance 103

Appendìx 6 Loan agreement

“ R equisition C om pensation” includes all compensation or other moneys payable by

reason o f any act or event such as is referred to in paragraph (b) o f the d efinition o f “ Total
Loss” ;

“ Secured L ia b ilitie s ” means all lia b ilitie s vvhich the B orrow er, the Security Parties or
any o f them have, at the date o f this Agreement or at any later time or times, under or by
in connection w ith any Pinance Document or any ju dgm ent relating to any Pinance
Document; and for this purpose, there shall be disregarded any total or partial discharge
o f these liabilities, or variation o f their terms, w hich is effected by, or in connection w ith,
any bankruptcy, liquidation, arrangement or other procedure under the insolvency laws o f
anỹ countĩỹ;

“ S ecurity In te re st” means:

(a) a mortgage, charge (whether fixed or ílo atin g ) or pledge, any m aritim e or other
lien or any other security interest o f any kind;

(b) the security rights o f a p la in tiff under an action in rem\ and

(c) any arrangement entered into by a person (A ) the effect o f w hich is to place
another person (B ) in a position w hich is sim ilar, in economic teưns, to the
position in w hich B w ould have been had he held a security interest over an asset
o f A ; but this paragraph (c) does not apply to a rig h t o f set o ff or combination o f
accounts conferred by the Standard terms o f business o f a bank or financial
institution;

“ S ecurity P a rty ” means the Borrovver, the Guarantor and any other person (except the
Lender and the Approved Manager) who, as a surety or mortgagor, or in any sim ilar
capacity, executes a document fa llin g w ith in the last paragraph o f the definition o f
“ Pinance Documents” ;

“ S ecurity P eriod” means the period commencing on the date o f this Agreement and
ending on the date on which the Lender notifies the B orrow er and the Security Parties
that:

(a) all amounts which have become due fo r payment by the B orrow er or any Security
Party ưnder the Pinance Documents have been paid;

(b) no amount is owing or has accrued (w ith o ut yet having become due fo r payment)
under any Pinance Document;

“ S hip” means the capesize dry b u lk caưier m.v. “ Capesize” currently under construction
by the B uilder for, and to be purchased by the B orrow er under, the S hipbuilding Contract,
and to be registered at delivery in the name o f the Borrovver under Isle o f Man flag;

“ S h ip b u ild in g C o n tra c t” means the shipbuilding contract dated M ay 2002 made

between the B uiider and the B oư ow er fo r the construction by the B uilder o f the Ship and
its purchase by the Borrovver at a contract price o f $36,500,000 as supplemented and
amended from time to time;

“ Swap Exposure” means, as at any relevant date and in relation to the Lender, the
amount certified by the Lender to be the aggregate net amount in Dollars w hich w ould be
payable by the B oưow er to the Lender under (and calculated in accordance w ith ) section
6(e) (Payments on Early Term ination) o f the M aster Agreem ent entered into by the
Lender w ith the Borrower i f an E arly Term ination Date had occuưed on the relevant date
in relation to all continuing Designated Transactions entered into between the Boưoxver
and the Lender;

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“ T o ta l Loss” means;

(a) actual, constructive, compromised, agreed or arranged total loss o f the Ship;

(b) any expropriation, confiscation, requisition or acquisition o f the Ship, vvhether for
fu ll consideration, a consideration less than its proper value, a nominal
consideration or w ith o u t any consideration, w hich is effected by any govemment
or o ffic ia l authority or by any person or persons claim ing to be or to represent a
govem m ent or o ffic ia l authority (excluding a requisition fo r hire at the prevailing
m arket rate) unless it is w ith in 2 months redelivered to the B oư ow er’ s fu ll
control;

(c) any aưest, capture, seizure or detention o f the Ship (including any hijacking or
the ft) unless it is w ith in 2 months redelivered to the B oư ow er’ s fu ll control;

“ T o ta l Loss D ate” means:

(a) in the case o f an actual loss o f the Ship, the date on which it occuưed or, i f that is
unknow n, the date when the Ship was last heard of;

(b) in the case o f a constructive, compromised, agreed or arranged total loss o f the
Ship, the earliest of:

(i) the date on w h ich a notice o f abandonment is given to the insurers; and

( ii) the date o f any compromise, arrangement or agreement made by or on

b eh a lf o f the B orrow er w ith the S hip’ s insurers in which the insurers
agree to treat the Ship as a total loss; a«á

“ T ra n s a c tio n ” has the meaning given in the M aster Agreement.

1.2 Construction o f certain terms. In this Agreement:

“ a p p ro ve d ” means, fo r the purposes o f Clause 12, approved in w ritin g by the Lender;

“ asset” includes every kin d o f property, asset, interest or right, including any present,
future o r contingent rig h t to any revenues or other payment;

“ com p an y” includes any partnership, jo in t venture and unincorporated association;

“ consent” includes an authorisation, consent, approval, resolution, licence, exemption,

filin g , registration, notarisation and legalisation;

“ co n tin g e n t lia b ilit y ” means a lia b ility w hich is not certain to arise and/or the amount o f
which remains unascertained;

“ d ocu m e n t” includes a deed; also a letter, fax or telex;

“ excess ris k s ” means the proportion o f claim s fo r general average, salvage and salvage
charges not recoverable under the h u ll and m achinery policies in respect o f the Ship in
consequence o f its insured value being less than the value at w hich the Ship is assessed
fo r the purpose o f such claim s;

“ expense” means any kin d o f cost, charge or expense (including all legal costs, charges
and expenses) and any applicable value added or other tax;

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“ la w ” includes any order or decree, any form o f delegated legislation, any treaty or
intemational convention and any regulation or resolution o f the C ouncil o f the European
Union, the European Commission, the United Nations or its Security Council;

“ legal o r a d m in is tra tiv e a c tio n ” means any legal proceeding or arbitration and any
administrative or regulatory action or investigation;

“ lia b ility ” includes every kin d o f debt or lia b ility (present or future, certain or
contingent), vvhether incurred as principal or surety or othenvise;

“ m onths” shall be construed in accordance w ith Clause 1.3;

“ o b lig a to ry insurances” means all insurances effected, or w h ich the B orrow er is obliged
to effect, under Clause 12 or any other provision o f this Agreem ent or another Pinance
Document;

“ p aren t co inpany” has the meaning given in Clause 1.4;

“p erson ” includes any com pany; any State, political su b-d ivision o f a State and local or
municipal authority; and any international organisation;

“p o licy”, in relation to any Insurance, includes a slip, cover note, certificate o f entry or
other document evidencing the contract o f Insurance or its terms;

“ p rotection and in d e m n ity ris k s ” means the usual risks covered by a protection and
indemnity association managed in London, including p o llu tio n risks and the proportion ( if
any) o f any sums payable to any other person or persons in case o f co llisio n vvhich are not
recoverable under the hull and m achinery policies by reason o f the incorporation in them
o f clause 1 o f the Institute Tim e Clauses (H ulls) (1/10/83) or clause 8 o f the Institute
Time Clauses (H ulls) (1/11/1995) or the Institute Amended Running Down Clause
(1/10/71) or any equivalent provision;

“ re g u la tio n ” includes any regulation, rule, o ffic ia l directive, request or guideline whether
or not having the force o f law o f any govemmental, intergovernm ental or supranational
body, agency, department or regulatory, self-regulatory or other authority or organisation;

“ su b sid ia ry” has the meaning given in Clause 1.4;

“ ta x” includes any present or future tax, duty, impost, levy or charge o f any kind which is
im posed by any State, any p olitical sub-division o f a State or any local or municipal
authority (including any such imposed in connection w ith exchange Controls), and any
connected penalty, interest or fine; and

“ w a r risks” includes the risk o f mines and all risks excluded by clause 23 o f the Institute
Tim e Clauses (H ulls) (1/10/83) or clause 24 o f the Institute T im e Clauses (Hulls)
(1/11/1995).

1.3 M e aning o f “ m o n th ” . A period o f oiie or more “ m o iith s ” ends on the day in the relevant
calendar month num erically corresponding to the day o f the calendar m onth on which the
period started (“ the n u m e ric a lly co rre sp on d ing day” ), but:

(a) on the Business Day fo llo w in g the num erically corresponding day i f the numerically
corresponding day is not a Business Day or, i f there is no later Business Day in the same
calendar month, on the Business Day preceding the num erically corresponding day; or

(b) on the last Business Day in the relevant calendar month, i f the period started on the last
Business Day in a calendar m onth or i f the last calendar m onth o f the period has no
num erically corresponding day;

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and “ m o n th ” and “ m o n th ly ” shall be construed accordingly.

1.4 M e a n in g o f “ s u b s id ia ry ” . A company (S) is a subsidiary o f another company (P) if:

(a) a m a jo rity o f the issued shares in s (or a m a jo rity o f the issued shares in s which carry
u n lim ited righ ts to Capital and in com e d istrib u tion s) are directly ow n ed by p or are
indirectly attributable to P; or

(b) p has direct or indirect control over a m ajority o f the voting rights attaching to the issued
shares o f S; or

(c) p has the direct or indirect power to appoint or remove a m ajority o f the directors o f S; or

(d) p othenvise has the direct or indirect power to ensure that the affairs o f s are conducted in
accordance w ith the vvishes o f P;

and any company o f w hich s is a subsidiary is a parent company o f s.

1.5 G eneral In te rp re ta tio n . In this Agreement:

(a) references in Clause 1.1 to a Pinance Document or any other document being in an
approved form include references to that form w ith any m odifications to that form w hich
the Lender approves or reasonably requires;

(b) references to, or to a provision of, a Pinance Document or any other document are
references to it as amended or supplemented, whether before the date o f this Agreement
or othenvise;

(c) references to, or to a provision of, any law include any amendment, extension, re-
enactment or replacement, whether made before the date o f this Agreement or otherwise;

(d) words denoting the singular number shall include the plural and vice versa; and

(e) Clauses 1.1 to 1.5 apply unless the contrary intention appears.

1.6 H eadings. In interpreting a Pinance Document or any provision o f a Pinance Document,

all clause, sub-clause and other headings in that and any other Pinance Document shall be
entirely disregarded.

2 PACILITY

2.1 A m o u n t o f fa c ility . Subject to the other provisions o f this Agreement, the Lender shall
make available to the Borrovver by way o f a single advance a loan fa c ility not exceeding
$25,000,000 and representing 68% o f the contract p ric eContract Price o f the Ship.

2.2 Purpose o f L o a n . The B orrow er undertakes w ith the Lender to use the Loan only fo r the
purpose stated in the preamble to this Agreement.

3 DRAW DOW N

3.1 Request fo r advance o f Loan. Subject to the Drawdown Date being a Business Day
during the A v a ila b ility Period, the B oư ow er may request the Loan to be made by
ensuring that the Lender receives a completed D raw dow n Notice not later than 11.00 a.m.
(London tim e) tw o (2) Business Days p rio r to the intended Drawdown Date.

3.2 D ra w d o w n N o tice irre v o c a b le . A Drawdown N otice must be signed by a director or a

duly authorised attom ey in fact o f the B orrow er; and once served, a Drawdown N otice
cannot be revoked \vitho u t the prior consent o f the Lender.

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3.3 Disbursement o f Loan. Subject to the provisions o f this Agreement, the Lender shall on
the Drawdown Date make the Loan to the Borrower; and păyment to the Borrovver shall
be made to the account o f the B uilder which the Borrower specifies in the Drawdown
Notice.

3.4 Disbursement o f Loan to th ir d p a rty . The payment o f the Loan by the Lender under
Clause 3.3 to the B uilder in accordance w ith the Drawdown Notice shall constitute the
making o f the Loan and the Borrovver shall at that time become indebted, as principal and
direct obligor, to the Lender in an amount equal to the Loan.

4 INTEREST

4.1 Paym ent o f n o rm a l interest. Subject to the provisions o f this Agreement, interest on the
Loan in respect o f each Interest Period shall be paid by the Borrovver on the last day o f
that Interest Period.

4.2 N o rm a l rate o f interest. Subject to the provisions o f this Agreement, the rate o f interest
on the Loan in respect o f an Interest Period shall be the aggregate o f the M argin and
L IB O R for that Interest Period.

4.3 Paym ent o f accrued interest. In the case o f an Interest Period longer than three (3)
months, accrued interest shall be paid every three (3) months during that Interest Period
and on the last day o f that Interest Period.

4.4 N o tiíic a tio n o f m a rk e t d is ru p tio n . The Lender shall prom ptly n o tify the Borrovver i f for
any reason the Lender is unable to obtain Dollars in the London Interbank M arket in
order to fund the Loan (or any part o f it) during any Interest Period, slating the
circLimstances which have caused such notice to be given.

4.5 Suspension o f d ra w d o w n . I f the Lender’ s notice under Clause 4.4 is served betbre the
Loan is made, the Lender’ s obligation to make the Loan shall be suspended w hile the
circumstances refened to in the Lender’ s notice continue.

4.6 N egotiation o f a lte rn a tive rate o f interest. l f the Lender’ s notice under Clause 4.4 is
served after the Loan is made, the Borrovver and the Lender shall use reasonable
endeavours to agree, w ith in the 30 days after the date on w hich the Lender serves its
notice under Clause 4.4 (the “ N egotiation P eriod” ), an alternative interest rate or (as the
case may be) an altemative basis fo r the Lender to fund or continue to tund the Loan
during the Interest Period concemed.

4.7 Application o f agreed alternative rate o f interest. A n y alternative interest rate or an

altêmative basis which is agreed during the Negotiation Period shall take effect in
accordance w ith the terms agreed.

4.8 Alternative rate of interest in absence of agreement. If an alternative interest rate or

alternative basis is not agreed w ith in the Negotiation Period, and the relevant
circumstances are continuing at the end o f the Negotiation Pericd, then the Lender shall
set an interest period and interest rate representing the cost o f íunding o f the Lender in
Dollars or in any available currency o f the Loan plus the M argin; and the procedure
provided fo r by this Clause 4.8 shall be repeated i f the relevant circumstances are
continuing at the end o f the interest period so set by the Lender.

4.9 Notice o f prepayment. I f the Boưovver does not agree w ith an interest rate set by the
Lender under Clause 4.8, the Borrower may give the Lender not less than fifteen (15)
Business Days’ notice o f its intention to prepay at the end o f the interest period set by the
Lender.

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4.10 P repaym ent. A notice under Clause 4.9 shall be irrevocable; and on the last Business
Day o f the interest period set by the Lender, the Borrovver shall prepay (vvithout premium
or penalty) the Loan, together w ith accrued interest thereon at the applicable rate plus the
Margin.

4.11 A p p lic a tio n o f prepaym ent. The provisions o f Clause 7 shall apply in relation to the
prepayment as applicable.

5 INTEREST PERIODS

5.1 Commencement o f In te re st Periods. The first Interest Period shall commence on the
Drawdown Date and each subsequent Interest Period shall commence on the expiry o f the
preceding Interest Period.

5.2 Duration of normal Interest Periods. Subject to Clauses 5.3 and 5.4, each Interest
Period shall be:

(a) 1, 3, 6 or 12 months as n otiĩied by the Borrovver to the Lender not later than 11.00 a.m.
(London tim e) two (2) Business Days before the commencement o f the Interest Period; or

(b) 3 months, i f the Borrovver fails to n otify the Lender by the time specified in paragraph (a);
or

(c) such other period as the Lender may agree in vvriting w ith the Boưovver.

5.3 Duration of Interest Periods for repayment instalments. In respect of an amount due
to be repaid under Clause 7 on a particular Repayment Date, an Interest Period shall end
on that Repayment Date.

5.4 Non-avaỉlability of matching deposits for Interest Period selected. If, after the
Boưovver has selected and the Lender has agreed an Interest Period longer than twelve
(12) months, the Lender notiĩies the Borrower by 11.00 a.m. (London tim e) on the first
Business Day before the commencement o f the Interest Period that it is not satisĩied that
deposits in Dollars for a period equal to the Interest Period w ill be available to it in the
London Interbank Market when the Interest Period commences, the Interest Period shall
be o f twelve (12) months.

6 DEFAULTINTEREST

6.1 Payment of default interest on overdue amounts. The Boưower shall pay interest in
accordance w ith the fo llo w in g provisions o f this Clause 6 on any amount payable by the
Borrovver under any Pinance Document w hich the Lender does not receive on or before
the relevant date, that is:

(a) w ith in tw o (2) banking days from the date on which the Pinance Documents provide that
such amount is due fo r payment; or

(b) i f a Pinance Document provides that such amount is payable on demand, w ith in three (3)
banking days from the date on which the demand is served; or

(c) i f such amount has become imm ediately due and payable under Clause 18.4, the date on
w hich it became immediately due and payable.

6.2 D e fa u lt rate o f interest. Interest shall accrue on an overdue amount from (and
including) the relevant date under Clause 6.1 until the date o f actual payment (as w ell
after as before judgm ent) at the rate per annum determined by the Lender to be one per
cent. (1% ) above:

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A p p e n d ix 6 Loan agreement

(a) in the case o f an overdue amount o f principal, the higher o f the rates set out at Clauses
6.3(a) and (b); or

(b) in the case o f any other overdue amount, the rate set out at Clause 6.3(b).

