The mystery of finance lease contract

However, the reality that the shipowner must face is that the total rent that the shipowner should pay during the financial lease period is the sum of the ship acquisition cost and the profit of the shipowner. For short leases to be possible, the market must be on the shipowners' side. Ensure that the shipowner can earn all the acquisition costs of the vessel and the profits of the shipowner through operation in just a few years.

In fact, the lease period is relatively long is one of the basic characteristics of ship finance leasing, ship leasing period is generally more than 10 years, 15 years or even longer. The long lease period is not an accident, but should be a necessity.

As one of the ship financing methods, ship financial leasing is different from other financing methods such as bank loans. In most ship loan arrangements, the shipowner as the borrower must provide repayment guarantees, including the mortgage set on the ship and the guarantee provided by the third party.

However, in ship finance leasing arrangements, ship mortgage is no longer meaningful because the lessor is the registered owner of the ship. Although the essence of financial leasing is financing, the form of financing is leasing.

In the ordinary case of time chartering, the shipowner's remedy against the charterer's failure to pay the agreed rent should be to withdraw the ship, that is, to refuse to allow the shipowner to continue to use the ship. As long as the shipowner withdraws the ship in time, the outstanding debt is usually not very large.

This relief is a more practical relief for shipowners. However, for the shipowner in ship finance leasing, this relief may no longer be very effective, because the ship is not the shipowner wants to keep, and owning the ship is not the shipowner's purpose, but the means.

In the absence of performance guarantee, whether the lessor is willing to provide leasing financing to the shipowner depends on the shipowner's ability to pay rent and its reliability. If the shipowner is a company with good credit standing and low credit risk, the lessor will not have too much concern in providing financing.

However, this does not mean that the credit status of shipowners is the only basis for ship finance leasing transactions. As long as the shipowner can find a reliable charterer for the ship, the lessor can also provide financing in the form of financial leasing. In this case, although the lessee found by the shipowner has no credit risk, if the lease term is much shorter than that of the financial lease, the interests of the lessor are still not well protected.

Therefore, the lessor should not only see that the shipowner has entered into a reliable lease with a third party, but also ensure that the term of the lease is equal to or longer than the term of the ship finance lease. As long as the shipowner transfers the lease between himself and the third party to the lessor, the lessor actually does not need to care about the credit status of the shipowner, even if the shipowner is bankrupt, the lessor can still require the third party to perform the lease. This is why ship finance leases are usually long.

From a shipowner's point of view, there also seems to be no reason not to accept a ship finance lease arrangement with a longer charter period. Because the longer the lease limit means that the shipowner should pay the amount of rent for each period is lower, so the pressure on the shipowner is less.

Sometimes the owner may wish to become the true owner of the ship before the expiry of the agreed charter period, for example, due to changes in the market, the sale of the ship can achieve a greater profit, or the owner needs to set a mortgage on the owner to service other financing.

What the shipowner needs to do is to add in the financial lease contract the option to obtain the ship by paying all the rent in advance. Such option should not be opposed by the lessor as long as the conditions for exercising it are clearly specified.

6 Rent

The rent that the shipowner should pay in accordance with the financial leasing contract is calculated according to the lessor's total investment and investment rate of return, and then divided into each phase according to the length of the lease term. The specific factors affecting the rental level include: ship purchase price, lessor financing cost, tax incentives, lease term, risk compensation and profit of lessor.

Ship price refers to the price paid by the lessor to order or purchase the ship, which is the main component of the rental. It is difficult to imagine that the lessor can purchase the ship without financing, so the financing cost of the lessor will also be reflected in the rent. Financing cost usually includes interest and fees, etc. The level of financing cost first depends on the overall supply and demand state of the capital market at the time of financing, but the financing ability of lessors will also have an impact on the level of financing cost.

As a financing method, financial leasing is often based on tax incentives, and lessors will transfer the tax deductions and other advantages they can enjoy to shipowners, so as to make the financial leasing conditions they provide more attractive to shipowners. The greater the tax incentives that the lessor transfers to the shipowner, the lower the rents tend to be.