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Indonesian Cabotage Regime: Implications for foreign owners, operators and financiers
Contributed by:
Norton Rose: Stephen Woods (Senior Associate, Singapore), Ben Rose (Partner, Singapore) and Susandarini (Partner, Jakarta).
In May 2011, broad cabotage rules applying to the Indonesian domestic sea carriage sector came into effect which significantly
increased the practical and compliance obstacles for vessel owners operating in Indonesian waters. A year on, estimates suggest a significant percentage of fleets operating in Indonesian waters have yet to fully catch up with the new regime. Many foreign vessel owners and operators have been relying on temporary exemptions to the rules whilst exploring ways to comply with the regime in a manner that lawfully mitigates the effect of the new restrictions.
Defaults and Bankruptcies
The global shipping industry has been grabbing headlines lately, unfortunately for less admirable reasons. As the industry continues to grapple with depressed freight rates due to overcapacity across all shipping segments, continued high bunker prices and the pertinent problem of reduced lending from the traditional ship financiers, bankruptcies are expected to accelerate for the rest of 2012. “It’s amazing to see how both the borrowers and lenders allowed themselves to run out of cash,” commented a restructuring expert at a recent Marine Money conference in Hamburg.
Within a span of two weeks, both Berlian Laju Tanker and Humpuss Sea Transport have filed for protection orders from the courts in New York, under Chapter 15 of the United States Bankruptcy Code. The filings would allow both companies to halt legal proceedings in the United States and ensure their vessels can ply safely through ports in the United States without any threat of arrest. In Berlian Laju Tanker’s case, a number of its subsidiaries had already secured protection on March 12, under Section 210(10) of the Singapore Companies Act, thus securing a three-month stay on creditor actions and preventing ships from being impounded in Singapore. The court protection however does not extend beyond Singapore jurisdiction, which led to BLT’s Chapter 15 petition in New York to shield assets within US jurisdiction.
Time will tell
It has been a long time coming, and we all suspect it has been going on for the last year or two, but in the last six months shipping bankruptcies and restructurings have become more public and more talked about. And it is likely that such will continue with more companies, small and large, having to surrender, amicably or not, their vessels to their lenders. The question is, what does the lender do next?
Such a situation will not be, or should not be, unexpected to the lender. Situations which end in default and judicial auction are often a long time in the making and the bank should have plenty time to put together a team consisting of legal advice, vessel manager and internal “trouble shooters” to at least take possession of the vessel, handle the immediate crew situation, keep it insured, and handle a swift auction procedure. But now, as proud owner of a vessel with clean title, what next for the bank?
Sailing and Staying Ahead–Enhancing the Maritime Sector
By: Ho Mui Peng
In a departure from his usual practice, the Finance Minister chose to release most of the tax changes affecting specific industries through an Appendix attached to his speech.
Hence it was quite a surprise to find a number of important tax changes relevant to the shipping and offshore oil and gas sector here. This article sets out what these changes are and why they were made. The changes mentioned below which affect a ship owner will apply equally to a rig owner as Singapore has awarded the same Maritime Sector Incentives (MSI) to rig owners. Continue Reading
Judicial Sale – The Mechanics
By Jim James
Norton Rose, Hong Kong
Mortgagee banks possessing little experience of mortgage enforcement sometimes ask what is actually involved in a judicial sale
of a vessel. In this article – the last article in a series of three on this subject – we summarise the procedure in a typical undefended action using Hong Kong and Singapore as examples of two jurisdictions in Asia where these actions are not uncommon. For convenience the procedure is described in two parts although in practice the parts often overlap.
Perfecting the claim, arrest, default and judgment
- After notice of default and acceleration has been given, thereby perfecting the mortgage claim, a writ in rem (or claim document) is issued and an affidavit leading to warrant of arrest is sworn and filed. The affidavit is read by the Admiralty judge or the Registrar, who may double as Chief Bailiff (“CB”), and, if he is satisfied with the application, a warrant of arrest is issued. In Hong Kong the CB will execute the warrant and serve the writ on the vessel while it is present in Hong Kong waters. Similarly in Singapore, the CB will issue a letter of authority for the claimant mortgagee’s solicitors to effect service on the vessel in Singapore. In both jurisdictions the solicitors provide the CB with an undertaking to pay arrest expenses; they also place an initial deposit with the court and may be asked to supplement that deposit later. Arrest costs accrue throughout the period of arrest, until the vessel is either release or sold.