6.3 C a lcu la tion o f d e ĩa u lt rate o f interest. The rates referred to in Clause 6.2 are:

(a) the rate applicable to the overdue principal amount imm ediately p rior to the relevant date
(but only fo r any unexpired part o f any then current Interest Period);

(b) the M argin plus, in respect o f successive periods o f any duration (including at call) up to
3 months which the Lender may select from time to time;

(i) L IB O R ; or

(ii) i f the Lender deíermines that D ollar deposits fo r any such period are not being
made available to it by leading banks in the London Interbank M arket in the
ordinary course o f business, a rate from tim e to time determined by the Lender by
reference to the cost o f funds to it from such other sources as the Lender may
from time to time determine.

6.4 Notification of interest periods and default rates. The Lender shall promptly notiíy the
Boưower o f each interest rate determined by it under Clause 6.3 and o f each period
selected by it fo r the purposes o f paragraph (b) o f that Clause; but this shall not be taken
to im ply that the Borrower is liable to pay such interest only w ith effect from the date o f
the Lender’ s notiíìcation.

6.5 Paym ent o f accrued d e ĩa u lt interest. Subject to the other provisions o f this Agreement,
any interest due under this Clause shall be paid on the last day o f the period by reĩerence
to which it was determined.

6.6 C om p ou n ding o f d e ĩa u lt interest. A ny such interest vvhich is not paid at the end o f the
period by reíerence to vvhich it was determined shal! thereupon be compounded.

6.7 Application to M a ste r Agreem ent. For the avoidance o f doubt, this Clause 6 does not
apply to any amount payable under the Master Agreement in respect o f any continuing
Designated Transaction as to vvhich section 2(e) (Detầuỉt Interest; Other Amounts) o f the
Master Agreement shall apply.

7 REPAYMENT AND PREPAYMENT

7.1 A m o u n t o f repaym ent instalm ents. The Borrower shall repay the Loan by twenty (20)
equal consecutive six-m onthly repayment instalments o f $750,000 each and a balloon
instalment o f $10,000,000 which shall be paid together w ith the twentieth and íìnal such
instalment.

7.2 R epaym ent Dates. The first instalment shaỉl be repaid on the date fa llin g six (6) months
after the Drawdown Date and the last instalment on the earlier o f (i) the date íầlling One
hundred and tvventy (120) months after the Drawdown Date and (ii) 30 September 2014.

7.3 F in a l R epayinent Date. On the final Repayment Date, the Borrovver shall additionally
pay to the Lender all other sums then accrued or ow ing under any Pinance Document.

7.4 V o lu n ta ry prepaym ent. Subject to the fo llo w in g conditions, the Borrovver may prepay
the whole or any part o f the Loan on the last day o f an Interest Period.

7.5 Conditỉons for voluntary prepayment. The conditions referred to in Clause 7.4 are
that:

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 Appendix 6 Loan agreement

(a) a partial prepayment shall be $750,000 or a m ultiple o f $750,000;

(b) the Lender has received from the Borrower at least ten (10) days’ p rio r vvritten notice
specifying the amount to be prepaid and the date on w hich the prepayment is to be made;
and

(c) the Borrower has provided evidence satisfactory to the Lender that any consent required
by the Borrower or any Security Party in connection w ith the prepayment has been
obtained and remains in force, and that any regulation relevant to this Agreement which
affects the Boưovver or any Security Party has been complied w ith.

7.6 E ffe ct o f notice o f prepayment. A prepayment notice may not be withdrawn or

amended vvithout the consent o f the Lender and the amount specified in the prepayment
notice shall become due and payable by the Boưovver on the date fo r prepayment
specified in the prepayment notice.

7.7 Mandatory prepayment.

The Borrovver shall be obliged to prepay the whole o f the Loan i f the Ship is sold,
\vhether pursuant to the exercise o f a call option or otherwise, or becomes a Total Loss:

(a) in the case o f a sale, on or beíore the date on which the sale is completed by delivery o f
the Ship to the buyer; or

(b) in the case o f a Total Loss, on the earlier o f the date fa llin g one hundred and eighty (180)
days after the Total Loss Date and the date o f receipt by the Lender o f the proceeds o f
Insurance relating to such Total Loss;

7.8 A m o un ts payable on prepaym ent. A prepayment shall be made together w ith accrued
interest (and any other amount payable under Clause 20 or othervvise) in respect o f the
amount prepaid and, i f the prepayment is not made on the last day o f an Interest Period
together w ith any sums payable under Clause 20.1(b) but \vithout premium or penalty.

7.9 Application of partial prepayment. Each partial prepayment under Clause 7.5 shall be
applied against the repayment instalments and the balloon instalment specified in Clause
7.1 pro rata to the amount o f each such instalment or balloon. Each partial prepayment
under Clause 7.7 shall be applied against the repayment instaỉments and the balloon
instalment specified in Clause 7.1 in inverse order o f m aturity.

7.10 No re b o rro w in g . No amount prepaid may be reborrowed.

7.11 Unvvinding o f Designated Transactions. On or p rior to any repayment or prepayment

o f the Loan under this Clause 7 or any other provision o f this Agreement, the Borrower
shall w h o lly or partially reverse, offset, unvvind or otherwise terminate one or more o f the
continuing Designated Transactions so that the notional principal amount o f the
continuing Designated Transactions thereaữer remaining does not and w ill not in the
future (taking into account the scheduled amortisation) exceed the amount o f the Loan as
reducing from time to time thereaữer pursuant to Clause 7.1.

8 CONDITIONS PRECEDENT

8.1 Docum ents, fees and no d e ĩa u lt. The Lender’ s obligation to make the Loan is subject to
the fo llo w in g conditions precedent:

(a) that, on or before the Service o f the Drawdown Notice, the Lender receives the documents
described in Part A o f Schedule 2 in form and substance satisfactory to it and its lawyers;

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Appendíx 6 Loan agreement

(b) that, on the Drawdown Date but prior to the advance o f the Loan, the Lender receives the
documents described in Part B o f Schedule 2 in form and substance satisfactory to it and
its lawyers;

(c) that, on or before the Drawdown Date, the Lender receives the arrangement fee referred
to in Clause 19.1; and

(d) that both at the date o f the Drawdown Notice and at the Drawdown Date:

(i) no Event o f Default has occurred and is continuing or w ould result from the
borrowing o f the Loan;

(ii) the representations and waưanties in Clause 9.1 and those o f the Borrower or any
Security Party which are set out in the other Pinance Documents would be true
and not misleading i f repeated on each o f those dates w ith reference to the
circumstances then existing; and

( iii) none o f the circumstances contemplated by Clause 4.4 has occurred and is
continuing^aĩié.

8.2 W a ive rs o f conditions precedent. I f the Lender, at its discretion, permits the Loan to be
borrowed before certain o f the conditions referred to in Clause 8.1 are satisfied, the
Borrower shall ensure that those conditions are satisfied w ith in fifteen (15) Business Days
after the Drawdown Date (or such longer period as the Lender may specify).

9 REPRESENTATIONS AND \VARRANTIES

9.1 G eneral. The Borrower represents and vvarrants to the Lender as follow s.

9.2 Status. The Borrovver has been duly re-domiciled and is v a lid ly existing and in good
standing under the laws o f the Cayman Islands.

9.3 Share Capital and ownership. The Borrower has an authorised share Capital o f 2000
registered shares w ith par value o f $1 each, and the legal title and beneficial ovvnership o f
all those shares is held, free o f any Security Interest or other claim, by such persons as
have been notifieđ to and approved by the Lender p rior to the Drawdown Date.

9.4 Power. The Boưower has the corporate capacity, and has taken all corporate action and
obtained all consents necessary fo r it:

(a) to execute the Shipbuilding Contract, to purchase and pay fo r the Ship under the
Shipbuilding Contract and register the Ship in its name under the Isle o f Man flag;

(b) to execute the Pinance Documents to which the Borroxver is a party; and

(c) to boưow under this Agreement. to enter into Designated Transactions and to inake all
the payments contemplated by, and to com ply w ith, the Pinance Documents.

9.5 Consents in force. A ll the consents referred to in Clause 9.4 remain in íbrce and nothing
has occurred which makes any o f theiTi liable to revocation.

9.6 Legal v a lid ity ; effective S ecu rity Interests. The Pinance Documents to w hich the
B oưow er is a party, do now or, as the case may be, w ill, upon execution and delivery
(and, where applicable, registration as provided fo r in the Pinance Documents):

(a) constitute the B orrow er’ s legal, valid and binding obligations enforceable against the
Borrower in accordance w ith their respective terms; and

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 Appendix 6 Loan agreement

(b) create legal, valid and binding Security Interests enforceable in accordance w ith their
respective terms over all the assets to which they, by their terms, relate;

subject to any relevant insolvency laws affecting creditors’ rights generally.

9.7 No th ird p a rty S ecurity Interests. W ithout lim itin g the generality o f Clause 9.6, at the
time o f the execution and delivery o f each Pinance Document:

(a) the Borrower w ill have the right to create all the Security Interests vvhich that Pinance
Document purports to create; and

(b) no third party w ill have any Security Interest (except fo r Permitted Security Interests) or
any other interest, right or claim over, in or in relation to any asset to which any such
Security Interest, by its teưns, relates unless othenvise permitted in the Pinance
Documents.

9.8 No conílicts. The execution by the Borrower o f each o f the Underlying Documents and
the Pinance Documents, and the boưow ing by the Borrovver o f the Loan, and its
compliance w ith each o f the Underlying Documents and the Pinance Documents w ill not
involve or lead to a contravention of:

(a) any currently existing law or regulation; or

(b) the constitutional documents o f the Borrower; or

(c) any contractual or other obligation or restriction w hich is binding on the Borrower or any
o f its assets.

9.9 No \v ith h o ld in g taxes. A ll payments which the Borrower is liable to make under the
Shipbuilding Contract and the Pinance Documents may be made vvithout deduction or
\vithholding fo r or on account o f any tax payable under any law o f any Pertinent
Jurisdiction.

9.10 No d efault. No Event o f Default has occurred and is continuing.

9.11 Inĩormation; no material adverse change. AU inform ation which has been provided in
vvriting by or on behaỉf o f the Borrovver or any Security Party to the Lender in connection
w ith any Pinance Document satisfied the requirements o f Clause 10.5; all audited and
unaudited accounts which have been so provided satisfied the requirements o f Clause
10.7; and there has been no material adverse change in the financial position or State o f
affairs o f the Boưower from that disclosed in the latest o f those accounts.

9.12 No litig a tio n . No material legal or administrative action in volving the Borrovver
(including action relating to any breach o f the IS M Code) has been commenced or taken
or, to the B orrow er’ s knovvledge, is lik e ly to be commenced or taken.

9.13 V a lid ity and completeness o f S h ip b u ild in g C o n tra ct. The Shipbuilding Contract
constitutes valid, binding and enforceable obligations o f the B uilder and the Borrower
respectively in accordance w ith its terms; and:

(a) the copy o f the Shipbuilding Contract delivered to the Lender before the date o f this
Agreement is a true and complete copy; and

(b) no amendments or additions to the Shipbuilding Contract have been agreed nor has the
B oưow er or the B uilder waived any o f their respective rights under the Shipbuilding
Contract.

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9.14 No rebates etc. There is no agreement or understanding to allow or pay any rebate,
premium, commission, discount or other benefit or payment (howsoever described) to the
Borrower, the Builder or a third party in connection w ith the purchase by the B oư ow er o f
the Ship, other than as disclosed to the Lender in \vritin g on or p rio r to the date o f this
Agreenient.

9.15 Compliance with certain undertakings. At the date o f this Agreement, the Boưovver is
in compliance w ith Clauses 10.2, 10.4, 10.9 and 10.13.

9.16 Taxes paid. The Borrower has paid all taxes applicable to, or imposed on or in relation
to the Borrovver, its business or the Ship.

9.17 IS M Code com pliance. AU requirements o f the ISM Code as they relate to the
Borrower, the Approved Manager and the Ship have been complied w ith.

9.18 No money la u nd e rin g. W ithout prejudice to the generality o f Clause 2.2, in relation to
the borrovving by the Borrovver o f the Loan, the períoưnance and discharge o f its
obligations and liabilities under the Pinance Documents, and the transactions and other
arrangements effected or contemplated by the Pinance Documents to which the BorroNver
is a party, the Borrower confirm s that (i) it is acting fo r its own account, (ii) that it w ill
use the proceeds o f the Loan for its own beneíĩt, under its fu ll responsibility and
exclusively fo r the purposes specifíed in this Agreement and ( iii) that the foregoing w ill
not involve or lead to contravention o f any law, o fficia l requirement or other regulatory
measure or procedure implemented to combat “ money laundering” (as defined in A rtic le
1 o f the Directive (91/308/EEC) o f the Council o f the European Communities).

10 GENERAL UNDERTAKINGS

10.1 G eneral. The Borrower undertakes w ith the Lender to com ply w ith the fo llo w in g
provisions o f this Clause 10 at all times during the Security Period, except as the Lender
may otherwise permit.

10.2 T itle ; negative pledge. The Borrower w ill:

(a) hold the legal title to, and own the entire beneficial interest in the Ship, the Insurances and
Earnings, free trom all Security Interests and other interests and rights o f every kind,
except for those created by the Pinance Documents and the effect o f assignments
contained in the Pinance Documents and except íb r Permitted Security Interests or
othenvise as permitted by the Pinance Documents; and

(b) not create or perm it to arise any Security Interest (except fo r Pem iitted Security Interests
or othenvise as permitted by the Pinance Documents) over any other asset, present or
tuture (including, but not lim ited to the B orrow er’ s rights against the Lender under the
Master Agreement or all or any part o f the Borrovvers’ interest in any amount payable to
the Boưovver by the Lender undêr the Master Agreement).

10.3 No disposal o f assets. The Borrovver w ill not transfer, lease or othenvise dispose of:

(a) all or a substantial part o f its assets, whether by One transaction or a number o f
transaclions, whelher related or not; or

(b) any debt payable to it or any other right (present, future or contingent right) to receive a
payment, including any rig h t to damages or compensation.

Provided hovvever that the Borrovver is entitled to sell, transfer or othenvise dispose o f the
Ship, in which case the Lender w ill fu lly co-operate w ith the Boưovver in facilita ting such
sale and the Lender w ill imm ediately, upon receipt o f the sale proceeds and after being
satisfied that all Secured L ia bilities have been fu lly repaid:

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(ị} release the Mortgage and other encumbrances created in favour o f the Lender
over the Ship; and

( ii) release the Borrower from all its obligations and liabilities to the Lender under the
Pinance Documents (except as otherwise provided therein).

10.4 No other liabỉlities or obligations to be incurred. The Borrower will not incur any
Pinancial Indebtedness except under the Shipbuilding Contract and the Pinance
Documents and as reasonably incurred in the ordinary course o f operating, trading and
chartering the Ship.

10.5 Iníormation provided to be accurate. A ll fmancial and other inform ation w hich is
provided in w ritin g by or on behalf o f the Borrower under or in connection w ith any
Pinance Document w ill be true and not misleading and w ill not om it any material fact or
consideration.

10.6 P ro visio n o f fín a n cia l statements. The Borrower w ill send to the Lender:

(a) as soon as possible, but in no event later than one hundred and eighty (180) days after the
end o f each financial year o f the Boưovver and the Guarantor^ starting from 31 December
2004, the audited Consolidated financial statements o f the B oưow er and the Guarantor;

(b) as soon as possible, but in no event later than sixty (60) days after the end o f each quarter
in each financial year o f the Borrower and the Guarantor^ starting from 30 June 2004, the
unaudited Consolidated ĩinancial statements o f the Borrower and the Guarantor, to be
ce rtified as to their correctness by the ch ie f financial o ffice r o f the Guarantor.

10.7 F o rm o f íin a n cia l statements. A ll fmancial statements (audited and unaudited)

delivered under Clause 10.6 w ill:

(a) be prepared in accordance w ith all applicable laws and generally accepted accounting
principles consistently applied;

(b) give a true and fair view o f the State o f affairs o f the B orrow er and the Guarantor at the
date o f those accounts and o f its p ro fit for the period to w hich those accounts relate; and

(c) fu lly disclose or provide for all significant liabilities o f the Borrower and the Guarantor.

10.8 Consents. The Borrower w ill maintain in force and prom ptly obtain or renew, and w ill
p rom ptly send certified copies to the Lender of, all consents required:

(a) fo r the Borrower to perf 0 TTn its obligations under any Pinance Document;

(b) fo r the v a lid ity or enforceability o f any Pinance Document;

(c) fo r the Borrovver to continue to own and operate the Ship,

and the B oưow er w ill com ply w ith the terms o f all such consents.

10.9 Maintenance of Security Interests. The Borrovver will:

(a) at its own cost, do all that it reasonably can to ensure that any Pinance Document va lid ly
creates the obligations and the Security Interests which it purports to create; and

(b) \vitho u t lim itin g the generality o f paragraph (a), at its own cost, prom ptly register, file,
record or enrol any Pinance Document w ith any court or authority in all Pertinent
iurisd ictio n s, pay any stamp, registration or sim ilar tax in all Pertinent Jurisdictions in
respect o f any Pinance Document, gi ve any notice or take any other step w hich may be or

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become necessary or desirable fo r any Pinance Document to be valid, enforceable or

admissible in evidence or to ensure or protect the p rio rity o f any Security Interest w hich it
creates, save fo r the in itia l costs incuưed fo llo w in g the negotiation and agreement o f the
Pinance Documents and the registration o f the Security Interests o f the Lender which
shall be bome by the Lender.

