Ship Finance FAQ

Ship finance is the discipline of providing debt and equity capital to acquire, build, operate, refinance and dispose of ocean-going and other commercial vessels. It sits between corporate finance, project finance and asset finance, and is distinctive because of the mobility of the asset, the cyclicality of earnings and the international legal frameworks that govern registration, security and enforcement.

A typical transaction combines a specific vessel or fleet as collateral, cash flow from its commercial employment as the primary source of repayment, and a security package spanning mortgages, assignments of earnings and insurances, share pledges and, where relevant, sponsor support.

A ship loan is usually senior debt — the first-ranking secured financing in the capital structure — supplied by commercial banks or leasing houses to fund acquisition, refinance or newbuilding. It is typically secured by a first-ranking mortgage over the vessel, assignments of earnings and insurances and, in many transactions, share pledges and sponsor undertakings.

Senior debt keeps ownership with the borrower and is secured by a first-ranking mortgage and related security. In a sale and leaseback, the owner sells the vessel to a financier and simultaneously charters it back under a bareboat charter, often with a purchase option or purchase obligation at the end of the term — transferring legal title while remaining the operator.

Loan-to-value (LTV) compares outstanding secured debt with the value attributed to the financed vessel or collateral pool. Lenders use it to size the facility, test covenants and monitor collateral coverage; the denominator is the contractually agreed value, which may rest on broker appraisals, desktop valuations or another agreed basis.

The debt service coverage ratio (DSCR) measures whether cash available from a vessel or shipping business is sufficient to cover scheduled principal and interest. It is a repayment-capacity measure used at underwriting and as a typical financial covenant, not a profitability ratio.

A ship mortgage is a registered security interest over a vessel. It gives the lender contractual and statutory rights that may be exercised following default, and is usually supported by assignments of earnings and insurances. Its practical value depends on valid registration, priority, flag-state law and enforcement, so it is a central element of the security package rather than a guarantee of full recovery.

A recourse structure allows a lender to pursue a borrower or sponsor beyond the specific asset that secures the loan. A non-recourse structure limits the claim to the vessel and its associated security. Most shipping transactions sit on a spectrum between the two, with limited-recourse features — such as cost-overrun support or completion guarantees — rather than a full corporate guarantee.

Banks value ships to underwrite loans, test covenants and estimate recovery, using one or more of three approaches: broker appraisals based on comparable sales, desktop valuations, and income-based methods. Fair market value is the usual reference for loan-to-value tests, financial reporting and impairment.

The EU ETS creates a priced carbon cost that flows into charter economics, break-even and coverage. CII ratings can affect a vessel’s employability, value and financing options. The Poseidon Principles are a lender framework for disclosing the climate alignment of shipping portfolios. Sustainability-linked loans can also vary the margin against agreed sustainability performance targets.

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