In Conversation with Dagfinn Lunde, DVB Bank
Marine Money Asia is privileged to have an opportunity to interview Mr. Dagfinn Lunde, Member of the Board of Managing Directors at DVB Bank. Mr. Lunde has played an instrumental role in transforming the bank from a regional geographical model to one that is built around teams of specialists who follow specific industry sectors: a) container business, b) cruise & ferry, c) crude oil & LNG tanker, d) chemical, LPG and product tanker, e) dry bulk, f) offshore drilling & production, and g) offshore support. In this interview, the third since 2010, Mr Lunde speaks to us on the development of ship finance in 2011, and his vision for DVB in 2012, a year where he expects to see bottoming in most shipping sectors.
Marine Money Asia: What would you say is DVB’s top priority for this year – reducing, stabilizing or expanding the lending portfolio?
Precious Words
Avid readers of Marine Money should find Khalid Hashim-led Precious Shipping a familiar name. This is a company which has been consistently ranked within the top 10 under the financial strength category in our annual rankings of global listed shipping companies. Such an achievement is a clear reflection of the prudent policies and financial discipline that the management has put in place. We reproduce excerpts from Precious Shipping’s latest annual review, in which one can find bountiful blunt and valuable insights on the challenging shipping market we are in today.
Demand: With the current business climate of a very fragile banking system coupled with demand from three of the largest markets in the world (US, EU and China) looking a bit shaky, the environment for the next 2 years is going to be extremely challenging. The demand destruction, that has taken place in large part due to the shaky position of the financial infrastructure of the world, has been reversed to a large extent by the massive and globally coordinated Government bailouts, as well as stimulus packages liberally employed during 2009, 2010 and 2011. Most importantly, banks need to re-open to the world their collective windows on trade finance which they had shut at the peak of the financial crisis in the middle of 2008, and which have still some way to go before they could be termed as “normal”. The danger marker is, of course, the reaction of world GDP when the life-support-drug to the economy of massive coordinated Governmental stimuli starts to wear off. The fear, which is still largely in the background, is that world GDP may stumble which would have an adverse impact on demand growth. These will be the key trigger points to watch out for to indicate if better times are just around the corner. Continue Reading
Conflicts between Mortgagees and Charterers
By Jim James
Norton Rose, Hong Kong
On occasion, the mortgagees and the charterers of a vessel will be found to have differing commercial interests. Usually, a conflict will arise in circumstances where the mortgagee wishes to take prompt action to enforce its rights (e.g. by arresting the vessel and having it sold free of charter), and the charterer wishes such action to be deferred until the end of the charter period. If the charterer and the mortgagee are not parties to a priorities agreement, general legal principles govern their respective rights. English law in this area is not entirely clear. Each case depends upon its own facts and circumstances, and specific legal advice should be sought in individual cases.
There are two main reasons why the law in this area may seem somewhat unclear. The first reason is that these cases arise rarely in
practice, because either the rights of the parties are governed by a priorities agreement, or it becomes evident that the shipowner is insolvent, which means that the charterparty cannot be performed in any event. Continue Reading
Welcome to London
Marine Money Asia was in London this week to attend the Marine Money London conference. The weather was overcast and cool; a bit like the shipping market really. The theme of the conference was “How to save an industry in trouble?” A bit dramatic perhaps, and we are not suggesting for a moment that we, or the world, could exist without shipping, but it is clear to all that major issues in the industry and in the financing of the industry need careful thought and a plan of action. The discussion at the London conference was
focused on three main issues: how shipping companies and shipping banks handle the existing fleet and debt to that fleet; whether the shipping banks and other finance sources can “fill the gap” required over the next year or two to deliver all the already contracted newbuildings; and where does the industry go hence bearing in mind that the common model used for the last decades seems not to have worked and not to be re-usable going forward.
The general conclusion was, yes, we will muddle through. The vessels will be delivered and the banks, together with a small amount of private equity and a large amount of private equity (meaning shipowners own reserves) will fill the gap. Where do we go hence. On that one there are two schools. One believes that when the European debt crisis sorts itself out, whenever that might be, and European banks will again be able to borrow and lend US dollars, we will be “back to normal.” The other school believes that we are in for a structural change. We will have, and should have, huge consolidation within the industry, and financing to the shipping industry will be structured and corporate.
Crisis Management for Mortgagees-Part III
This is the third and final article in a three-part series examining loan enforcement and judicial sale of vessels. In the first two articles, Norton Rose (Asia) LLP partners, Ben Rose and Robert Driver looked at preparations and options for enforcement and vessel arrest and judicial sale. The third and final article is contributed by Manish Singh from ship managers V.Ships and focuses on certain practical matters which a mortgagee needs to consider when arresting a vessel. V.Ships is a highly experienced asset manager, having successfully supported mortgagees during the various recent crises experienced by the shipping industry.
Difficult operating environment, sustained drop in the freight markets, continued pressure by way of cost inflation and increased regulations all make shipping a particularly challenging business at this time. Add to that concerns around counterparty risks and failing contractual relationships and the instances of defaults, restructurings and recovery of assets from non-performing loan relationships is on the rise.