10.10 Notiílcation of litigation. The Borrovver w ill provide the Lender w ith details o f any
legal or administrative action exceeding $500,000 in vo lvin g the Boưower, any Security
Party or the Ship, the Earnings or the Insurances as soon as such action is instituted or it
becomes apparent to the B orrow er that it is like ly to be instituted, unless such legal or
administrative action is contested in good faith or it is clear that the legal or
administrative action cannot be considered material in the context o f any Pinance
Document.

10.11 No am endm ent to S h ip b u ild in g C o n tra c t. The Borrovver w ill not agree to anv material
amendment or supplement to, or w aive or fail to enforce, the Shipbuilding Contract or
any o f its provisions.

10.12 No am endm ent to M a ste r A g re e m e n t. The Borrower w ill not agree to any amendment
or supplement to, or waive or fa il to enforce, the Master Agreement or any o f its
provisions w ithout the p rio r Nvritten consent o f the Lender (such consent not to be
unreasonably be \vithheld).

10.13 C o n firm a tio n o f no defa ult. The B orrow er w ill, w ith in five (5) Business Days after
Service by the Lender o f a w ritten request, serve on the Lender a notice which is signed
by a director or duly authorised attorney-in-fact o f the Borrovver and which:

(a) states that no Event o f Deíầult has occurred and is continuing; or

(b) states that no Event o f Deíầult has occurred and is continuing, except tb r aspeciĩied event
or matter, o f which all material details are given.

10.14 N o tifíca tio n o f d efault. The B orrow er w ill n otify the Lender as soon as the Borrovver
becomes avvare of:

(a) the occurrence o f an Event o f D efault w h ich is continuing; or

(b) any matter vvhich indicates that an Event o f Default may have occurred andw ill be
continuing;

and w ill keep the Lender fu lly up-to-date w ith all developments.

10.15 P rovision o f fu rth e r ỉn fo rn ia tio n . The Borrower vvill, as soon as practicable after
receiving a request therefore in w ritin g , provide the Lender w ith any additional financial
or other inform ation relating:

(a) to the Borrower, the Ship, the Eam ings or the Insurances; or

(b) to any other matter relevant to, or to any provision of, a PinanceDocument,

which may be reasonably requested by the Lender at any time.

10.16 P a ri passu. The obligations o f the B o ư o w e r under this Agreement shall, throughout the
Security Period, be direct, general and unconditional obligations o f the Borrower and rank
at least pari passu w ith all other present and future unsecured and unsubordinated
Pinancial Indebtedness o f the Borrower.

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10.17 O w nership. The Borrower shall procure that there shall be no change in the legal or
beneficial ownership o f its shareholder interests, or in its control or management,
throughout the Security Period, w ithout the p rio r vvritten consent o f the Lender (such
consent not to be unreasonably w ithheld) unless after any such changes the Borrovver
remains w ith in the same group o f companies as the Guarantor, in which case the consent
o f the Lender shall not be required.

10.18 C h a rte r Assignm ent. I f the B oư ow er enters into any charter in respect o f the Ship
vvhich is o f tvvelve (12) or more months in duration, or is capable o f exceeding twelve
(12) or more months in duration, the Borrovver shall at the request o f the Lender execute
in favour o f the Lender an assignment o f such charter in such form and on such terms as
the Lender may require, and shall deliver to the Lender any documents in relation thereto
vvhich the Lender may reasonably require. Provided always that the Lender agrees not to
serve notice o f such assignment upon the relevant charterer p rior to the occurrence o f an
Event o f Default which is continuing.

11 CORPORATE UNDERTAKINGS

11.1 G eneral. The Borrower also undertakes w ith the Lender to com ply w ith the follo w in g
provisions o f this Clause 11 at all times during the Security Period except as the Lender
may othenvise permit.

11.2 M aintenance o f status. The Borrovver w ill m aintain its separate corporate existence and
remain in good standing under the laws o f the R epublic o f the Cayman Islands.

11.3 Negative u nd e rtakings. The Borrower w ill not:

(a) carry on any business other than the ownership, chartering and operation o f the Ship;

(b) effect any íbrm o f redemption, purchase or retum o f share Capital;

(c) provide any form o f credit or financial assistance to any person (save fo r noưnal trade
credit in the ordinary course o f business) w ith o u t the p rio r w ritten consent o f the Lender
provided however that the Borrower (subject to no Event o f Default having occurred and
continuing) shall be entitled to make loans to its shareholders, on condition that such
loans are fu lly subordinated to the B o rro w e r’ s obligations under the Loan Agreement and
the other Pinance Documents;

(d) open or maintain any account w ith any bank or fm ancial institution except accounts w ith
the Lender fo r the purposes o f the Pinance Documents;

(e) issue, allot or grant any person a right to any share in its Capital or repurchase or reduce
its issued share Capital provided however that the Borrovver (subject to no Event o f
Default having occuưed and continuing) and subject to giving p rior notice to the Lender
shall be entitled to declare or make payments o f any dividends or distributions vvithout the
p rio r vvritten approval o f the Lender;

(f) acquire any shares or other securities other than u s or U K Treasury b ills and certificates
o f deposit issued by major North A m erican or European banks, or enter into any
transaction in a derivative;

(g) enter into any form o f amalgamation, merger or de-merger or any form o f reconstruction
or reorganisation; or

(h) issue any guarantees or undertakings other than (i) those given in relation to the Pinance
Documents to which the Boưovver is a party and ( ii) those required in the normal course
o f business.

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12 INSURANCE

12.1 G eneral. The Borrower also undertakes w ith the Lender to com ply w ith the fo llo w in g
provisions o f this Clause 12 at all times during the Security Period except as the Lender
may othenvise perniit.

12.2 M aintenance o f o b lig a to ry insurances. The B oưow er shall keep the Ship insured at the
expense o f the Borrovver against:

(a) fire and usual marine risks (including hull and machinery and excess risks);

(b) war risks;

(c) protection and indemnity risks; and

(d) any other risks against w hich the Lender considers, having regard to practices and other
circumstances prevailing at the relevant time, it would in the opinion o f the Lender be
reasonable for the Borrower to insure and which are specified by the Lender by notice to
the Boưower.

12.3 Term s o f o b lig a to ry insurances. The Borrower shall effect such insurances:

(a) in Dollars;

(b) in the case o f íìre and usual marine risks and war risks, in an amount onan agreed value
basis at least the greater o f (i) 120% o f the Loan and (ii) the market value o f the Ship; and

(c) in the case o f oil pollution lia b ility risks, for an aggregate amount equal to the highest
level o f cover from time to time available ưnder basic protection and indem nity club entry
and in the intemational marine Insurance market;

(d) in relation to protection and indem nity risks in respect o f the S hip’ s fu ll tonnage;

(e) in the case o f protection and indem nity risks, w ith a protection and indem nity risks
association which is an member o f the International Group and in relation to all other
insurances, through first class brokers and with first class Insurance com panies and/or
undenvriters and/or in first class war risks associations as the case may be.

12.4 P u rth e r protections fo r the Lender. In addition to the terms set out in Clause 12.3, the
Borrower shall procure that the obligatory insurances shall:

(a) vvhenever the Lender requires, name (or be amended to name) the Lender as additional
named assured fo r its rights and interests, warranted no operational interest and w ith fu ll
waiver o f rights o f subrogation against the Lender, but \vithout the Lender thereby being
liable to pay (but having the right to pay) premiums, calls or other assessments in respect
o f such Insurance;

(b) name the Lender as loss payee w ith such directions fo r payment as set out in the loss
payable clause;

(c) provide that all payments by or on behalf o f the insurers under the obliga to ty insurances
to the Lender shall be made w ithout set-off, counterclaim or đeductions or condition
xvhatsoever;

(d) provide that such obligatory insurances shall be prim ary w ithout rig h t o f contribution
from other insurances vvhich may be carried by the Lender;

(e) provide that the Lender may make p ro o f o f loss i f the Borroxver fails to do so.

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12.5 R enew ai o f o b lig a to ry insurances. The Borrower shall:

(a) at least tw enty one (21) days before the expiry o f any obligatoĩy Insurance:

(i) n o tify the Lender o f the brokers (or other insurers) and any protection and
indem nity or war risks association through or w ith whom the Borrower intends to
renew that obligatory Insurance and o f the terms o f renewal; and

( ii) obtain the Lender’ s approval to the matters reíerred to in paragraph (i), such
approval not to be unreasonably w ithheld or delayed;

(b) at least fourteen (14) days before the expiry o f any obligatory Insurance, renew that
o bligatory Insurance fo llo w in g the Lender’ s approval pursuant to paragraph (a); and

(c) procure that the approved brokers and/or the war risks and protection and indem nity
associations w ith which such a renewal is effected shall prom ptly after the renewal n o tify
the Lender in w ritin g o f the terms and conditions o f the renewal.

12.6 Copies o f policies; letters o f u n d e rta kin g . The Borrovver shall ensure that all approved
brokers provide the Lender w ith pro forma copies o f all policies relating to the obligatory
insurances w hich they are to effect or renew and o f a letter or letters or undertaking in a
form required by the Lender and including undertakings by the approved brokers that:

(a) they w ill have endorsed on each policy, imm ediately upon issue, a loss payable clause
and a notice o f assignment com plying w ith the provisions o f Clause 12.4;

(b) they w ill hold such policies, and the benefit o f such insurances, to the order o f the Lender
in accordance w ith the said loss payable clause;

(c) they w ill advise the Lender immediately o f any material change to the terms o f the
o bligatory insurances;

(d) they w ill n o tify the Lender, not less than íourteen (14) days before the expiry o f the
obligatory insurances, in the event o f their not having received notice o f renewal
instructions from the Borrower or its agents and, in the event o f their receiving
instructions to renew, they w ill prom ptly n o tify the Lender o f the terms o f the
instructions; and

(e) they w ill not set o ff against any sum recoverable in respect o f a claim relating to the Ship
under such obligatorỹ insurances any premiums or other amounts due to them or any
other person whether in respect o f the Ship or othenvise, they waive any lien on the
policies, or any sums received under them, which they m ight have in respect o f such
prem ium s or other amounts, and they w ill not cancel such obligatory insurances by reason
o f non-paym ent o f such premiums or other amounts, and w ill aưange fo r a separate
p o lic y to be issued in respect o f the Ship forthw ith upon being so requested by the
Lender.

12.7 Copies o f certificates o f e n try. The Borrower shall ensure that any protection and
indem nity and/or war risks associations in which the Ship is entered provides the Lender
w ith :

(a) a ce rtified copy o f the certificate o f entry for the Ship;

(b) a letter or letters o f undertaking in such form as may be required by the Lender; and

(c) a ce rtified copy o f each certificate o f íìnancial responsibility fo r pollution by o il or other

E nvironm entally Sensitive Material issued by the relevant certiíying authority in relation
to the Ship.

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12.8 Deposit o f o rig in a l policies. The Borrovver shall ensure that all policies relating to
obligatory insurances are deposited w ith the approved brokers through which the
insurances are effected or renevved.

12.9 Paym ent o f prem ium s. The B orrow er shall punctually pay all prem ium s or other sums
payable in respect o f the o bligatory insurances and produce all relevant receipts when so
required by the Lender.

12.10 Guarantees. The Boưovver shall ensure that any guarantees required by a protection and
indem nity or war risks association are prom ptly issued and rem ain in fu ll force and effect.

12.11 C om pliance w ith term s o f insurances. The Borrovver shall neither do nor om it to do
(nor perm it to be done or not to be done) any act or thing w h ich w o u ld or m ight render
any obligatory Insurance in va lid , vo id , voidable or unenforceable or render any sum
payable under an obligatory Insurance repayable in w hole or in part; and, in particular:

(a) the Borrovver shall take all necessary action and com ply w ith all requirements which may
from time to time be applicable to the obligatory insurances, and (w ith o u t lim itin g the
obligation contained in Clause 12.7(c)) ensure that the o b lig a to ĩy insurances are not made
subject to any material exclusions or qualifications to w h ich the Lender has not given its
prior approval (such approval not to be unreasonably vvithheld);

(b) the Borrower shall not make any changes relating to the classification or classification
society or manager or operator o f the Ship approved by the undenvriters o f the obligatory
insurancest w ithout first n o tify in g the underwriters and obtaining the ir approval; and

(c) the Borrovver shall not em ploy the Ship, nor allow it to be em ployed, otherwise than in
conform ity w ith the terms and conditions o f the o bligatory insurances, w ithout first
obtaining the consent o f the insurers and com plying w ith any requirements (as to extra
premium or othenvise) w hich the insurers speciíy.

12.12 A lte ra tio n to term s o f insurances. The Borrower shall neither make or agree to any
material alteration to the terms o f any obligatory Insurance nor w aive any right relating to
any obligatory insurance.

12.13 Settlem ent o f ciaỉms. The Borrovver shall not settle, com prom ise or abandon any claim
under any obligatory insurance fo r Total Loss or fo r a M a jo r Casualty, xvithout the prior
w ritten consent o f the Lender and shall do all things necessary and provide all documents,
evidence and inform ation to enable the Lender to collect or recover any moneys which at
any time become payable in respect o f the obligatory insurances.

12.14 P rovision o f in fo rn ia tio n . In addition, the B oư ow er shall p ro m p tly provide the Lender
(or any persons w hich it may designate) w ith any in íbrm a tion w h ich the Lender (or any
such designated person) requests tb r the purpose of:

(a) obtaining or preparing any report from an independent m arine Insurance broker as to the
adequacy o f the obligatory insurances effected or proposed to be effected; and/or

(b) effecting, maintaining or renewing any such insurances as are referred to in Clause 12.16
below or dealing w ith or considering any matters relating to any such insurances;

and the Borrower shall, fo rth w ith upon demand, in d e m n ify the Lender in respect o f all
fees and other expenses incurred by or for the account o f the Lender in connection w ith
any such report as is referred to in paragraph (a).

12.15 M o rtgagee’ s interest, additional p e rils Insurance. The Lender shall be entitled from
time to time to effect, maintain and renew a mortgagee’ s interest m arine Insurance and a
mortgagee’ s interest additional perils insurance, each in such amounts, on such lerms.

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through such insurers and generally in such manner as the Lender may from time to time
consider appropriate (but fo r an amount not exceeding 110% o f the amount o f the Loan)
and the Borrovver shall upon demand fu lly in d em n ify the Lender in respect o f all
premiums and other expenses vvhich are reasonably incurred in connection w ith or w ith a
v iew to effectin g, m aintaining or renew ing any such Insurance or dealing with, or
considering, any matter arising out o f any such Insurance, such costs, premium and
expenses to be supported by the necessary vouchers/invoices.

13 S H IP C O V E N A N T S

13.1 G eneral. The Boưovver also undertakes w ith the Lender to com ply w ith the follo w in g
provisions o f this Clause 13 at all times during the Security Period except as the Lender
may othenvise perm it.

13.2 S h ip ’ s nam e and re g is tra tio n . The B orrow er shall keep the Ship registered in its name
as an Isle o f M an Ship at the port o f Douglas; shall not do or allow to be done anything as
a result o f w hich such registration m ight be cancelled or im perilled; and shall not change
the name or port o f registry o f the Ship vvithout the p rio r written consent o f the Lender,
such consent not to be unreasonably withheld.

13.3 R e p a ir and cIassificatio n . The B oư ow er shall keep the Ship in a good and safe
condition and State o f repair:

(a) consistent w ith first-class ship oxvnership and management practice;

(b) so as to m aintain the S hip’ s class, being C LA S S , free o f overdue recommendations and
conditions affecting the S hip’ s class and at all times w ith a classification society w hich is
a member o f the lA C S ; and

(c) so as to com ply w ith a ll laws and regulations applicable to vessels registered at ports in
the Isle o f M an or to vessels trading to any ju ris d ic tio n to w hich the Ship may trade from
tim e to tim e, in cluding but not lim ited to the IS M Code.

13.4 M o d iíic a tio n . The B orrow er shall not make any m odification or repairs to, or
replacement of, the Ship or equipment installed on the Ship w hich would or m ight
m aterially alter the structure, type or perfoirnance characteristics o f the Ship or m aterially
reduce its value vvithout the p rio r vvritten consent o f the Lender.

13.5 R em oval o f p a rts. The B orrow er shall not remove any material part o f the Ship, or any
item o f equipm ent installed on the Ship, unless the part or item so removed is forthw ith
replaced by a suitable part or item which is in the same condition as or better condition
than the part or item removed, is free from any Security Interest or any right in favour o f
any person other than the Lender and becomes on installation on the Ship the property o f
the B orrow er and subject to the security constituted by the Mortgage P rovided th a t the
B orrow er m ay install equipm ent owned by a th ird party i f the equipment can be removed
vvithout any risk o f damage to the Ship.

13.6 Surveys. The Borrovver shall submit the Ship re gularly to all periodical or other surveys
w hich may be required fo r classification purposes and, i f so required by the Lender
provide the Lender, w ith copies o f all survey reports.

13.7 In s p e c tio n . The Borrovver shall perm it the Lender (by surveyors or other persons
appointed by it fo r that purpose) to board the Ship at all reasonable times (but in any
event \vitho u t interfering w ith the ordinary trading o f that Ship) to inspect its condition or
to satisfy themselves about proposed or executed repairs and shall afford all proper
íacilitie s fo r such inspections.

