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Stephen Marais, partner at Holman Fenwick Willan, considers the possible implications Brexit could have on the shipping finance markets.
There is a lot of talk in terms of what may happen in the future, but until article 50 is triggered all the laws stay the same, none of the banks have moved so Brexit itself, in terms of what it is, hasn’t made an impact yet. However, where it has made a change is to do with uncertainty and the market sentiment as a whole. Shipping finance is a very capital intensive business so credit committees in banks and other financial institutions are looking very carefully at their lending decisions and deciding whether to lend money or not.
I think with a lot of this it’s very important to differentiate between Brexit and trends within the shipping finance market as a whole.
Shipping is very much a dollar based international business and there has already been a trend, independent of Brexit, towards more dollar based institutions providing finance as they have an in-built competitive advantage over other financial institutions. For example, if you look at a dollar based loan to a Chinese shipping company then it’s not going to have an impact.
What hasn’t helped though are the currency fluctuations because charter rentals and everything that underpins shipping tends to be dollar based and so if you are a European shipping company or you are looking to hedge your currency exposure in sterling or euro then the fluctuations don’t help in terms of economic decision making or planning.
European-focused business will certainly be affected longer term and I think that one of the trends that we are seeing is where banks and institutions are under pressure to finance and support their local industry and businesses. This has happened in the UK where banks such as RBS, Lloyds and Bank of Scotland were told to focus on core banking, and shipping was categorised as non-core because there isn’t a major shipbuilding industry in this country employing tens of thousands of people. So they have already reduced their shipping exposure whereas if you speak to Japanese banks their focus is very much on lending to Japanese operators and supporting Japanese yards.
There is also a lot of talk about passporting requirements and the ability to provide services within European markets. However, five US investment banks, including Goldman Sachs and JP Morgan, recently announced they would continue to support London as a financial centre. It is, however, those products and services which are specifically for the European market which are likely to be affected.
I don’t see any major change here. English law and English security documents should continue to be the dominant governing law in ship finance. There has been some movement towards using local laws, for example we have been seeing Norwegian law governed loan agreements in the Norwegian market, but even in that situation they would tend to rely on English law security documentation because Norwegian law security does not allow the full range of options that English law does, such as security assignment of contracts. Also English law has underpinned ship finance for a lot longer than the EU has been in existence and because it’s such an international business, the interpretation, understanding and knowledge in terms of what English law would be in a given situation is well understood in jurisdictions around the world.
If the deals are committed and the funds have been advanced, then I don’t see any change at all. The LMA and other bodies have been looking at the changes that may need to be made to loan documentation. There will be some references in loan documentation to EU laws, for example in VAT clauses and a few other areas, but it’s not a lot.
I’ve already mentioned the diminished role in European banks providing ship finance. This trend is likely to continue given the difficulty we are seeing for example in the European banking system and the pressure to support local industry and businesses. So a trend we are starting to see is dealing with financial institutions who are still using English law but perhaps operating out of other jurisdictions be it Singapore, Hong Kong or Shanghai.
I think we are definitely going to be seeing more restructuring and consolidation in the industry as companies are finding it difficult to attract finance. They need to look at alternative sources of finance which is driving the pressure on them to restructure their businesses to become more attractive to these alternative sources. For example, if you are looking to raise funds in the US which has a lot of regulatory reporting requirements it is very difficult to be a family-owned shipping business trying to attract institutional investors. (In the old days they would have had a relationship banker who would understand the family and the business but that sort of relationship banking has now gone in many aspects.)
The major issue is the massive funding gap in the shipping industry which has a lot of implications for owners and other parties and the uncertainty over Brexit is adding to what is already an uncertain picture. We are certainly seeing a flight to quality—lenders are picking companies that they perceive as the ones to support through the difficult times and there are certain top companies which will have no problem attracting finance whereas the rest of the industry is really struggling to attract finance at the moment.
Potentially yes if the UK government decides to more aggressively support UK-based shipping businesses through tonnage tax and other incentives and use the tax and regulatory regime to encourage more investment in the UK.
Interviewed by Fran Benson.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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