|Alan Bainbridge||In today's session we're going to look in the context of NPLs at how shipping loan portfolios in particular are dealt with and I'm joined by Simon Lew. Simon what specific issues do you see in trading shipping portfolios in particular?|
|Simon Lew||Well, the first thing to note, Alan, is that in the shipping portfolios that we see on the market right now, a very high proportion of those loans are written on a bilateral basis. And that means that the documentation is written solely between the lender and the borrower, and all of the security is granted in favour of the lender, rather than via a security agent who would hold for the benefit of the lending group, which is what you would see on a syndicated loan. Now, on the face of it a bilateral loan is by far the simplest structure because the buyer of the bilateral loan is getting 100% control over that particular loan, but from a legal perspective, and from a transferability perspective, a bilateral loan is much trickier, because not only do you have to transfer the loan, but you've got to transfer each of the individual security interests separately from one another. And of course in the context of a shipping loan, we have a multitude of different governing laws - your loan agreement might be governed by English law, but your mortgage is going to be governed by the law of the flag state which might be the Marshall Islands or Liberia or Panama or Malta or something like that. And then you will have a share pledge potentially, which would be subject to a completely different governing law, which would be the law of the incorporation of the borrower, and you may have account charges which will be governed by the law of the place where the account is actually held. So, you will have a multitude of different laws, and you need local counsel advice or the appropriate way to transfer each of those individual security interests one by one, under the law which governs that security interest. The process of completing that formal legal transfer needs to be very carefully coordinated because you've got to make sure that all of those security interests are transferred at the same time, and that any local law registrations are affected immediately so that you don't have any gap in the security.|
|Alan Bainbridge||Understood. And then what particular issues are buyers looking for in the context of shipping on portfolios that are NPLs?|
The first thing I think a buyer is going to want to look at is the current trading patterns of the ship. A buyer of a distressed shipping loan needs to understand how easy or difficult it is going to be to enforce its security, to enforce the mortgage over the ship and get its hands on the metal in a default scenario. And you can only arrest a ship when it arrives in a particular jurisdiction, and the law that governs the arrest proceedings is not the law of the mortgage, it's the law of the place where the ship actually is at the time of the arrest. Now, as all shipping litigators will tell you, there are good arrest jurisdictions and there are bad arrest jurisdictions, so getting a picture of the trading patterns of the vessel, where it is at any given moment in time, where it's likely to appear across the globe, is quite important from a buyer's perspective because that allows it to then plot where might be the appropriate place to force an arrest in a default scenario.
Another similar issue here concerns sanctions compliance. Understandably, buyers today are very concerned to make sure that a ship has been operated in compliance with sanctions laws across the globe. And so they will look at the historic trading presents of the ship over the last two years, perhaps even over going back over a longer period in order to determine where a ship has been, and whether it is appeared in jurisdictions where it shouldn't be because there is a danger that is being operated in breach of sanctions. This is a particularly sensitive area for US fund buyers, because the US rules on sanctions compliance mean that if a vessel has been used in breach of sanctions, then any financier of that vessel could itself be subject to penalty in the US, even though the ship itself and the ship owner itself is not subject to US sanctions rules. So, US buyers are very keen on checking where a ship has been.
Another issue obviously that a buyer is going to be looking at is whether the loan itself has been subject to any restructurings and those may be formal restructurings where there's documentation available in the data room that you can actually read, but also they're going to want to know whether there have been any informal discussions going on between the selling bank, and the borrower about payment deferrals, or about potentially spending enforcement proceedings for any given moment in time. The last thing any buyer wants is to buy a loan and then find that it stopped essentially from enforcing that loan because of something that the seller has done in discussion with the borrower that allows the borrower to defer payments or has given the borrower an assurance that the loan won't be enforced for a given period.
|Alan Bainbridge||And so on that point, what about MPLS that are already subject to enforcement proceedings?|
This is a very tricky area indeed. We've seen situations where mortgages are being enforced in various jurisdictions and where enforcement proceedings are actually taking place in those jurisdictions, at the time when the selling bank decides to sell the loan. Now one of the things that the buyer has got to do is find out, investigate, whether or not it's going to be able to step into those legal proceedings, and in many instances it will be the case that the buyer of the loan can't do that. If the loan is sold, those proceedings will have to be restarted all over again and that could mean that you have months of delay before you can actually get to a real enforcement situation with respect to that vessel. So, this is a very tricky area and there are solutions to it, but it obviously involves some sort of synthetic arrangement whereby the buyer is going to enter into a sub- participation of the loan from the seller, the seller will remain the lender of record, and will continue to carry out the enforcement process subject, perhaps to the litigation conduct agreement that will be negotiated between the buyer and the seller, so that the buyer has control over how that litigation is being conducted.
Similar issues arise in relation to ships that are perhaps subject to an insurance claim at the time when the loan is sold, because you need to check whether that insurance can be passed on to the buyer, or whether the insurance claim is really - if you like - personal to the seller, and might not be capable of being passed on. Again, in that situation you may need some sort of synthetic solution in order to ensure that the insurance claim is not prejudiced.
Loan portfolio divestments, whether by way of sale or securitization, continue to make headlines and the prospect of increasing impairments in the coming year has drawn wide commentary regarding the impact on loan exposures in several key industries disproportionally impacted by the pandemic.
Drawing on our experience of several of the most high-profile disposals and acquisitions of performing and non-performing loans in such sectors, this video series will guide both sellers and buyers on the key areas to be considered in the context of preparing to sell or buy a loan portfolio in one of these sectors, together with some additional commentary on areas that will regularly be the basis for detailed negotiations.
In the fourth video in the series, Alan Bainbridge and Simon Lew discuss some of the specific issues that arise when trading impaired and non-performing shipping loan portfolios.