13.8 Prevention o f and release from arrest. The Borrovver shall promptly discharge:

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(a) all liabilities which give or may give rise to maritime or possessory liens on or claims
eníorceable against the Ship, the Eamings or the Insurances, unless the same are
contested in good faith by the appropriate proceedings;

(b) all taxes, dues and other amounts charged in respect o f the Ship, the Earnings o r the
Insurances; and

(c) all other outgoings vvhatsoever in respect o f the Ship, the Earnings or the Insurances;

and, forthw ith upon receiving notice o f the aưest o f the Ship, or o f its detention in
exercise or purported exercise o f any Hen or claim, the Borrower shall procure its release
by providing bail or otherwise as the circumstances may require.

13.9 C om pliance vvith laws etc. The Borrower shall:

(a) comply, or procure compliance w ith the IS M Code, all Environmental Laws and all other
laws or regulations relating to the Ship, its ovvnership, operation and management or to
the business o f the Borrower;

(b) not employ the Ship nor allow its employment in any manner contrary to any law or
regulation in any relevant ju risd ictio n including but not lim ited to the ISM Code; and

(c) in the event o f hostilities in any part o f the world (whether war is declared or not), not
cause or perm it it to enter or trade to any zone which is declared a war zone by any
govemment or by the Ship’ s war risks insurers unless the p rior w ritten consent o f the
Lender has been given and the Borrovver has (at its expense) eíTected any special,
additional or m odified Insurance cover which the Lender may require.

13.10 P rovision o f in fo rm a tio n . The Borrovver shall prom ptly provide the Lender w ith any
iníbrmation which it requests regarding:

(a) the Ship, its employment, position and engagements;

(b) the Eamings and payments and amounts due to the Ship’ s master and crew;

(c) any expenses incurred, or lik e ly to be incurred, in connection w ith the operation,
inaintenance or repair o f the Ship and any payments made in respect o f the Ship;

(d) any tovvages and salvages;

(e) the B orrow er’ s , the Approved Manager’ s or the Ship’ s compliance w ith the ISM Code;

and, upon the Lender’ s request, provide copies o f any current charter relating to the Ship,
o f any current charter guarantee and o f the Ship’ s Document o f Compliance.

13.11 N o tiíic a tio n o f certain events. The Borrower shall im m ediately n o tify the Lender by
fax, confirmed forth\vith by letter, of:

(a) any casualty w hich is or is lik e ly to be or to become a M ajor Casualty;

(b) any occurrence as a result o f which the Ship has become or is, by thepassingo f time or
othenvise, lik e ly to become a Total Loss;

(c) any requirement or recommendation made by any insurer or classification society

affecting the ship’ s class or by any competent authority \vhich is not imm ediately
complied w ith (unless in case o f requirements or recommendations imposed by a
classification society compliance thereto is duly postponed in accordance w ith the rules o f
such classification so cie ty);

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(d) any arrest or detention o f the Ship (unless the ship is released w ith 3 Business Days
fo llo w in g such arrest or detention), any exercise or purported exercise o f any lien on the
Ship or its Eamings (unless released w ith in 3 Business Days follo w in g the exercise or
purported exercises o f any such lien) or any requisition o f the Ship for hire;

(e) any intended dry docking o f the Ship;

(f) any Environmental Claim made against the Borrower or in connection w ith the Ship, or
any Environmental Incident;

(g) any claim for breach o f the ISM Code being made against the Boưower, the Approved
Manager or othenvise in connection w ith the Ship; or

(h) any other matter, event or incident, actual or threatened, the effect o f which w ill or could
lead to the IS M Code not being complied w ith;

and the Borroxver shall keep the Lender advised in \vriting on a regular basis and in such
detail as the Lender shall require o f the B orrow er’ s, the Approved Manager’ s or any other
person’ s response to any o f those events or matters.

13.12 Restrictions on chartering, appointment of managers etc. The Borrower shall not (in
the case o f (a) - (d), other than in relation to the Charter):

(a) let the Ship on demise charter for any period;

(b) enter into any time or consecutive voyage charterin respect o f the Ship fo r a term which
exceeds, or which by virtue o f any optional extensions may exceed, 13 months;

(c) charter the Ship otherwise than on bona fide arm ’ s length terms at the time when the Ship
is fixed;

(d) appoint a manager o f the Ship other than the Approved Manager;

(e) de-activate or lay up the Ship; or

(f) put the Ship into the possession o f any personfor the purpose o f w ork being done upon
her in an amount exceeding or lik e ly to exceed $1,000,000 (or the equivalent in any other
cuưency) unless that person has first given to the Lender and in terms satisfactory to it a
w ritten undertaking not to exercise any Hen on the Ship or the Earnings fo r the cost o f
such w ork or fo r any other reason.

13.13 N otice o f M ortgage. I f required by the laws o f the flag o f the Ship, the B oưow er shall
keep the Mortgage registered against the Ship as a valid first p rio rity statutory mortgage,
carry on board the Ship a certified copy o f the Mortgage and place and maintain in a
conspicuous place in the navigation room and the M aster’ s cabin o f the Ship a framed
printed notice stating that the Ship is mortgaged by the Borrovver to the Lender.

14 S E C U R IT Y C O V E R

14.1 M in im u m re q u ire d se curity cover. Clause 14.2 applies i f the Lender notifies the
Borrower, at any time during the Security Period, that:

(a) the market value (determined as provided in Clause 14.3) o f the Ship; plus

(b) the net realisable value o f any additional security previously provided under this Clause
14;

is below 120 % o f the Loan.

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14.2 P rovision o f a d d itio n a l se curity; prepaym ent. I f the Lender serves a notice on the
Borrovver under Clause 14.1, the Borrovver shall, vvithin one (1) month after the date on
which the Lender’ s notice is served, either:

(a) provide, or ensure that a third party provides, additional security which, in the opinion o f
the Lender, has a net realisable value at least equal to the shortfall and is documented in
such terms as the Lender may approve or require. Such additional security shall be
constituted by:

(ị) additional pledged cash deposits in favour o f the Lender in an amount equal to the
shortfall and in an account and manner to be determined by the Lender; and/or

(iị) any other security acceptable to the Lender at its absolute discretion to be
provided in a manner deteưnined by the Lender; or

(b) prepay such part (at least) o f the Loan as w ill eliminate the shortfall.

14.3 V a lu a tio n o f Ship. The market value o f the Ship at any date is that shown by a valuation
prepared;

(a) in Dollars;

(b) as at a date not more than fourteen (14) days previously;

(c) by Clarkson’ s Shipvalue.net; or ( i f unavailable) by an independent sale and purchase

shipbroker which the Lender has approved or appointed fo r the purpose;

(d) w ith or w ithout physical inspection o f the Ship (as the Lender may require);

(e) on the basis o f a sale for prompt delivery for cash on normal arm ’ s length commercial
terms as between a w illin g seller and a w illin g bưyer, ữee o f any existing charter or other
contract o f employment.

14.4 V alue o f a d d ỉtio n a l vessel securlty. The net realisable value o f any additional security
which is provided under Clause 14.2 and vvhich consists o f a Security Interest over a
vessel shall be that shown by a valuation com plying w ith the requirements o f Clause 14.3
or i f the additional security is in the form o f a cash deposit fu ll credit shall be given for
such cash deposit on a D ollar for D ollar basis.

14.5 V alua tio ns b indỉng. A n y valuation o f a Vessel under Clause 14.2, 14.3 or 14.4 shall be
binding and conclusive as regards the Borrower (save in case o f maniíest error).

14.6 P rovision o f in ío rm a tio n . The Borrower shall prom ptly provide the Lender and any
shipbroker or expert acting under Clause 14.3 or 14.4 w ith any inform ation which the
Lender or the shipbroker or expert may reasonably request fo r the purposes o f the
valuation; and, i f the Borrovver fails to provide the inform ation b}' the date specịfíed in the
request, the valuation may be made on any basis and assumptions w hich the shipbroker
(or the expert appointed by it) considers prudent.

14.7 A n n u a l valuations. The Ship shall be valued on the Drawdown Date and every 6 months
thereaữer in accordance w ith the provisions o f Clause 14.3 or, at the Lender’ s discretion,
by reference to Clarkson’ s Shipvalue.net, in each case o f the cost and expense o f the
Borrovver.

14.8 P aym ent o f va lu a tio n expenses. W ithout prejudice to the generality o f the B orrow er’ s
obligations under Clauses 19.2, 19.3 and 20.3, the Borrovver shall, on demand, pay the
Lender the amount o f the fees and expenses o f any shipbroker or expert instructed by the

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Lender under this Clause as supported by all relevant invoices and/or vouchers and all
legal and other expenses incurred by the Lender in connection w ith any matter arising out
o f this Clause.

14.9 Application of prepayment. Clause 7 (as applicable) shall apply in relation to any
prepayment pursũant to Clause 14.2(b).

15 PAYMENTS AND CALCULATIONS

15.1 C u rre n cy and method o f paym ents. A ll payments to be made by the Borrower to the
Lender under the Master Agreement or a Pinance Document shall be made to the Lender:

(a) by not later than 11.00 a.m. (New Y o rk C ity tim e) on the due date;

(b) in same day D ollar funds settled through the New Y o rk Clearing House Interbank
Payments System (or in such other D ollar funds and/or settled in such other manner as the
Lender shall speciíy as being customary at the time fo r the settlement o f intemational
transactions o f the type contemplated by this Agreement); and

(c) to the account o f the Lender at A n American Bank, New Y ork, N Y , USA (Account No
000100001, A B A 000000001, SW IFT Code AMBKZZOO), or to such other account w ith
such other bank as the Lender may from time to time n o tify to the Borroxver.

15.2 Paym ent on non-Business Day. I f any payment by the Borrower under a Pinance
Document would otherwise fall due on a day which is not a Business Day:

(a) the due date shall be extended to the next succeeding Business Day; or

(b) i f the next succeeding Business Day falls in the next calendar month, the due date shall be
brought forward to the immediately preceding Business Day;

and interest shall be payable during any extension under paragraph (a) at the rate payable
on the original due date.

15.3 Basis fo r ca lcu latio n o f p e rio d ic paym ents. A ll interest and any other payments under
any Pinance Document vvhich are o f an annual or periodic nature shall accrue from day to
day and shall be calculated on the basis o f the actual number o f days elapsed and a 360
day year.

15.4 L en d e r accounts. The Lender shall maintain an account shoxving the amounts advanced
by the Lender and all other sums owing to the Lender from the Borrovver and each
Security Party under the Pinance Documents and all payments in respect o f those
amounts made by the Borrower and any Security Party.

15.5 A ccounts p rim a facie evidence. I f the account maintained under Clause 15.4 shows an
amount to be owing by the Borrovver or a Security Party to the Lender, that account shall
be prima facie evidence that that amount is owing to the Lender, always excluding cases
o f manifest error.

16 APPLICATION OF RECEIPTS

16.1 N o rm a l o rd e r o f app lica tio n. Except as any Pinance Document may othenvise provide,
any sums w hich are received or recovered by the Lender under or by virtue o f any
Pinance Document shall be applied:

FIRST: in or tov/ards the payment o f all expenses and charges reasonably made or
incuưed by the Lender in protecting its rights under this Agreement or any o f the Security
Documents;

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S E C O N D L Y : in or tovvards the payment o f any interest as is then due and payable under
this Agreement;

T H IR D L Y : in or tONvards the payment pari passu o f any principal as is then due and
payable under this Agreement and any sums payable under the Master Agreement;

P O U R TH LY : in or tovvards the payment o f any other amounts as are then due and
payable under this Agreement and the Security Documents (or any o f them); and

F IF T H L Y a n y s u rp lu s sh a ll be p a id to the B o rro w e r o r to a n y o th e r p erson le g a lly

e n title d to it.

16.2 V a ria tio n o f o rd e r o f applỉcation. The Lender may, by notice to the Borrovver and the
Security Parties, provide fo r a different manner o f application from that set out in
Clause 16.1 either as regards a specified sum or sums or as regards sums in a specified
category or categories.

16.3 Notice of varỉation of order of applicatỉon. The Lender may give notices under
Clause 16.2 from time to time; and such a notice may be stated to apply not only to sums
which may be received or recovered in the future, but also to any sum w hich has been
received or recoveređ on or after the thirđ Business Day before the date on which the
notice is served.

16.4 A p p ro p ria tio n rig h ts o ve rrid d e n . This Clause 16 and any notice w hich the Lender
gives under Clause 16.2 shall override any right o f appropriation possessed, and any
appropriation made, by the Boưower or any Security Party.

17 A P P L IC A T IO N O F E A R N IN G S

17.1 Paym ent o f E arnings and swap paym ents. The Borrower undertakes w ith the Lender
to ensure that, throughout the Security Period:

(a) subject only to the provisions o f the General Assignment, all the Earnings are paid to the
Eamings Account; and

(b) all payments, i f any, by the Lender to the BoiTower under each Designated Transaction
are paid to the Eamings AccounÍT,

17.2 A p p lic a tio n o f E arnỉngs. A fte r an Event o f Deíault occurs^ and is continuing no monies
shall be withdrawn from the Eamings Account save as hereinafter provided and the
Lender shall on each Repayment Date and on each due date for the payment o f interest
under this Agreement apply in accordance w ith Clause 15.1 so much o f the balance on the
Earnings Account as equals:

(a) the repayment instalment due on that Repayment Date; or

(b) the amount o f interest payable on that interest payment dateệ,

in discharge o f the B orrow er’ s lia b ility for that repayment instalment or that interest.

A ny surplus accumulated in the Eamings Account shall remain in such Eamings Account
unless othenvise permitted in the Pinance Documents.

17.3 L ocation o f accounts. The Borrovver shall prom ptly:

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(a) com ply w ith any requirement o f the Lender as to the location or re-location o f the
Earnings Account;

(b) execute any documents which the Lender speciĩies to create or maintain in favour o f the
Lender a Security Interest over (and/or rights o f set-off, consolidation or other rights in
relation to) the Earnings Account.

17.4 Debỉts fo r expenses etc. Follow ing the occurrence o f an Event o f Default which is
continuing the Lender shall be entitled (but not obliged) from time to time to debit the
Eamings Account w ith prior notice to the Boưovver in order to discharge any amount due
and payable to it under Clause 19 or 20 or payment o f which it has become entitled to
demãnd under Clause 19 or 20.

17.5 Borrower’s obligations unaffected. The provisions o f this Clause 17 (as distinct from a
distribution effected under Clause 17.2) do not affect:

(a) the lia b ility o f the Borroxver to make payments o f principal and interest on the due dates;
or

(b) any other lia b ility or obligation o f the Borrower or any Security Party under any Pinance
DÕcument.

