07 May 2020

Return of the seller's credit

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Seller's credit – deferring payment of part of the purchase price by a shipyard – is a well-known method of ship finance, usually used alongside other financing methods (e.g. loan finance). With ever-increasing financial pressures on owners in recent months, seller's credit is likely to become an essential part of more and more ship finance transactions, enabling the acquisition of vessels from shipyards where conventional bank finance is insufficient. This article outlines the basic elements of seller's credit, and reviews this method of financing from the owner's perspective.

What is seller's credit?

Seller's credit involves a seller providing the buyer with a credit for part of the contract price (usually the delivery instalment), which the buyer is not obliged to pay until a later date. Such arrangements can arise in new-build transactions - where the credit will be provided by the shipyard to the owner – as well as the sale and lease-back of second-hand vessels – where the credit is provided by the owner who then charters the vessel from the buyer. Seller's credit means that the buyer can take delivery of the vessel after having paid only part of the contract price. The seller's credit will be payable either in a lump sum (a 'bullet' repayment) or by instalments, or a combination of instalments followed by a larger lump-sum at the end of the repayment period (a 'balloon').

How is seller's credit secured?

There are a number of ways for the seller to secure the payment of the seller's credit. This may include any or a combination of the following: a mortgage over the vessel, an assignment of the vessel's insurances, earnings and requisition compensation, a guarantee or other security from the parent company, collateral vessel security, or equity conversion (where the seller can convert the credit into a shareholding in the ship-owning company). 

From the owner's perspective, it is important to ensure that the seller's credit security package is compatible with that required by the lender to the loan finance: the lender will undoubtedly require that the seller's security is subordinated to its own. For instance, the lender will expect the seller's mortgage and/or assignment to be of second priority, ranking behind the lender's first priority mortgage and/or assignment. Further, the lender may require that the repayment of the seller's credit is subordinated to the repayment of the loan. The relationship between the seller's credit security and the loan security will need to be regulated by an inter-creditor agreement.

Seller's credit: the buyer's perspective

Seller's credit provides a number of advantages for an owner. It can assist in the owner's acquisition of a new-build vessel, particularly during difficult financial times. Also, in the case of a sale-and-leaseback of a second-hand vessel, where the owner will provide the seller's credit, it may make the arrangement more attractive to a possible buyer: not only does the seller's credit assist the buyer (lessor) in acquiring the vessel, but it will give the buyer some comfort that the owner (seller) (who will become the charterer) has an ongoing interest in the relationship with the buyer and the performance of the charter. 

Conclusion

To take advantage of this means of financing, owners should keep a number of points in mind. First, they should be sensitive to the possible conflict between seller and lender when it comes to security: the seller's security package should be agreed at an early stage, so the lender has full awareness of the security position when its offer of finance is made. Secondly, an inter-creditor agreement should be entered into, regulating the relationship between the two security packages, and to ensure that no points of complexity arise, for instance, if the loan is accelerated because the owner is in default under the loan agreement. Thirdly, the buyer will need to enter into sensitive negotiations with its seller/shipyard at a time when it too is likely to be under financial pressure. Clear legal documentation is required to avoid problems in the future.

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Jonathan Ward

Jonathan Ward
Partner

T:  +44 20 7809 2081 M:  +44 7768 693 184 Email Jonathan | Vcard Office:  London

David Metzger

David Metzger
Of counsel

T:  +44 20 7809 2334 M:  Email David | Vcard Office:  London