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16 January 2019
Over the past couple of years, securitisation has gained popularity in the shipping industry. It is the new contender filling the funding gap faced by the industry's post-credit crunch and the global financial crisis which ensued thereafter.
Primarily used in the aviation sector, asset-backed securitisation structures have been successfully employed to finance shipping assets due to:
A typical asset-backed securitisation involves the sale of receivables (eg, ships, loans and freight) by their owner, known as an originator (who will either be a shipping company or a bank), to a newly formed special purpose vehicle (SPV) in a tax-efficient jurisdiction. The SPV shares are usually held by an entity other than the originator, making it an orphan company. This limits the possibility of the SPV being considered as an originator's subsidiary. Further, this structure also prevents the SPV from being affected by the originator's potential bankruptcy and, more importantly, it will also have a separate balance sheet.
The SPV raises the finance for the purchase of the originator's vessels by issuing debt securities to investors in the form of bonds and occasionally equity securities. These are issued in several tranches with varied maturity periods and are usually carrying different interest rates.
After the acquisition of the vessels, the SPV leases the vessels back on a bareboat charter basis to the originator. The principal and interest payments which are due to the investors are paid by the revenue generated from operating the vessels. Payments will usually be made by a paying agent that is appointed by the SPV, as and when they fall due in terms of the transaction documents.
The receivables act as a security over the SPV's obligations which are granted in favour of a security trustee for the investors' benefit. The typical security in an asset-backed securitisation includes:
Malta's securitisation laws have developed an attractive legal framework which allows for various classes of asset to be securitised, including vessels. The Merchant Shipping Act (Chapter 234 of the Laws of Malta) has created a secure maritime jurisdiction which affords considerable protection to the mortgagee through swift enforcement mechanisms. In turn, the Securitisation Act (Chapter 484 of the Laws of Malta), which is drafted in a similar fashion, safeguards investors' interests while providing incentives to originators.
Under the Securitisation Act, the definition of a 'securitisation asset' is broad and includes "any asset, whether existing or future, whether moveable or immovable, and whether tangible or intangible". In terms of form, an SPV may be:
Under Article 7 of the Securitisation Act, SPVs are granted statutory bankruptcy remoteness so there is no need to orphan it.
Further, there are no restrictions on the method by which the originator may transfer the receivables to the SPV. Indeed, Article 9(1) of the Securitisation Act lists "novation, sale, assignment and declaration of trust" as possible modes of transfer.
Security-wise, investors have a special privilege under the Securitisation Act over the securitisation assets which rank in priority of all other claimants, save for other securitisation creditors that enjoy a higher ranking.
Asset-backed securitisation in the shipping sphere has recently come to prominence in light of traditional financiers' reluctance to finance shipping activities. The amalgamation of Malta's securitisation framework and merchant shipping laws makes up for a sui generis alternative corporate vehicle to facilitate such transactions and provide the stability and security for which investors yearn.
For further information on this topic please contact Mark Fenech or Charalampos Kazantzis at Fenech & Fenech Advocates by telephone (+356 2124 1232) or email (firstname.lastname@example.org or email@example.com). The Fenech & Fenech website can be accessed at www.fenechlaw.com.
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