18 EVENTS OF D E P AU LT

18.1 Events o f D eíault. An Event o f Default occurs if:

(a) the Borrower or any Security Party fails to pay, \vithin two (2) Business Days o f it
becoming due or being demanded (as the case may be), any sum payable under a Pinance
Document or under any document relating to a Pinance Document; or

(b) any breach occurs ofC lause 8.2, 10.2, 10.3, 10.17, 10.18, 11.2, 11.3 or 14.2; or

(c) any breach by the Borrower or any Security Party occurs o f any provision o f a Pinance
Document (other than a breach covered by paragraph (a) or (b)) if, in the opinion o f the
Lender, such deíầult is capable o f remedy and such default continues unremedied fifteen
(15) Business Days after vvritten notice from the Lender requesting action to remedy the
same; or

(d) (subject to any applicable grace period specified in any Pinance Document) any breach by
the Borrovver or any Security Party occurs o f any provision o f a Pinance Document (other
than a breach covered by paragraph (a), (b) or (c)); or

(e) any representation, vvarranty or statement made by, or by an o ffice r of, the Borrower or a
Security Party in a Pinance Document or in the Drawdown Notice or any other notice or
document relating to a Pinance Document is untrue or misleading when it is made; or

(f) any o f the fo llo w in g occurs in relation to any Pinancial Indebtedness o f a Security Party:

(i) any Pinancial Indebtedness o f a Security Party is not paid when due or, i f so
payable, on demand unless the same is contested in good faith by appropriate
proceeding; or

(ii) any Pinancial Indebtedness o f a Security Party becomes due and payable p rio r to
its stated maturity date as a consequence o f any event o f default; or

(iii) a lease, hire purchase agreement or charter creating any Pinancial Indebtedness o f
a Security Party is terminated by the lessor or owner as a consequence o f any
termination event; or

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(iv ) any overdraft, loan, note issuance, acceptance credit, letter o f credit, guarantee,
foreign exchange or other fa cility, or any swap or other derivative contract or
transaction, relating to any Pinancial Indebtedness o f a Security Party ceases to be
available as a result o f any event o f default; or

(v) any Security Interest securing any Pinancial Indebtedness o f a Security Party
becomes enforceable; or

(g) any o f the follo w in g occurs in relation to a Security Party :

(i) a Security Party becomes, in the reasonable opinion o f the Lender, unable to pay
its debts as they fa ll due; or

(ii) any assets o f a Security Party are subject to any form o f execution, attachment,
aưest, sequestration or distress in respect o f a sum of, or sums aggregating,
$1,000,000 or more or the equivalent in another currency, where such execưtion,
attachment, arrest, sequestration or distress is not discharged w ith in th irty (30)
days from the date the same is instituted; or

( iii) any administrative or other receiver is appointed over any asset o f a Security
Party; or

(iv ) a Security Party makes any form al declaration o f bankruptcy or any formal
statement to the effect that it is insolvent or like ly to become insolvent, or a
w inding up or administration order is made in relation to a Security Party, or the
members or directors o f a Security Party pass a resolution to the effect that it
should be wound up, placed in administration or cease to carry on business, save
that this paragraph does not apply to a fu lly solvent w inding up o f a Security
Party other than the Borrower which is, or is to be, etYected fo r the purposes o f an
amalgamation or reconstruction previously approved by the Lender; or

(v) a bona fide petition is presented in any Pertinent Jurisdiction fo r the w inding up
or administration, or the appointment o f a provisional liquidator, o f a Security
Party unless the petition is being contested in good faith and on substantial
grounds and is dismissed or withdrawn w ith in 60 days o f the presentation o f the
petition; or

(v i) a Security Party petitions a court, or presents any proposal for, any íbrm o f
ju d icia l or non-judicial suspension or deferral o f payments, reorganisation o f its
debt (or certain o f its debt) or aưangement w ith all or a substantial proportion (by
number or value) o f its creditors or o f any class o f them or any such suspension or
deferral o f payments, reorganisation or arrangement is effected by court order,
contract or othenvise; or

(v ii) in a Pertinent iu risd ictio n other than England, any event occurs o r any procedure
is commenced w hich, in the opinion o f the Lender’ s legal advisors, is sim ilar to
any o f the foregoing; or

(h) the Borrower ceases or suspends carrying on its business or a part o f its business which,
in the reasonable opinion o f the Lender, is adversely maíerial in the context o f this
Agreement; or

(i) it becomes unlaw ful in any Pertinent Jurisdiction or impossible:

(i) for the Borrower or any Security Party to discharge any lia b ility under a Pinance
Document or to com ply w ith any other obligation w hich the Lender considers
material under a Pinance Document; or

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( ii) fo r the Lender to exercise or enforce any right under, or to enforce any Security
Interest created by a Pinance Document; or

(j) any consent necessary to enable the Borrower to own, operate or charter the Ship or to
enable the B oưow er or any Security Party to com ply w ith any provision which the
Lender considers material o f a Pinance Document or an Underlying Document is not
granted, expires vvithout being renevved, is revoked or becomes liable to revocation or any
condition o f such a consent is not fu lfille d ; or

(k) it appears to the Lender that, \vithout its p rior consent, a change has occurred or probably
has occurred after the date o f this Agreement in the ultimate beneficial ovvnership o f any
o f the shares in the Borrovver or in the ultimate control o f the voting rights attaching to
any o f those shares save as permitted in this Agreement and the other Pinance
DÕcuments; or

(1) any provision which the Lender considers material o f a Pinance Document proves to have
been or becomes invalid or unenforceable, or a Security Interest created by a Pinance
Document proves to have been or becomes invalid or unenforceable or such a Security
Interest proves to have ranked after, or loses its p rio rity to, another Security Interest or
any other th ird party claim or interest; or

(m) the security constituted by a Pinance Document is in any way im perilled or in jeopardy;
or

(n) any other event occurs or any other circumstances arise or develop including, vvithout
lim ita tio n a material adverse change in the ĩm ancial position, State o f affairs or prospects
o f the Boưovver or any other Security Party, in the light o f which the Lender (acting
reasonably) considers that there is a material and significant risk that the Borrower or
such other Security Party is, or w ill later become, unable to discharge its liabilities under
the Pinance Documents as they fall due.

18.2 Actions following an Event of Default. On, or at any time after, the occurrence o f an
Event o f D eíault vvhich is continuing the Lender may;

(a) serve on the B oưow er a notice stating that all obligations o f the Lender to the Borrower
under this Agreement are terminated; and/or

(b) serve on the Borrovver a notice stating that the Loan, all accrued interest and all other
amounts accrued or owing under this Agreement are imm ediately due and payable or are
due and payable on demand; and/or

(c) take any other action which, as a result o f the Event o f Default or any notice served under
paragraph (a) or (b), the Lender is entitled to take under any Pinance Document or any
applicable law.

18.3 Termination of obligatỉons. On the Service o f a notice under Clause 18.2(a), all the
obligations o f the Lender to the Boưoxver under this Agreement shall terminate.

18.4 A c c e le ra tio n o f Loan. On the Service o f a notice under Clause 18.2(b), the Loan, all
accmed interest and all other amounts accrued or owing from the B oưow er or any
Security Party under this Agreement and every other Pinance Document shall become
im m ediately due and payable or, as the case may be, payable on demand.

18.5 M u ltip le notices; action w ith o u t notice. The Lender may serve notices under Clauses
18.2(a) and (b) simultaneously or on different dates and it may take any action referred to
in Clause 18.2 i f no such notice is served or simultaneously w ith or at any time after the
Service o f both or either o f such notices.

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18.6 E xclusion o f L en d e r lia b ility . Neither the Lender nor any receiver or manager
appointed by the Lender, shall have any lia b ility to the Borrower or a Security Party:

(a) for any loss caused by an exercise o f rights under, or enforcement o f a Security Interest
created by a Pinance Document or by any failure or delay to exercise such a right o r to
enforce such a Security Interest; or

(b) as mortgagee in possession or othervvise, fo r any income or principal amount which m ight
have been produced by or realised from any asset comprised in such a Security Interest or
for any reduction (hovvever caused) in the value o f such an asset;

except that this does not exempt the Lender or a receiver or manager from lia b ility for
losses shown to have been caused directly and m ainly by the dishonesty or the w ilfu l
misconduct o f the Lender’ s own officers and employees or (as the case may be) such
receiver’ s or manager’ s own partners or employees.

18.7 In te rp re ta tio n . In Clause 18.1(f) references to an event o f default or a termination event

include any event, hovvsoever described, which is sim ilar to an event o f default in a
fa c ility agreement or a termination event in a finance lease; and in Clause 18.1(g)
“ p e titio n ” inclưdes an application which i f made by a third party is bona fide and is not
contested in good faith.

19 FEES A N D EXPENSES

19.1 A rra n g e m e n t fee. The Borrower shall pay to the Lender on the date o f signing o f this
Agreement an arrangement tee o f $100,000 such fee to be inclusive o f all legal costs for
the negotiation, finalisation and execution o f this Agreement and the other Pinance
Documents, issuance o f any legal opinions and registration o f any Pinance Documents in
any Pertinenl Jurisdiction.

19.2 Costs o f v a ria tio n , am endnients, enĩorcem ent etc. The Borrovver shall pay to the
Lender, on the Lender’ s demand, the amount o f all expenses reasonably incurred by the
Lender in connection with:

(a) any amendment or supplement to a Pinance Document, or any proposal fo r such an

amendment to be made;

(b) any consent or waiver by the Lender concerned under or in connection w ith a Pinance
Document, or any request fo r such a consent or waiver;

(c) any step taken by the Lender w ith a view to the protection, exercise or enforcement o f
any right or Security Interest created by a Pinance Document or íb r any sim ilar purpose.

There shall be recoverable under paragraph (c) the fu ll amount o f all legal expenses,
allowed under rules o f court or any taxation or other procedure carried out under such
rules.

19.3 D ocum entary taxes. The Borroxver shall prom ptly pay any tax payable on or by
reference to any Pinance Document, and shall, on the Lender’ s demand, fu lly indem niíy
the Lender against any claims, expenses, liabilities and losses resulting from any failure
or delay by the Borrower to pay such a tax.

19.4 C e rtific a tio n o f am ounts. A notice vvhich is signed by two (2) officers o f the Lender,
which states that a specified amount, or aggregate amount, is due to the Lender under this
Clause 19 and which indicates (vvithout necessarily speciíying a detailed breakdovvn) the
matters in respect o f w hich the amount, or aggregate amount, is due shall be prim a facie
evidence that the amount, or aggregate amount, is due alvvays excepting cases o f manifest
error.

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20 INDEMNITIES

20.1 Indemnities regarding borrowing and repayment of Loan. The Borrower shall fu lly
indem nify the Lender on its demand in respect o f all claims, expenses, liabilities and
losses w hich are made or brought against or incurred by the Lender, or which the Lender
reasonably and w ith due diligence estimates that it w ill incur, as a result o f or in
connection with:

(a) the Loan not being boưowed on the date specified in the Drawdown Notice fo r any
reason other than a default by the Lender;

(b) the receipt or recovery o f all or any part o f the Loan or an overdue sum othenvise than on
the last day o f an Interest Period or other relevant period;

(c) any failure (fo r whatever reason) by the Borrovver to make payment o f any amount due
under a Pinance Document on the due date or, i f so payable, on demand (after giving
credit fo r any default interest paid by the Borrovver on the amount concemed under
Clause 6);

(d) the occurrence and/or continuance o f an Event o f Default and/or the acceleration o f
repayment o f the Loan under Clause 18;

and in respect o f any tax (other than tax on its overall net income) fo r which the Lender is
liable in connection w ith any amount paid or payable to the Lender (whether for its own
account or othervvise) under any Pinance Document.

20.2 B reakage costs. W ithout lim itin g its generality, Clause 20.1 covers any claim, expense,
lia b ility or loss incurred by the Lender:

(a) in liquidating or em ploying deposits from third parties acquired or arranged to fund or
m aintain all or any part o f the Loan and/or any overdue amount (or an aggregate amount
w hich includes the Loan or any overdue amount); and

(b) in terminating, or othenvise in connection w ith, any interest and/or currency swap or any
other transaction entered into (vvhether w ith another legal entity or w ith another office or
department o f the Lender and whether in relation to the Master Agreement or othervvise)
to hedge any exposure arising ưnder this Agreement or a number o f transactions o f which
this Agreement is one.

20.3 Miscellaneous indemnities. The Borroxver shall fu lly indem nify the Lender on its
demand in respect o f all claims, expenses, liabilities and losses which may be made or
brought against or incurred by the Lender, in any country, as a result o f or in connection
w ith :

(a) any action taken, or omitted or neglected to be taken, under or in connection w ith any
Pinance Document by the Lender or by any receiver appointed under a Pinance
Document;

(b) any other Pertinent Matter;

other than claims, expenses, liabilities and losses w hich are shown to have been directly
and m ainly caused by the dishonesty or w ilfu l misconduct o f the officers or employees o f
the Lender.

W ithout prejudice to its generality, this Clause 20.3 covers any claims, expenses,
lia b ilitie s and losses which arise, or are asserted, under or in connection w ith any law
relating to safety at sea, the IS M Code or any Environmental Law.

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20.4 C u rre n cy in d e m n ity. I f any sum due from the Borrower or any Security Party to the
Lender under a Pinance Document or under any order or judgm ent relating to a Pinance
Document has to be converted from the currency in w hich the Pinance Document
provided for the sum to be paid (the “ C o n tra c tu a l C u rre n c y ” ) into another currency (the
Payment Currency”) for the purpose of:

(a) making or lodging any claim or p ro o f against the Borrower or any Security Party,
whether in its liquidation, any aưangement involving it or othenvise; or

(b) obtaining an order or judgm ent from any court or other tribunal; or

(c) enforcing any such order or judgment;

the Borrower shall indem nify the Lender against the loss arising when the amount o f the
payment actually received by the Lender is converted at the available rate o f exchange
into the Contractual Currency.

In this Clause 20.4, the “ avaiỉable rate o f exchange” means the rate at w hich the Lender
is able at the opening o f business (London tim e) on the Business Day after it receives the
sum concemed to purchase the Contractual Cuưency w ith the Payment Cuưency.

This Clause 20.4 creates a separate lia b ility o f the Borrower w hich is distinct from its
other liabilities under the Pinance Documents and w hich shall not be merged in any
judgm ent or order relating to those other liabilities.

20.5 A p p lic a tio n to M a ster A greem ent. For the avoidance o f doubt, Clause 20.4 does not
apply in respect o f sums due from the Borrower to the Lender under or in connection with
the Master Agreement as to which sums the provisions o f section 8 (Contractual
Currency) o f the Master Agreement shall apply.

20.6 C e rtid c a tio n o f am ounts. A notice which is signed by two (2) offìcers o f the Lender,
which states that a speciíìed amount, or aggregate amount, is due to the Lender under this
Clause 20 and which indicates (vvithout necessarily specifying a detailed breakdown) the
matters in respect o f w hich the amount, or aggregate amount, is due shall be prim a facie
evidence that the amount, or aggregate amount, is due, always excluding cases o f
manitest eưor.

20.7 Mitigation. l f circumstances arise w hich would result in an increased amount being
payable by the Borrovver under this Clause then, w ithout in any way lim itin g the rights o f
the Lender under this Clause, the Lender shall use reasonable endeavours to transíer its
obligations, liabilities and rights under this Loan Agreement and the Pinance Documents
to another office or financial institution not atYected by the circumstances, but the Lender
shall be under no obligation to take any such action i f in its opinion, to do so would or
might:

(a) have an adverse effect on its business, operations or financial condition; or

(b) involve it in any a ctivity w hich is unlaw ful or prohibited or any a ctivity that is contrary
to, or inconsistent, w ith any regulation; or

(c) involve it in any expense (unless indem nified to its reasonable satisfaction) or tax
disadvantage.

21 N O S E T -O F F O R T A X D E D U C T IO N

21.1 No deductions. A ll amounts due from the Boưower under a Pinance Docum ent shall be
paid:

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(a) vvithout any form o f set-off, cross-claim or condition; and

(b) free and clear o f any tax deduction except a tax deduction which the Borrower is required
by law to make.

21.2 G ro ssin g-up fo r taxes. I f the Boưower is required by law to make a tax deduction from
any payment:

(a) the Boưovver shall n otify the Lender as soon as it becomes aware o f the requirement;

(b) the B oư o w e r shall pay the tax deducted to the appropriate taxation authority prom ptly,
and in any event before any fme or penalty arises;

(c) the amount due in respect o f the payment shall be increased by the amount necessary to
ensure that the Lender receives and retains (free from any lia b ility relating to the tax
deduction) a net amount which, after the tax deduction, is equal to the fu ll amount which
it w ould othervvise have received.

21.3 Evidence o f p aym ent o f taxes. W ith in one month after making any tax deduction, the
Borroxver shall deliver to the Lender documentary evidence satisfactory to the Lender that
the tax had been paid to the appropriate taxation authority.

21.4 Exclusion o f tax on overall net income. In this Clause 21 “tax deduction” means any
deduction or w ithholding fo r or on account o f any present or future tax except tax on the
Lender’ s overall net income.

21.5 A p p lic a tio n to the M a ster A greem ent. For the avoidance o f doubt, Clause 21 does not
apply in respect o f sums due from the Borrovver to the Lender under or in connection w ith
the Master Agreement as to which sums the provisions o f section 2(d) (Deduction or
W ith h oldin g fo r Tax) o f the Master Agreement shall apply.

21.6 Mitigation. I f circumstances arise vvhich vvould result in an increased amount being
payable by the Borrower under this Clause then, w ithout in any way lim itin g the rights o f
the Lender under this Clause, the Lender shall use reasonable endeavours to transfer its
obligations, lia b ilitie s and rights under this Loan Agreement and the Pinance Documents
to another o ffice or fmancial institution not affected by the circumstances, but the Lender
shall be under no obligation to take any such action i f in its opinion, to do so would or
m ight:

(a) have an adverse effect on its business, operations or fmancial condition; or

(b) involve it in any activity which is unlaw ful or prohibited or any activity that is contrary
to, or inconsistent, w ith any regulation; or

(c) involve it in any expense (unless indem nified to its reasonable satisfaction) or tax
disadvantage.

21.7 T a x c re d its. I f the Lender receives fo r its own account a repayment or credit in respect
o f tax on account for w hich the Borrovver has made an increased payment under this
Clause, it shall pay to the B oưow er a sum equal to the repayment or credit received,
provided always that:

(a) the Lender shall not be obliged to allocate to this transaction any part o f a tax repayment
or credit w h ich is referable to a number o f transactions;

(b) nothing in this Clause shall oblige the Lender to arrange its tax affairs in any particular
manner, to claim any type o f relief, credit, allowance or deduction instead of, or in
p rio rity to, another or to make any such claim w ith in any particular time;

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(c) nothing in this Clause shall oblige the Lender to make a payment which exceed any
repayment or credit in respect o f tax on account o f which the Borrower has made an
increased payment under this Clause; and

(d) any allocation or determination made by the Lender under or in connection w ith this
Clause shall be binding on the Borrower.

22 IL L E G A L IT Y , E TC

22.1 Ille g a lity . This Clause 22 applies i f the Lender notiĩies the Borrovver that it has become,
or w ill w ith effect from a speciĩied date, become:

(a) unlawful or prohibited as a result o f the introduction o f a new law, anamendment to an

existing law or a change in the manner in which an existing law is or w ill be interpreted
or applied; or

(b) contrary to, or inconsistent w ith, any regulation,

fo r the Lender to maintain or give effect to any o f its obligations under this Agreement in
the manner contemplated by this Agreement.