Lenders are concerned not only about non-performance in certain relationships but also cost pressures which may impact the committed standards of operations that are necessary for safety, asset preservation, trading continuity and environment protection. It is for this reason that V.Ships are working extensively with its principals not only to deliver turn-key asset management but also advisory and strategic support to optimize costs and enhance operational efficiencies.
As highlighted in the previous articles, there is no such thing as a normal set of circumstances surrounding a workout situation. The magnitude and dynamics can and do vary enormously. The scale and intensity of the problems faced can and are often adversely impacted by delay in decision making, disputes between stakeholders, poor information and a host of other reasons. Irrespective of the factors specific to the case, every recovery project requires meticulous planning and co-ordination between various stakeholders. Often such takeovers need to be implemented within a short period of time. Due to the multiple stakeholders involved, this is particularly challenging as there are various liens that need to be recognized and managed effectively.
Any mismanagement of liens will surely lead to delays and disputes which may invite additional costs and liabilities or may even lead to subsequent arrest of the vessel.
Circumstances will also vary according to the type of asset owner and type of asset(s) involved. For example, further to the creditor risks, on cargo vessels that are in a laden condition, the recovery project must also anticipate the risks of cargo going off specification and what care is required during the transition to prevent this. Similarly on passenger carrying vessels there is an extensive stakeholder group and further commercial and reputational issues to consider.
Planning for recovery scenarios:
While circumstances vary and must be assessed and acted about on their own merits, there is no substitute for good process to manage a series of actions from the initial diagnosis of the problems faced, through scenario planning until successful completion of the desired outcome.
Considering these priorities, the table below depicts a simple five-stage process that we as asset manager adopt with parties engaged in a work out situation to develop a roadmap to be combined with disciplined project management.
Practical considerations:
In terms of various considerations, the earlier articles in this series have already touched upon the commercial review process. This will typically involve the latest valuation of the assets against the exposure of the enforcing parties and claims pending in relation to the asset. Other than the mortgages themselves, typical liens include outstanding crew wages, insurance payments, creditors including bunkers and Lube oil suppliers, fees due to class and disbursements pending to ship agents. Sums may also be due in terms of ship manager’s fee and other 3rd party suppliers.
Careful consideration will be given to the review of charter parties in place and of the commercial outlook for the vessel to be traded.
In terms of the operational and technical considerations, at this stage, it is nessesary to carry out a physical inspection of the vessel and assesment of crew on board and how the vessel is being managed and cared for.
From an asset manager’s perspective, once a vessel has been located in a favourable jurisdiction the takeover can be implemented. This involves co-ordination with the crew and various other liens involved. It will, in most instances, be nessesary to replace the existing crew with incoming crew.
Managing the situtaion on board involves gaining early access and deploying a project team on the vessel. This project team will not only gain the confidence of Master and crew but carry out a comprehensive inspection of vessel to establish actual condition and the scope of works involved to maintain or bring the vessel back into trading condition.
Lay-up scenarios:
It is possible that due to the depressed market conditions, in certain instances the laying up of the vessel may be the most effective strategy short or mid term. Different scenarios tend to play out depending on the type of asset, location, degree of the readiness desired for safety or commercial reasons and other relevant factors.
Risk Management:
It is important for the asset manager to use comprehensive risk assessment tools in order to anticipate all operational, commercial and reputational risks and have a robust management plan to respond to all associated issues. At V.Ships, we have an established and tested management system which anticipates and address all routine matters and contingencies. This provides us with the tools to employ measures to mitigate or manage all material risks.
Communications:
Given the wide range of stakeholders involved, a clearly defined and coordinated communications plan is imperative in instances where vessel recovery is involved. Such instances meet with close attention from trade press as well as the regional media in the location where vessel recovery is affected. Misinterpretation of information or uncoordinated communications could again result in adverse publicity.
Early engagement with an asset manager:
It is desirable to establish an early engagement with competent asset managers in order to carry out the assesment of the asset, development of a strategy and ensuring smooth implementation.
Such engagements could be by way of engaging a competent manager to carry our asset inspections. This can readily be done by exercising the right to carry out periodic inspection available to lender within mortgage
contract. Managers are also often tasked to carry out an audit and report on key operational and financial parameters as well as optimisation of costs and management as a lender’s representative.
V.Ships is the leading independent ship-manager and marine services provider globally and we focus on the marine, offshore and leisure markets. V.Ships group companies service a fleet of over 1,000 vessels and manage an international pool of about 25,000 seafarers drawn through the global V.Ships network that includes over 70 offices across the world in over 26 different countries.
www.vships.com
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