How does a "Sale and Leaseback" transaction work in the shipping industry?

A Sale and Leaseback is essentially a loan disguised as a property deal, widely used to raise capital. A shipowner sells their vessel to a leasing company (often based in China) for immediate cash, then immediately leases it back to operate it for a daily fee. The leasing company becomes the legal owner of the steel, offering them better security than a traditional mortgage. If the shipowner stops paying rent, the lessor doesn't need to go through a lengthy foreclosure process; they simply cancel the charter and take their ship back.

What is a "ship mortgage" and how is it registered?

A ship mortgage is a specialized security interest recorded directly with the ship's Flag State registry (e.g., Panama, Liberia, or the Marshall Islands). It gives the lender a "priority right" to sell the ship if the loan isn't repaid. A lawyer must ensure the mortgage is "perfected" by filing the correct statutory forms immediately; a delay of even 24 hours can be fatal if another creditor files a claim first. This registration acts as a global "do not touch" sign, warning other creditors that the bank has the first claim on the vessel's value.

Why are Special Purpose Vehicles (SPVs) almost always used to own ships?

SPVs are used to "ring-fence" liability, following the "one-ship, one-company" rule. If a ship is owned directly by the parent company and causes a massive oil spill, the claimants could seize the entire fleet to pay for the damages. By placing each ship into its own separate SPV, lawyers ensure that a disaster on Ship A only bankrupts that specific SPV, leaving Ship B and the parent company's assets safe from seizure. This structure is virtually mandatory for bank financing, as lenders want their collateral isolated from other business risks.

How can a lawyer help secure funding from Export Credit Agencies (ECAs)?

ECAs (like K-Sure in Korea or Sinosure in China) provide government-backed guarantees to banks lending money for ships built in their country. A lawyer helps you navigate the strict eligibility rules, proving that the "local content" of the ship—like the steel and engine—meets the agency's threshold. They negotiate the "reimbursement agreement," ensuring that if you default and the government pays the bank, the ECA’s terms for recovering that money from you aren't overly aggressive or crippling.

What are the "Poseidon Principles" and how do they affect green shipping finance?

The Poseidon Principles are a global framework where major banks agree to align their shipping loan portfolios with international climate goals. Practically, this means if your ship is a heavy polluter ("dirty" vessel), it will be significantly harder and more expensive to get a loan. Lawyers now draft "sustainability-linked" loan agreements where the interest rate fluctuates based on the ship's carbon efficiency; if you retrofit the ship to be greener, your interest rate drops, incentivizing environmental compliance through financial rewards.

What happens if a shipowner defaults on a loan while the ship is in international waters?

Legally, a bank cannot seize a ship on the high seas; they must wait for it to enter the territorial waters of a friendly jurisdiction. Lawyers track the vessel's location data to predict its next port of call. Once it arrives, they hire local counsel to file an "in rem" arrest warrant with the local court. The moment the ship docks, a marshal boards the vessel and physically posts the warrant, legally "arresting" the ship and preventing it from leaving port until the debt is settled or the ship is sold.

How do lawyers handle cross-border collateral enforcement?

This involves strategic "forum shopping." Since shipping laws vary wildly between countries, a lawyer will advise the bank to wait until the ship sails to a "creditor-friendly" jurisdiction (like the US, UK, or Singapore) before arresting it, rather than trying to enforce a mortgage in a country with slow or corrupt courts. They coordinate legal teams across time zones to ensure the arrest papers are filed the exact moment the ship arrives, avoiding a scenario where the ship refuels and escapes before the court order is signed.

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Sonia Horvathova

Papapetros, Papangelis, Tatagia & Partners Law Firm (PPT Legal)

Shipping Finance · Greece

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Shipping Finance FAQ

The primary difference is the extreme mobility and volatility of the asset. Unlike a factory that stays on a specific plot of land, a ship moves between different legal jurisdictions daily, meaning the asset securing the loan can literally sail away from the bank’s reach. Shipping finance lawyers must draft mortgages that are enforceable globally, not just locally. Additionally, ships face unique "maritime liens"—such as unpaid crew wages or salvage claims—that legally jump ahead of the bank’s mortgage in the payout queue, requiring stricter loan covenants to ensure the owner keeps the vessel debt-free.

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