22.2 N o tiílc a tio n and effect o f ille g a lity . On the Lender notifyin g the Borrovver under
Clause 22.1, the Lender’ s obligation to make the Loan shall terminate; and thereupon or,
i f later, on the date specified in the Lender’ s notice under Clause 22.1 as the date on
which the notiĩied event wouId become effective the Borrower shall prepay the Loan in
fu ll in accordance w ith Clause 7.

22.3 M itig a tio n . I f circumstances arise which would result in a notiíìcation ưnder Clause 22.1
then, w ithout in any way lim itin g the rights o f the Lender under Clause 22.3, the Lender
shall use reasonable endeavours to transfer its obligations, liabilities and rights under this
Agreement and the other Pinance Documents to another oíTice or financial institution not
aíYected by the circumstances but the Lender shall not be under any obligation to take any
such action if, in its opinion, to do would or might:

(a) have an adverse effect on its business, operations or ĩm ancial condition; or

(b) involve it in any activity which is unlaw ful or prohibited or any a ctivity that is contrary
to, or inconsistent w ith, any regulation; or

(c) involve it in any expense (unless indemniíìed to its satisíầction) or tax disadvantage.

23 IN C R E A S E D COSTS

23.1 Increased costs. This Clause 23 applies i f the Lender notiĩies the Borrower that it
considers that as a result of:

(a) the introduction or alteration after the date o f this Agreement o f a law, or an alteration
after the date o f this Agreement in the manner in svhich a law is inteipreted or applied
(disregarding any effect w hich relates to the application to payments under this
Agreement o f a tax on the Lender’ s overall net income); or

(b) com plying w ith any regulation (including any which relates to Capital adequacy or
liquidity Controls or w hich affects the manner in w hich the Lender allocates Capital
resources to its obligations under this Agreement) w hich is introduced, or altered, or the
interpretation or application o f which is altered, after the date o f this Agreement,

the Lender (or a parent company o f it) has incuưed or w ill incur an “ increased cost” .

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23.2 Meaning of “increased costs”. In this Clause 23, “increased costs” means:

(a) an additional or increased cost incurred as a result of, or in connection w ith, the Lender
having entered into, or being a party to, this Agreement or having taken an assignment o f
rights under this Agreement, o f íunding or maintaining the Loan or perform ing its
obligations under this Agreement, or o f having outstanding all or any part o f the Loan or
other unpaid sums; or

(b) a reduction in the amount o f any payment to the Lender under this Agreement or in the
effective retum which such a payment represents to the Lender or on its Capital;

(c) an additional or increased cost o f funding all or maintaining all or any o f the advances
comprised in a class o f advances formed by or including the Loan or (as the case may
require) the proportion o f that cost attributable to the Loan; or

(d) a lia b ility to make a payment, or a retum foregone, w hich is calculated by reference to
any amounts received or receivable by the Lender under this Agreement,

but not an item attributable to a change in the rate o f tax on the overall net income o f the
Lender (or a parent company o f it) or an item covered by the indemnity for tax in Clause
20.1 or by Clâuse 20.7.

For the purposes o f this Clause 23.2 the Lender may in good faith allocate or spread costs
and/or losses among its assets and liabilities (or any class o f its assets and lia bilities) on
such basis as it considers appropriate.

23.3 Paym ent o f increased costs. The Borrovver shall pay to the Lender, on its demand, the
amounts which the Lender from time to time notifies the Borrovver that it has speciĩied to
be necessary to compensate it fo r the increased cost.

23.4 Notice o f prepaym ent. I f the Borrower is not w illin g to continue to compensate the
Lender fo r the increased cost under Clause 23.3, the Borrower may give the Lender not
less than 14 days’ notice o f its intention to prepay the Loan at the end o f an Interest
Period.

23.5 Prepaym ent. A notice under Clause 23.4 shall be irrevocable; and on the date specified
in its notice o f intended prepayment, the Borrower shall prepay (vvithout premium or
penalty) the Loan, together w ith accrued interest thereon at the applicable rate plus the
Margin.

23.6 A p p lic a tio n o f prepaym ent. Clause 7 shall apply in relation to the prepayment.

24 S E T -O FF

24.1 A p p lic a tio n o f c re d it balances. Follow ing the occurrence o f Event o f Default vvhich is
continuing the Lender may w ith p rio r notice to the Borrower:

(a) apply any balance (vvhether or not then due) which at any time stands to the credit o f any
account in the name o f the Borrovver at any office in any country o f the Lender in or
towards satisfaction o f any sum then due from the Borrower to the Lender under any o f
the Pinance Documents; and

(b) for that purpose:

(i) break, or alter the m aturity of, all or any part o f a deposit o f the Borrovver;

(ii) convert or translate all or any part o f a deposit or other credit balance into Dollars;

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( iii) enter into any other transaction or make any entry w ith regard to the credit
balance which the Lender considers appropriate.

24.2 E xistin g rig h ts unaffected. The Lender shall not be obliged to exercise any o f its rights
under Clause 24.1; and those rights shall be w ith o ut prejudice and in addition to any rig h t
o f set-off, combination o f accounts, charge, lien or other right or remedy to w hich the
Lender is entitled (vvhether under the general law or any document).

24.3 No S ecurity Inte re st. This Clause 24 gives the Lender a contractual rig h t o f se t-off only,
and does not create any equitable charge or other Security Interest over any credit balance
o f the Borrower.

25 T R A N S P E R S A N D C H A N G E S IN L E N D IN G O F F lC E

25.1 T ra n s íe r by B o rro w e r. The Borroxver may not, w ithout the consent o f the Lender (such
consent not to be unreasonably vvithheld or delayed), transfer any o f its rights, lia b ilitie s
or obligations under any Pinance Document.

25.2 Assỉgnm ent by L en d er. The Lender may assign all or any o f the rights and interests
which it has under or by virtue o f the Pinance Documents, subject to the consent o f the
Borrower (such consent not to be unreasonably w ithheld or delayed). A n y costs, fees and
expenses or any Vaiue Added Tax thereon fo r such assignment or transíer o f the rights o f
the Lender shall be paid by the Lender or the assignee or transferee (as the case may be)
w ithout any lia b ility vvhatsoever on the B orrow er or any Security Party either under the
Pinance Docưments or othenvise.

25.3 Rights o f assignee. In respect o f any misrepresentation made in or in conneclion w ilh a

Pinance Document, a direct assignee o f any o f the Lender’ s rights or interests ưnder or by
virtue o f the Pinance Documents shall be entitled to recover damages by reference to the
loss incurred by that assignee as a result o f the misrepresentation iưespective o f whether
the Lender would have incurred a loss o f that kind or amount.

25.4 S u b -p a rtic ip a tio n ; su brog a tion assignm ent. The Lender may sub-participate all or any
part o f its rights and/or obligations under or in connection w ith the Pinance Documents
w ith the consent o f the B orrow er, unless an Event o f Default has occuưed and is
continuing, in which case the consent o f the Borrower is not required; and the Lender
may assign, in any manner and terms agreed by it, all or anv part o f those rights to an
insurer or surety who has become subrogated to them.

25.5 Disclosure o f in tb rm a tio n . The Lender may disclose to a potential assignee or

sub-participant any inform ation w h ich the Lenđer has received in relation to the
Boưower, any Security Party or the ir affairs under or in connection w ith any Pinance
Document, against execution o f an appropriate confidentiality agreement.

25.6 Change o f le n din g office. The Lender may change its lending office by givin g notice to
the B oưow er and the change shall become effective on the later of:

(a) the date on which the BoiTower receives the notice; and

(b) the date, i f any, speciíied in the notice as the date on which the change w ill come into
effect.

26 V A R IA T IO N S A N D W A IV E R S

26.1 V a ria tio n s, w aivers etc. b y L e n d e r. A document shall be effective to vary, vvaive,
suspend or lim it any provision o f a Pinance Document, or the Lender’ s rights or remedies
under such a provision or the general law, only i f the document is signed, or specifically

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agreed to by fax, by the Borrower and the Lender and, i f the document relates to a
Pinance Document to which a Security Party is party, by that Security Party.

26.2 Exclusion o f other or implied variations. Except for a document which satisfies the
requirements o f Clause 26.1, no document, and no act, course o f conduct, failure or
neglect to act, delay or acquiescence on the part o f the Lender (or any person acting on its
behalí) shall result in the Lender (or any person acting on its behalí) being taken to have
varied, w aived, suspended or lim ited, or being precluded (permanently or tem porarily)
from enforcing, relying on or exercising:

(a) a provision o f this Agreement or another Pinance Document; or

(b) an Event o f Default; or

(c) a breach by the Borrower or a Security Party o f an obligation under a Pinance Document
or the genẽral law; or

(d) any rig h t or remedy conferred by any Pinance Document or by the general law;

and there shall not be im plied into any Pinance Document any term or condition requiring
any such provision to be enforced, or such rig h t or remedy to be exercised, w ith in a
certain or reasonable time.

27 N O T IC E S

27.1 G en e ra l. Unless othenvise specifícally provided, any notice under or in connection w ith
any Pinance Document shall be given by letter or fax; and references in the Pinance
Documents to vvritten notices, notices in \v ritin g and notices signed by particular persons
shall be construed accordingly.

27.2 Addresses for C om m unications. A notice shall be sent:

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(a) to the Borrower: c/o a Guarantee Corp.

Athens
Greece

F a xN o : +30 210 000 0000

A ttn: The Manager

(b) to the Lender: Head O ffice

London
England

Fax No: +44 20 7000 0000

A ttn: The Manager

or to such other address as the relevant party may n otify the other.

27.3 E ffective date o f notices. Subject to Clauses 27.4 and 27.5;

(a) a notice which is delivered personally or posted shall be deemed to be served, and shall
take effect, at the time when it is delivered;

(b) a notice which is sent by fax shall be deemed to be served, and shall take effect, 2 hours
after its Iransmission is completed.

27.4 Service outside business hours. However, i f under Clause 27.3 a notice would be
deemed to be served:

(a) on a day which is not a business day in the place o f receipt; or

(b) on such a business day, but after 5 p.m. local time;

the notice shall (subject to Clause 27.5) be deemed to be served, and shall take effect, at 9
a.m. on the next day which is such a business day.

27.5 Ille g ib le notices. Clauses 27.3 and 27.4 do not apply i f the recipient o f a notice notifies
the sender w ith in 1 hour after the time at which the notice would otherwise be deemed to
be served that the notice has been received in a form which is illegible in a material
respect.

27.6 V a lid notices. A notice under or in connection w ith a Pinance Docuinent shall not be
invalid by reason that its conlents or Ihe manner o f serving it do not com ply w ith the
requirements o f this Agreement or, where appropriate, any other Pinance Document
under vvhich it is served if;

(a) the failure to serve it in accordance w ith the requirements o f this Agreement or any other
Pinance Document, as the case may be, has not caused any party to suffer any significant
loss or prejudice; or

(b) in the case o f incorrect and/or incomplete contents, it should have been reasonably clear
to the party on which the notice was served what the correct or missing particulars should
have been.

27.7 Englỉsh langu age. A ny notice under or in connection w ith a Pinance Document shall be
in English.

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27.8 M e a nin g o f “ notice” . In this Clause 28 “ notice” includes any demand, consent,
authorisation, approval, instruction, waiver or other communication.

28 SU PPLEM EN TAL

28.1 R ights cum ulative, non-exclusive. The rights and remedies which the Pinance
Documents give to the Lender are:

(a) cumulative;

(b) may be exercised as often as appears expedient; and

(c) shall not, unless a Pinance Document e xp licitly and specifically states so, be taken to
exclude or lim it any right or remedy confeưed by any law.

28.2 S eve ra b ility o f provisions. l f any provision o f a Pinance Document is or subsequently

becomes void, unenforceable or illegal, that shall not affect the va lidity, enforceability or
legality o f the other provisions o f that Pinance Document or o f the provisions o f any other
Pinance Document.

28.3 C o u n te rp a rts. A Pinance Document may be executed in any number o f counterparts.

28.4 T h ird p a rty rig h ts. A person who is not a party to this Agreement has no right under the
Contracts (Rights o f Third Parties) A ct 1999 to enforce or to enjoy the beneĩit o f any term
o f this Agreement.

29 L A W A N D J U R IS D IC T IO N

29.1 E nglish law. This Agreement shall be governed by, and construed in accordance w ith,
English law.

29.2 E xclusive E nglish ju ris d ic tio n . Subject to Clause 29.3, the courts o f England shall have
exclusive jurisdiction to settle any disputes which may arise out o f or in connection w ith
this Agreement.

29.3 Choice of foruin for the exclusive beneílt of the Lender. Clause 29.2 is for the
exclusive benefit o f the Lender, which reserves the rights;

(a) to commence proceedings in relation to any matter which arises out o f or in connection
w ith this Agreement in the courts o f any country other than England and w hich have or
claim jurisdiction to that matter; and

(b) to commence such proceedings in the courts o f any such country or countries
concurrently w ith or in addition to proceedings in England or vvithout commencing
proceedings in England.

The Boưovver shall not commence any proceedings in any country other than England in
relation to a matter vvhich arises out o f or in connection w ith this Agreement.

29.4 Process agent. The Borrower iưevocably appoints A Process Agent Ltd at its registered
office fo r the time being, presently at London, England to act as its agent to receive and
accept on its behalf any process or other document relating to any proceedings in the
English courts which are connected w ith this Agreement.

29.5 L e n d e r’ s rig h ts unaffected. Nothing in this Clause 29 shall exclude or lim it any right
which the Lender may have (whether under the law o f any countr}', an intemational
convention or othenvise) with regard to the bringing o f proceedings, the Service o f

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process, the recognition or enforcement o f a judgm ent or any sim ilar or related matter in
any jurisdiction.

29.6 Meaning of “proceedings”. In this Clause 29, “proceedings” means proceedings o f any
kind, including an application fo r a provisional or protective measure.

T H IS A G R E E M E N T has been entered into on the date stated at the beginning o f this
Agreement.

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SCHEDULE1

D R A W D O W N N O T IC E

To: The Bank o f Shipping

London
England

Attention: Loans Adm inistration

] 2004

D R A W D O W N N O T IC E

1 We refer to the loan agreement (the “ Loan A greem ent” )

dated [ ] 2004 and made between us, as Borrovver, and you,
as Lender, in connection w ith a fa c ility o f us$25,000,000. Terms defined in the Loan
Agreement have their defined meanings when used in this Drawdown Notice.

2 We request to boưow as follow s:-

(a) Amount: u s $ [« ];

(b) Drawdown Date: [ ] 2004;

(c) Duration o f the first Interest Period: [ • ] months;

(d) Payment in stru ction s: [ ].

3 We represent and warrant that:

(a) the representations and warranties in Clause 9 o f the Loan Agreement would remain true
and not misleading i f repeated on the date o f this notice w ith reference to the
circumstances now existing;

(b) no Event o f Default has occurred or w ill result fro m the boưow ing o f the Loan.

4 This notice cannot be revoked without the p rio r consent o f the Lender.

5 We authorise you to deduct the arrangement fee referred to in Clause 19 from the amount
o f the Loan.

D irector
fo r and on b eh a lf o f
A S H IP P IN G C O M P A N Y SA

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SCHEDULE2

CONDITION PRECEDENT DOCUMENTS

PART A

The fo llo w in g are the documents refeưed to in Clause 8.1(a).

1 A duly executed original o f each Pinance Document (and o f each document required to be
delivered by each Pinance Document) other than those referred to in Part B.

2 Copies o f the certificate o f incorporation and constitutional documents o f the B orrow er

and each Security Party.

3 Copies o f resolutions o f the directors and shareholders o f the Borroxver and each Security
Party authorising the execution o f each o f the Pinance Documents to w hich the B oư ow er
or that Security Party is a party, and (in the case o f the Borrovver) authorising named
officers or representatives to give the Drawdown Notice and other notices under this
Agreement, and ratifying the execution o f the Shipbuilding Contract.

4 The original o f any power o f attorney under which any Pinance Document is executed on
behalf o f the Borrovver or a Security Party.

5 Copies o f all consents which the Borrovver or any Security Party requires to enter into, or
make any payment under, the Masler Agreement, any Pinance Document or the
Shipbuilding Contract, i f any.

6 Evidence satisíactory to the Lender that the Borrower has opened the Earnings Account
w ith the Account Bank.

7 A valuation o f the Ship by reĩerence to Clarkson’ s Shipvalue.net, at the cost and expense
o f the Borrower.

8 Copies o f the Shipbuilding Contract, and o f all documents signed or issued by the
Borrovver or the B uilder (or either o f them) under or in connection therewith.

9 Documentary evidence that the agent for Service o f process named in Clause 29 has
accepted its appointment.

10 Pavourable opinions from lawyers appointed by the Lender on such matters conceming
the laws o f the Cayman Islands and such other relevant jurisdictions as the Lender may
require.

PART B

The follo w in g are the documents referred to in Clause 8.1(b).

1 A duly executed original o f the Mortgage, the Deed o f Covenant and the General
Assignment (and o f each document to be delivered thereunder).

