Corporate finance and maritime legal experts Watson, Farley & Williams explains the potential complexities around securing financing for retrofitted exhaust gas cleaning systems
A briefing by Watson, Farley & Williams, entitled ‘The 2020 global sulphur cap’, has addressed the difficulties associated with finding financing options for retrofitted systems known colloquially as scrubbers.
“There are challenges around the financing of retrofitted scrubbers on an asset finance basis,” it noted. “These are not insuperable, but there does not currently appear to be a ‘one size fits all’ financing solution which is quick and easy.”
Regarding who takes responsibility for compliance costs in charterparty agreements, the briefing said existing time charter arrangements could be difficult to interpret if they lack terms assigning explicit cost obligations for shipowners and charterers.
In existing agreements, owners looking for charterers to assume the mantle of compliance costs may opt not to fit scrubbers and require their charterers to use low-sulphur fuel. Alternatively, the brief said charterers may offer to bear the cost of retrofitting scrubbers in return for a reduced charter rate.
Assigning responsibility for compliance costs in new time charter agreements, the firm advised, “might give rise to some difficult discussions”.
Owners who opt to retrofit scrubbers but do not look to charterers or time charter agreements for financing face other difficulties, according to the briefing.
“Shipowners electing to retrofit scrubbers will probably seek a way to finance the acquisition and installation cost,” it said.
“The main concern relating to any type of scrubber financing is the form of security the creditor will receive.”
"Assigning responsibility for compliance costs in new time charter agreements might give rise to some difficult discussions”
Discussing the benefits and potential pitfalls of financing options for retrofitting scrubbers, the brief primarily addressed mortgaging practices.
“If the ship is mortgaged, the rights and remedies of a scrubber financier will need to be addressed by agreement with the ship mortgagee,” the brief said.
In other words, if a shipowner agrees a scrubber retrofit financing deal with one lender and then mortgages the ship, the mortgage lender has to take into account that the scrubber financier owns the scrubber system on board that ship.
This is true “whether the scrubber financier takes an express security interest over the scrubber or takes quasi-security in the form of a lease or title retention arrangement,” according to the brief.
“Such arrangements with a mortgagee of the ship can be complicated to agree.” So complicated, in fact, that a ship without a mortgage would not be able to get a mortgage without security terms being expressly agreed for the scrubber financier.
Two important considerations in the scrubber financing calculation are that it is impractical to remove an exhaust gas cleaning system once installed and it is not very lucrative to sell a second-hand system if it were to be removed.
“Any substantial recovery from the sale of a second-hand scrubber” is unlikely, making “financing of scrubbers on an asset-only basis unattractive,” the brief said.
“The most secure approach for a scrubber financier is to take a first priority mortgage over the ship (which can secure one or more scrubbers).”
However, the brief noted this approach was only likely to be commercially viable for shipowners if the mortgage was taken out to secure scrubbers across a fleet of ships.
If there is already a mortgage on the ship, the brief said, a scrubber-related mortgage would require the consent of the initial mortgage holder, resulting in “challenging and time-consuming” negotiations.
Other keys to effective financing include isolating repayment sources and avoiding existing debt restrictions, according to the brief.
Financing options for scrubber retrofits will be discussed in detail during Marine Propulsion & Auxiliary Machinery’s Americas Sulphur Cap 2020 Conference in Houston, Texas in March 2019. Book now to reserve your place.