2 Documentary evidence that:

142 Institute of Chartered Shipbrokers

 Appendix 6 Loan agreement

(a) upon delivery the Ship has been or w ill be unconditionally delivered by the Builder to,
and accepted by, the Borrower under the Shipbuilding Contract, and the fu ll purchase
price payable under the Shipbuilding Contract (in addition to the part to be fmanced by
the Loan) has been or w ill be duly paid, together w ith copies o f all documents executed
and delivered by the B uilder (and, where applicable, the BorroNver) under the
Shipbuilding Contract;

(b) upon delivery the Ship is or w ill be d e ĩin itive ly and permanently registered in the name o f
the Boưower under Isle o f Man flag at the Poĩt o f Douglas;

(c) upon delivery the Ship is or w ill be in the absolute and unencumbered ownership o f the
Borrower save as contemplated by the Pinance Documents;

(d) upon delivery the Ship w ill maintain the class w ith the classification society set out in
Clause 13.3(b), free o f all overdue recommendations and conditions o f such classification
society affecting class;

(e) the Mortgage has been duly registered against the Ship as a valid first p rio rity statutory
Isle o f Man ship mortgage in accordance w ith the laws o f the Isle o f Man; and

(f) the Ship is insured in accordance w ith the provisions o f this Agreement and all
requirements therein in respect o f insurances have been complied with.

3 Documents establishing that the Ship w ill, as from the Drawdown Date, be managed by
the Approved Manager, together w ith:

(a) a letter o f undertaking executed by the Approved Manager in favour o f the Lender in the
terms required by the Lender, subordinating the rights o f the Approved Manager against
the Ship and the Borrovver to the rights o f the Lender under the Pinance Documents; and

(b) copies o f the Approved Manager’ s Document o f Compliance and evidence that follo w in g
delivery the Ship’ s Safety Management Certificate (together w ith any other details o f the
applicable safety management system which the Lender requires) w ill be duly issued.

4 Pavourable legal opinions from lawyers appointed by the Lender on such matters
concerning the laws o f the Isle o f Man and such other relevant jurisdictions as the Lender
may require.

Every copy document delivered under this Schedule shall be certified as a true and up to date
copy by a director or the secretary (or equivalent officer) o f the Borrovver or other relevant party.

Shipping Pinance 143

Appendix 6 Loan agreement

E X E C U T IO N P A G E

BORROW ER

SIG N E D by

for and on behalf o f

A SH IPPIN G C O M PA N Y S.A.
in the presence of:

LENDER

SIG N E D by

for and on behalf o f

TH E BA N K O F SH IPPIN G
LTD
in the presence of:

144 Institute of Chartered Shipbrokers

Appendíx 7 Navios Maritime Holdings lnc,'Fleet and company update’,June 23,2009

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Appendix 7 Navios Maritime Holdings lnc,‘Fleet and company update’,June 23,2009

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146 Institute of Chartered Shipbrokers

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A ppendix 7 Navios Maritime Holdings lnc,‘Fleet and company update',June 23,2009

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Shipping Pinance 149

A ppendix 7 Navios Maritime Holdings lnc,'Fleet and company update’,June 23, 2009

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150 Institute of Chartered Shipbrokers

 Appendix 7 Navios Maritime Holdings lnc,'Fleet and company update',June 23,2009

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Shipping Pinance 151

A ppendíx 7 Navios Maritime Holdings lnc,‘Fleet and company update’,June 23,2009

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152 Institute of Chartered Shipbrokers

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A ppendix 7 Navios Maritime Holdings lnc,'Fleet and company update’,June 23,2009

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Shipping Pinance 155

Appendix 7 Navios Maritime Holdings lnc,'Fleet and company update’,June 23,2009

156 Institute of Chartered Shipbrokers

 Appendix 8 Marshall Islands Mortgage

Date 2008

SHIPPING MARITIME LTD.

as O wner

- and -

THE GOVERNOR AND COMPANY

OF THE BANK or SHIPPING
as Security Trustee

FIRST PREFERRED MARSHALL ISLANDS MORTGAGE

m.v. “ SHIP”

Shipping Pinance 157

Appendíx 8 Marshall Islands Mortgage

IN D E X

Clause Page

1 D EPIN ITIO N S A ND IN T E R PR E T A T IO N 2
2 MORTGAGE 2
3 PAYMENTCOVENANTS 4
4 COVENANTS 5
5 PROTECTION 0 F SECU RITY 6
6 EN PO RCEA BILITY AND SE C U R ITY T R U ST E E 'S PO W ER S 6
7 A PPLICA TIO N 0 F M O N EY S 7
8 PU RTH ER A SSU RA N CES 8
9 POW ER 0 F A TTO R N EY 8
10 IN CO RPO RA TIO N 0 F G U A R A N T E E PR O V ISIO N S 9
11 ASSIGNMENT 9
12 N O TICES 9
13 TO TA L A M O U N T, ETC. 9
14 SU PPLEM EN TA L 9
15 LAW AND JU RISD ICTIO N 10
A CK N O W LED G EM EN TO FM O RTG A G E 12

158 Institute of Chartered Shipbrokers

 A ppendix 8 Marshall Islands Mortgage

TH IS FIRST PREPERRED M O R TG A G E is m ade on 2008

BY

(1) SHIPPING M A R ITIIVIE LTD ., a Corporation incoq)orated in the Republic o f The

M arshall Islands w hose registered office is at T rust C om pany Com plex, A jeltake Road,
A jeltake Island, M ajuro, T he M arshall Islands M H 96960 (the “ Owner” )

IN PAVOUR OF

(2) TH E B A N K OF SHIPPING , acting through its office at Head Office (the “ Security
Trustee” , which expression includes its successors and assigns).

BACKGROUND

(A) The Owner is the sole owner o f the whole o f the m.v. “ SHIP” documented under the laws
and flag o f the Republic o f The M arshall Islands w ith Official N um ber 2172 o f 37,689
gross registered tons and 24,199 net registered tons.

(B) By a loan agreement (the “Loan Agreement” ) dated 6 June 2008 and made betvveen (i)
Paragon Shipping Inc. (the “ Borrower” ) as borrower, (ii) the Lenders, (iii) the Arranger,
(iv) the A gent and (v) the Security T m stee it w as agreed that the Lenders would make
available to the Borroxver a revolving credit facility o f up to us$30,000,000. A copy o f the
form o f the Loan A greem ent vvithout attachm ents is annexed to this Mortgage marked “A ” .

(C) By a m aster agreem ent (on the 1992 ISD A (M ulticurrency-Crossborder) form) together
with the Schedule thereto in the form agreed (together, the “ Master Agreement” ), entered
or to be entered into betvveen (i) the Borrower and (ii) The Bank o f Shipping as swap bank
(the “ Swap Bank” ), the Boưower may enter into Designated Transactions pursuant to
C onfirm ations (as that term is defined in the M aster Agreem ent) to hedge the exposure o f
the B orrow er to interest rate íluctuations. A copy o f the form o f the M aster Agreem ent is
annexed to this Mortgage marked “ B” . The parties estimate that the maximum amount that
m ay be payable by the B o ư o w er to the L enders pursuant to the M aster Agreem ent shall not
exceed $9,000,000.

(D) By a guarantee (the “ Guarantee” ) dated 6 June 2008 and made between (i) the Owner and
(ii) the Security T rustee, the O w ner has guaranteed the B oư ow er’s liabilities under the
Loan A greem ent. A copy o f the form o f the G uarantee is annexed to this M ortgage marked
“C ” .

(E) By the A gency and Trust A greem ent entered into pursuant to the Loan Agreement, it was
agreed that the Security T rustee w ould hold the Trust Property on trust for the Lenders. A
copy o f the foim o f the A gency and T rust A greem ent is annexed to this Mortgage marked
“D” .

(F) It is one o f the conditions precedent to the availability o f the facility under the Loan
A greem ent that the O w ner executes and delivers this M ortgage, which is the Mortgage
refeư ed to in the Loan A greem ent, in favour o f the Security Trustee as security for the
Secured Liabilities and the perform ance and observance o f and compliance with the
covenants, term s and conditions contained in the Pinance Documents.

(G) Pursuant to the Loan Agreement, the Lenders have on the date o f this Mortgage advanced
to the Boưovver, and the B orrow er is indebted to the Lenders in, the principal amount o f
u s $ 3 0 , 0 0 0 , 0 0 0 .

(H) The Owner has authorised the execution and delivery o f this Mortgage under and pursuant
to C hapter 3 o f The Republic o f T he M arshall Islands M aritime Act 1990 as amended.

Shipping Pinance 159

A p p e n d ix 8 Marshall Islands Mortgage

IT IS A G R E E D as follows:

1 DEPINITIONS AND IN TE R P R E TA T IO N

1.1 Defíned expressions. Words and expressions defined in the Loan Agreement shall have
the same meanings when used in this Mortgage unless the context othenvise requires.

1.2 Delĩnitions. In this Mortgage, unless the contraty intention appears;

“ Guarantee” means the guarantee dated 6 June 2008 refeưed to in Recital (D);

“ Loan Agreement” means the loan agreement dated 6 June 2008 reíerred to in
Recital (B);

“ Master Agreement” means the master agreement and schedule thereto reíeưed to in
Recital (C);

“ Master Agreement Liabiiities” means all liabilities which the Boưovver has at the date of
this Mortgage or at any later time or times, to the Security Trustee under or in connection
with the Master Agreement;

“ Secured Liabilities” means all liabilities \vhich the Owner has, at the date o f this
Mortgage or at any later time or times, to the Security Trustee or any other Creditor Party
under or in connection with any Pinance Document to which it is a party or any judgment
relating to any Pinance Document to which it is a party; and for this purpose, there shall be
disregarded any total or partial discharge o f these liabilities, or variation o f their terms,
which is effected by, or in connection with, any bankniptcy, liquidation, arrangement or
other procedure under the insolvency laws o f any country; and

“ Ship” means the vessel described in Recital (A) and includes any share or interest in that
vessel and its engines, machinery, boats, tackle, outíìt, spare gear, fuel, consumable or other
stores, belongings and appurtenances whether on board or ashore and whether now ovvned
or later acquired.

1.3 References to M ajority Lenders. Reíerences in tliis Mortgage to an approval, consent,

or requirement o f the Majority Lenders inciude references to an approval, consent or
requirement of:

(a) the Agent or the Security Trustee acting with the authority o f the Majority Lenders; or

(b) the Security Trustee acting w ith the authority o f the A gent acting, in turn, with the
authority o f the Mạịority Lenders.

1.4 Application o f construction and interpretation provisions of Loan Agreement.

Clauses 1.2 and 1.5 o f the Loan Agreement apply, with any necessary modifications, to
this Mortgage.

1.5 Inconsistency between Guarantee provisions and this Mortgage. This Mortgage shall
be read together with the guarantee, but in case o f any conílict between the Guarantee and
this Mortgage, the provisions ot' the Guarantee shall prevail Provided that this Mortgage
shall always be govemed by Marshall Islands law.

2 MORTGAGE

2.1 Mortgage. In consideration ot' the Lenders agreeing, at the request o f the Owner, 10
advance the Loan to the Borrower and for other good and valuable consideration, the
Owner grants, conveys, mortgages, pledges, confirms, assigns, transfers and sets over the
whole o f the Ship to the Security Trustee as security for:

160 Institute of Chartered Shipbrokers

 Appendix 8 Marshall Islands Mortgage

(a) the due and punctual payment o f the Secured L ia bilitie s; and

(b) the performance and observance o f and compliance w ith the covenants, terms and
conditions contained in the Pinance Documents to w hich the Owner is or is to be a party.

2.2 E xtent o f p ro p e rty mortgaged. This Mortgage shall not cover property other than the
Ship as the term “ Vessel” is used in Sub-division 2 o f Section 308 o f Chapter 3 o f the
Republic o f The Marshall Islands M aritim e A ct 1990 as amended.

2.3 V oid provisions. A ny provision o f this Mortgage construed as vvaiving the preferred
status o f this Mortgage shall, to such extent, be void and o f no effect.

2.4 C o ntinuing security. This Mortgage shall remain in force until the end o f the Security
Period as a continuing security and, in particular:

(a) the Security Interests created by Clause 2.1 shall not be satisĩied by any intermediate
payment or satisfaction o f the Secured Liabilities;

(b) the Security Interests created by Clauses 2.1, and the rights o f the Security Trustee under
this Mortgage, are only capable o f being extinguished, lim ited or othervvise adversely
affected by an express and specific term in a document signed by or on behalf o f the
Security Trustee;

(c) no failure or delay by or on behalf o f the Security Trustee to enforce or exercise a

Security Interest created by Clause 2.1 or a right o f the Security Trustee under this
Mortgage, and no act, course o f conduct, acquiescence or failure to act (or to prevent the
Owner from taking certain action) which is inconsistent w ith such a Security Interest or
such a right shall preclude or estop the Security Trustee (either permanently or
temporarily) from enforcing or exercising it; and

(d) this Mortgage shall be additional to, and shall not in any way im pair or be impaired by:

(i) any other Security Interest whether in relation to property o f the Owner or that o f
a third party; or

(ii) any other right o f recourse as against the Owner or any third party,

which the Security Trustee or any other Creditor Party now or subsequently has in respect
o f any o f the Secuređ Liabilities.

2.5 P rin cip a l and independent debtor. The O wner shall be liable under this Mortgage as a
principal and independent debtor and accordingly it shall not have, as regards this
Mortgage, any o f the rights or defences o f a surety.

2.6 VVaiver o f rights and deíences. W ithout lim itin g Ihe generality o f Clause 2.5, the
Owner shall neither be discharged by, nor have any claim against any Creditor Party in
respect of:

(a) any amendment or supplement being made to the Pinance Documents;

(b) any aưangement or concession (including a rescheduling or acceptance o f partial

payments) relating to, or affecting, the Pinance Documents;

(c) any release or loss (even though negligent) o f any right or Security Interest created by the
Pinance Documents;

Shipping Pinance 161

Appendix 8 Marshall Islands Mortgage

(d) any failure (even though negligent) promptly or properly to exercise or enforce any such
right or Security Interest, including a failure to realise for its full market value an asset
covered by such a Security Interest; or

(e) any other Pinance Document or any Security Interest now being or later becoming void,
unenforceable, illegal or invalid or othenvise deíective for any reason, including a neglect
to register it.

2.7 S ubordination o f rights o f O w ner. A ll rights which the Ovvner at any time has (whether
in respect o f this Mortgage or any other transaction) against the Borrower, any other
Security Party or their respective assets shall be fu lly subordinated to the rights o f the
Cređitor Parties under the Pinance Documents; and in particular, the Owner shall not:

(a) claim, or in a bankruptcy o f the Borrower or any other Security Party prove for, any
amount payable to the Owner by the Borrovver or any other Security Party, whether in
respect o f this Mortgage or any other transaction;

(b) take or eníorce any Security Interest for any such amount;

(c) claim to set-off any such amount against any amount payable by the Owner to the
Boưower or any other Security Party; or

(d) claim any subrogation or other right in respect o f any Pinance Document or any sum
received or recovered by any Creditor Party under a Pinance Document.

2.8 No obligations imposed on Security Trustee. The Owner shall remain liable to perform
all obligations connected w ith the Ship and the Security Trustee shall not, in any
circumstances, have or incur any obligation o f any kind in connection w ith the Ship.

2.9 Negative Pledge; dỉsposai o f assets. The Owner shall not sell, create any Security
Interest not exclusively securing the Secured Liabilities over or otherwise dispose o f the
Ship or any right relating to the Ship.

2.10 Release o f security. A t the end o f the Security Period, the Security Trustee shall, at the
request and cost o f the Owner, discharge this Mortgage.

3 P A Y M E N T CO VENANTS

3.1 General. The Ovvner shall comply with the follow ing provisions o f this Clause 3 at all
times during the Security Period.

3.2 Covenant to pay Secured L ia b ilitie s. The Owner shall duly and puiictually pay to the
Security Tnistee the Secured Liabilities.

3.3 Covenant to pay expenses etc. The Owner shall pay to the Security Trustee all sưch
expenses, claims, liabilities, losses, costs, duties, fees, charges or other moneys as are
stated in this Mortgage to be payable by the Owner to or recoverable from the Owner by
the Security Trustee (or iii respect o f which the Owner agrees in this Mortgage to
indemnify the Security Trustee) at the times and in the manner specified in this Mortgage.

3.4 Covenaiit lo pay d eĩau lt interesí. The Owner shall pay to Ihe Security Trustee interest
on any expenses, claims, liabilities, losses, costs, duties, fees, charges or other moneys
referred to in Clause 3.3 from the date on which the relevant expense, claim, lia b ility,
loss, cost, duty, fee, charge or other money is paid or incurred by the Security Trustee (as
w ell after as before judgment):

(a) at the rate described in clause 7.2 o f the Loan Agreement;

162 Institute of Chartered Shipbrokers

 Appendìx 8 Marshall Islands Mortgage

(b) compounded in accordance with clause 7.6 o f the Loan Agreement; and

(c) on demand.

3.5 Covenant to pay other sums. The Owner shall pay to the Security Trustee each and
every other sum o f money which may be or become owing to the Security Trustee under
the Guarantee, this Mortgage and the other Pinance Documents to which the Owner is or
is to be a party at the times and in the manner specified in this Mortgage or in the other
Pinance Documents to which the Owner is or is to be a party.

4 COVENANTS

4.1 General. The Ovvner shall comply w ith the follow ing provisions o f this Clause 4 at all
times during the Security Period except as the Security Trustee may otherwise permit in
\vriting.

4.2 Insurance and Ship covenants. The Owner shall comply with the provisions o f clauses
13 (insurance) and 14 (ship covenants) o f the Loan Agreement which shall apply to this
Mortgage as i f set out in fu ll in this Mortgage with references therein to the Borrower
changed to references to the Owner and w ith any other necessary modifications and the
Owner shall compty with the provisions o f those clauses as so modified.

4.3 Períection o f Mortgage. The Owner shall:

(a) comply with and satisfy all the requirements and tbrmalities established by the Republic
ot' The Marshall Islands Maritim e Act 1990 as amended and any other pertinent
legislation o f the Republic o f The Marshall Islands to perfect this Mortgage as a legal,
valid and enĩorceable first preferred mortgage and maritime lien upon the Ship; and

(b) promptly provide the Security Trustee from time to time w ith evidence in such íbrm as
the Security Trustee requires that the Owner is complying w ith Clause 4.3(a).

4.4 Notice o f M ortgage. The Owner shall:

(a) carry on board the Ship w ith its papers a certified copy o f this Mortgage and cause that
certified copy o f this Mortgage to be exhibited to any person having business with the
Ship which might give rise to a lien or the Ship other than a lien for crew's wages and
salvage and to any representative o f the Security Trustee on demand; and

(b) place and maintain in a conspicuous place in the navigation room and the Master's cabin
o f the Ship a framed printed notice in plain type in English o f such size that the paragraph
o f reading matter shall cover a space not less than 6 inches wide and 9 inches high
reading as follows:

“ NOTICE 0 F MORTGAGE

This Vessel is covered by a First Preferred Mortgage to T H E B A N K OF

S H IP P IN G under authority o f Chapter 3 o f the Republic o f The Marshall
Islands Maritime Act 1990 as amended. Under the terms o f the said
Mortgage neither the Owner nor any Charterer nor the Master o f this Vessel
nor any other person has any right, power or authority to create, incur or
peưnit to be imposed upon this Vessel any lien \vhatsoever other than for
crew's wages and salvage.”

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5 P R O T E C T IO N O F S E C U R IT Y

5.1 Security Trustee's right to protect or maintain security. The Security Trustee may
take any action which it may think fit for the purpose o f protecting or maintaining the
security created by this Mortgage or for any sim ilar or related purpose.

5.2 Security Trustee's rig h t to insure, re p a ir etc. W ithout lim itin g the generality o f Clause
5.1, i f the Owner does not comply w ith Clause 4, the Security Trustee may:

(a) effect, replace and renew any Insurances;

(b) arrange for the caưying out o f such surveys and/or repairs o f the Ship as it deems
expedient or necessary; and

(c) discharge any liabilities charged on the Ship, or othenvise relating to or affecting it,
and/or take any measures which the Security Trustee may think expedient or necessary
for the purpose o f securing its release.

6 ENPORCEABILITY AND SECURITY TRUSTEE'S POVVERS

6.1 R ig h t to eníorce security. On the occurrence o f an Event o f Default but without the
necessity for any court order in any jurisdiction to the effect that an Event o f Default has
occurred or that the security constituted by this Mortgage has become enforceable, and
irrespective o f whether a notice has been served under clause 19.2 o f the Loan Agreement
or a demand made under Clause 2.1 o f the Guarantee:

(a) the security constituted by this Mortgage shall immediately become enforceable;

(b) the Security Trustee shall be entitled at any time or times to exercise the povvers set out in
Clause 6.2 and in any other Pinance Document;

(c) the Security Trustee shall be entitled at any time or times to exercise the powers
possessed by it as mortgagee o f the Ship conterred by the law o f any country or territory
the courts o f which have or claim any jurisdiction in respect o f the Owner or the Ship;
and

(d) Ihe Seciirity Trustee shall be entitled to exercise all the rights and remedies in íbreclosure
and othenvise given to mortgagees by applicable law including the provisions o f Chapter
3 o f the Republic o f The Marshall Islands M aritim e A ct 1990 as amended.

6.2 R ig h t to take possession, sell etc. On the occuưence o f an Event o f Deíault, the
Security Trustee shall be entitled then or at any later time or times:

(a) to take possession o f the Ship whether actually or constructively and/or othenvise to take
control o f the Ship wherever the Ship may be and cause the Owner or any other person in
possession o f the Ship forthw ith upon demand to suưender the Ship to the Security
Trustee without legal process and vvithout the Security Trustee or any other Creditor Party
being Hable for any losses thereby caused or to account to the Owner in connection
therevvith;

(b) to seil the Ship or any share in the Ship w ith or without prior notice to the Ov/ner, and
w ith or without the benefit o f any charterparty or other contract for its employment, by
public auction or private contract at any time, at any place and upon any terms (including,
without lim itation, on terms that all or any part or parts o f the purchase price be satisfied
by shares, loan stock or other securities and/or be left outstanding as a debt, \vhether
secured or unsecured and whether carrying interest or not) vvhich the Security Trustee
may think fit, w ith power fo r the Security Trustee to purchase the Ship at any such public
auction and to set o ff the purchase price against all or any part o f the Secured Liabilities;

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(c) to manage, insure, maintain and repair the Ship and to charter, employ, lay up or in any
other manner whatsoever deal w ith the Ship in any manner, upon any terms and for any
period which the Security Trustee may think fit, in all respects as i f the Security Trustee
were the owner o f the Ship and vvithout the Security Trustee or any other Creditor Party
being responsible for any loss thereby incurred;

(d) to collect, recover and give good discharge for any moneys or claims arising in relation to
the Ship and to permit any brokers through whom collection or recovery is effected to
charge the usual brokerage therefor;

(e) to take over or commence or defend ( if necessary using the name o f the Owner) any
claims or proceedings relating to, or affecting, the Ship which the Security Trustee may
think fit and to abandon, release or settle in any way any such claims or proceedings; and

(f) generally, to enter into any transaction or arrangement o f any kind and to do anything in
relation to the Ship which the Security Trustee may think fit.

6.3 No líability o f Security Trustee. The Security Trustee shall not be obliged to check the
nature or sufficiency o f any payment received by it under this Mortgage or to preserve,
exercise or enforce any right relating to the Ship.

6.4 No requirement to commence proceedings against Borrower. Neither the Security

Trustee nor any other Creditor Party w ill need to commence any proceedings under, or
enforce any Security Interest created by, the Loan Agreement or any other Pinance
Document before commencing proceedings under, or enforcing any Security Interest
created by, this Mortgage.

6.5 Conclusive evidence of certain matters. However, as against the Owner:

(a) any judgment or order o f a court in England or the Republic o f The Marshall Islands in
connection w ith the Loan Agreement; and

(b) any statement or admission o f the Borrower in connection w ith the Loan Agreement,

shall be binding and conclusive as to all matters o f fact and law to which it relates.

6.6 Suspense account. The Mortgagee may, for the purpose o f claiming or proving in a
bankruptcy o f the Borrovver or any other Security Party, place any sum received or
recovered under or by virtue o f this Mortgage or any Security Interest connected w ith it
on a separate suspense or other nominal account without applying it in satisfaction o f the
Borrower's obligations under the Loan Agreement.

7 A P P L IC A T IO N O F M O N E Y S

7.1 General. A ll sums received by the Security Trustee:

(a) in respect o f sale o f the Ship or any share in the Ship;

(b) in respect o f net proĩits arising out o f the employment o f the Ship pursuant to Clause
6.2(c); or

(c) in respect o f any other transaction or arrangement under Clauses 6.1 or 6.2,

shall be held by the Security Trustee upon trust in the first place to pay or discharge any
expenses or liabilities (including any interest) which have been paid or incuưed by the
Security Trustee in or in connection with the exercise o f its powers and to pay the balance
over to the Agent for application in accordance with clause 17 o f the Loan Agreement.

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A p p e n d íx 8 Marshall Islands Mortgage

8 P U R T H E R ASSURANCES

8.1 Owner's obligation to execute ỉurther documents etc. The Owner shall:

(a) execute and deliver to the Security Trustee (or as it may direct) any assignment,
mortgage, power o f attomey, proxy ór other document, governed by the láw o f England
or such other country as the Security Trustee may, in any particular case, specify; and

(b) effect any registration or notarisation, give any notice or take any other step,

which the Security Trustee may, by notice to the Owner, speciíy for any o f the purposes
described in Clause 8.2 or for any similar or related purpose.

8.2 Purposes o f fu rth e r assurances. The purposes reíerred to in Clause 9.1 are:

(a) validly and effectively to create any Security Interest or right o f any kind vvhich the
Security Trustee intended should be created by or pursuant to this Mortgage or any other
Pinance Document;

(b) to protect the priority, or increase the effectiveness, in any jurisdiction o f any Security
Interest which is created, or which the Security Trustee intended should be created, by or
pursuant to this Mortgage or any other Pinance Document;

(c) to enable or assist the Security Trustee to sell or otherwise deal w ith the Ship, to transíềr
title to, or grant any interest or right relating to, the Ship or to exercise any power which
is reíerred to in Clauses 8.1 or 8.2 or which is conĩerred by any Pinance Document; or

(d) to enable or assist the Security Trustee to enter into any transaction to commence, deíend
or conduct any proceedings and/or to take any other action relating to the Ship in any
country or under the law o f any country.

8.3 Term s o f fu rth e r assurances. The Security Trustee may speciíy the terms o f any
document to be executed by the Owner under Clause 8.1, and those terms may include
any covenants, undertakings, powers and provisions which the Security Trustee considers
appropriate to protect its, and any other Creditor Party’ s, interests.

8.4 Obligation to com ply w ith notice. The Owner shall comply with a notice under Clause
9.1 by the date speciĩied in the notice.

8.5 A d d itio n a l corporate action. A t the same time as the Ovvner deiivers to the Security
Trustee any document executed under Clause 8.1(a), the Owner shall also deliver to the
Security Trustee a certificate signed by 2 o f the Owner's officers which shall;

(a) set out the text o f a resolution o f the Owner's directors speciĩically authorising the
execution o f the document speciíied by the Security Trustee; and

(b) State that either the resolution was duly passed at a meeting o f the directors validl)'
convened and held throughout which a quorum o f directors entitled to vote on the
resolution was present or that the resolution has been signed by ali the directors and is
valid under the Owner's articles o f incorporation or other constitutional documents.

9 POW ER OF A TT O R N E Y

9.1 A pp o in tm en t. For the purpose o f securing the Security Trustee's interest in the Ship and
the due and punctual performance the Owner's obligations to the Security Trustee under
this Mortgage and every other Pinance Document to which the Owner is or is to be a
party, the Owner iưevocably and by way o f security appoints the Security Trustee its

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attomey, on behalí' o f the Owner and in its name or othervvise, to execute or sign any
document and do any act or thing which the Owner is obliged to do Iinder any Pinance
Document. Provided a!ways that this power o f attorney shall only become exercisable
upon the occurrence o f an Ẽvent o f Default.

9.2 R atiíica tion o f actỉons o f attorney. For the avoidance o f doubt and without lim itin g the
generality o f Clause 9.1, the Owner confirms that Clause 9.1 authorises the Security
Trustee to execute on its behalf a document ratifying any transaction or action which the
Security Trustee has purported to enter into or to take and which the Security Trustee
considers was or might have been outside its powers or othenvise invalid.

9.3 Delegation. The Security Trustee may sub-delegate to any person or persons all or any o f
the powers (including the discretions) conferred on the Security Trustee by Clauses 9.1
and/or 9.2, and may do so on terms authorising successive sub-delegations.

10 IN C O R P O R A T IO N O F G U A R A N T E E P R O V IS IO N S

10.1 Inco rp o ra tio n o f specitìc provisions. The follow ing provisions o f the Guarantee apply
to this Mortgage as i f they were expressly incorporated in this Mortgage w ith any
necessary modifications:

clause 6, payments;

clause 12.2, cuưency indemnity;

clause 13, set-off; and

clause 14, supplemental.

10.2 Inco rp o ra tío n o f general provisions. Clause 10.1 is vvithout prejudice to the application
to this Mortgage o f any provision o f the Guarantee which, by its terms, applies or relates
to the Pinance Documents generally or this Mortgage specifically.

11 A S S IG N M E N T

11.1 Assignm ent by Security Trustee. The Security Trustee may assign its rights under and
in connection with this Mortgage to the same extent as it may assign its rights under the
Guarantee.

12 N O T IC E S

12.1 A pp lica tio n o f provisions o f Loan Agreem ent. Clause 16 o f the Guarantee applies to
any notice or demand under or in connection with this Mortgage.

13 T O T A L A M O U N T , E TC.

13.1 T o tal am ount. For the purpose o f recording this Mortgage as required by Chapter 3 o f
the Republic o f The Marshall Islands M aritim e A ct 1990 as amended, the total amount is
(i) $30,000,000 in respect o f the Loan and (ii) $9,000,000 in respect o f the Master
Agreement Liabilities, together with interest, fees, commissions and períormance o f
mortgage covenants. The date o f maturity o f this Mortgage is June 2011 and there
is no separate discharge amount.

14 SUPPLEM ENTAL

14.1 No re strictio n on other rights. Nothing in this Mortgage shall be taken to exclude or
restrict any power, right or remedy which the Security Trustee or any other Creditor Party
may at any time have under:

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Appendix 8 Marshall Islands Mortgage

(a) any other Pinance Document; or

(b) the law o f any country or territory the courts o f which have or claim any jurisdiction in
respect o f the Owner or the Ship.

14.2 Exercise o f other rights. The Security Trustee may exercise any right under this
Mortgage before it or any other Creditor Party has exercised any right referred to in
Clause 14.1(a) or (b).

14.3 In v a lid ity o f Loan Agreem ent. In the event of:

(a) the Loan Agreement now being or later becoming void, illegal, unenforceable or
othenvise invalid for any reason vvhatsoever; or

(b) a bankruptcy o f the Borrower, the introduction o f any law or any other matter resulting in
the Borrovver being discharged from lia b ility under the Loan Agreement, or the Loan
Agreement ceasing to operate (fo r example, by interest ceasing to accrue);

this Mortgage shall cover any amount which would have been or become payable under or
in connection with the Loan Agreement i f the Loan Agreement had been and remained
entirely valid and enforceable and the Boưower had rernained fu lly liable under it; and
references in this Mortgage to amounts payable by the Borrower under or in connection
with the Loan Agreement shall include references to any amount which would have so been
or become payable as aforesaid.

14.4 In v a lid ity o f Finance Documents. Clause 14.3 also applies to each o f the other Pinance
Documents to which the Borrower is a party.

14.5 Settlement o r discharge co n d itio n a l. A ny settlement or discharge under this Mortgage

betvveen the Security Trustee or any other Creditor Party and the Owner shall be
conditional upon no security or payment to the Security Trustee or any other Creditor
Party by the Owner or any other person being set aside, adjusted or ordeređ to be repaid,
whether under any insolvency law or othervvise.

15 L A W A N D .lU R IS D IC T lO N

15.1 M a rsh a ll Islands !aw. This Mortgage shall be governed by, and construed in accordance
with, Marshall Islands law.

15.2 Choice o f fo ru m . The Security Trustee reserves the rights:

(a) to commence proceedings in relation to any matter which arises out o f or in connection
w ith this Mortgage in the courts o f any country which have or claim jurisdiction to that
matter; and

(b) to commence such proceedings in the courts o f any such country or countries
concurrently with or in addition to proceedings in the Marshall Islands or without
commencing proceedings in the Marshall Islands.

15.3 A ction against Ship. The rights referred to in Clause 15.2 include the right o f the
Security Trustee ío arrest and take action against the Ship at whatever place the Ship shal!
be found lying and for the purpose o f any action vvhich the Security Trustee may bring
before the courts o f that ju risd ictio n or other judicial authority and for the purpose o f any
action which the Security Trustee may bring against the Ship, any w rit, noticê, judgment
or other legal process or documents may (without prejudice to any other method o f
Service under applicable law) be served upon the Master o f the Ship (or upon anyone
a c tin g as th e M aster) an d su c h Service sh a ll b e d eem ed g o o d Service on th e O w n e r for all
purposes.

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 A ppendíx 8 Marshall Islands Mortgage

15.4 Security Trustee’s rights unaffected. Nothing in this Clause 15 shall exclude or lim it
any right which any Creditor Party may have (whether under the law o f any country, an
international convention or othervvise) w ith regard to the bringing o f proceedings, the
Service o f process, the recognition or enforcement o f a judgment or any sim ilar or related
matter in any jurisdiction.

15.5 Meaning of “proceedings”. In this Clause 15, “ proceedings” means proceedings o f any
kind, including an application for a provisional or protective measure.

THIS MORTGAGE has been executed by the duly authorised Attomey-in-Fact o f the Owner on
the date stated at the beginning o f this Mortgage.

SHIPPING MARITIME LTD.

By.

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Appendíx 8 Marshall Isiands Mortgage

A C K N O W LE D G E M E N T OF M O RTG AG E

H ELLENIC REPUBLIC )
) s s
C ITY 0 F PIRAEUS )

On this day o f June 2008 before me personally appeared to me

known who being by me duly swom did depose and say that he/she resides at
that he/she is an attomey-in-fact for S H IP P IN G
M A R IT IM E L T D . the Corporation described in and w hich executed the foregoing instm m ent; and
that he/she signed his/her name thereto by order o f the Board o f Directors o f said Corporation.

By

170 Institute of Chartered Shipbrokers