Tolani Maritime Institute; B Tech ME, IV th Year

Online learning material for subject: Ship Operation and Management

Number: Ch 7 -02 Prepared By: S K Srivastava

Chapter VII – Capitalization & Finance

Debt Financing:
This is most favoured way of financing ship. It can be:
1) Bonds
2) Commercial Bank loans
3) Shipyard Credit
4) Private debt

Bonds: These are certificates issued by shipowner for specific purpose like purchase of new ship at a
specific interest rate and period. They are certificate of indebtedness, where issuer guarantees pay on
demand or on maturity. They can be sold ad purchased between parties.

Commercial Bank Loans: It is quickest and most convenient method. Debt is arranged fixing Interest
rate, tenor & mortgage. Loan can be taken by one bank or a group of banks.

Shipbuilding Credit: Credit is given by ship yard for purchasing, which is to be paid with interest. In
some cases there is a joint venture by shipping company & Yard.

Private Debt: Loan taken from Private Individuals or finance companies, this is generally with heavy
Interest rates and such financers mortgage the ship. (Pension funds, commercial finance companies,
Investment banks, ship-finance banks etc.)
.
Th debt financing is least expensive but most restrictive form of ship finance. These loans have to be
secured or collateralized by Insurance, Corporate Guarantee, Pledge of shares, Personal Guarantees
etc.
Lending is seldom 100 % of vessel acquisition cost, they prefer to have a portion of the cost
provided by the owner. This helps in ensuring serious involvement of owner and easy recovery in
event of liquidation. There may be more than one lender (primary – who covers major part, secondary
– who pays loans only because of primary lender)

Debt – Mezzanine Finance: It is used when bank is unwilling to loan owner sufficient money, to
close gap high yield corporate debt bonds are issued which provide high rate of return for investor.
They also present high risk and usually arranged by investment bankers for small companies.
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 Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 7 -02 Prepared By: S K Srivastava

Leasing: By definition lease is a contract between a lessor and a lessee, in which the owner permits
the user to use an asset over the term of the lease in exchange for the payment of rent. In shipping
term it is called as Bareboat Charter. In such contract the charterer uses ship as allowed to him in
contract and pays a hire charge per day to shipowner.

Other Methods:
1) Convertible debt: where the financer has a right to covert debt in equity shares at a particular
price in the future.
2) K/S Partnership: It stands for Kommanditt selskap, a limited liability partnership with tax
credits. Here the Owner places his capital on deposit and takes a longterm credit at a lower
rate to avail tax benefits.
3) K/G Partnership: It stands for Kommand It Gesslschaft It is a German Limited Partnership
system, which holds individuals liable only for the amount of their investment. It helps in
equity financing from high net worth individuals who get tax benefits. Mostly it is used for
small ships.
4) Government Grants: Financial assistance is given from government sources as aid to simulate
domestic shipbuilding or domestic shipping. It may in form of soft loans, subsidies, cash
grant, lower taxes, write -off previous loans, accelerated depreciation to reduce tax, operating
subsidies, fuel subsidies etc.
5) Hedge Funds: They are legal structure that enable the managers to pursue an almost limitless
range of investment strategies such as hedging against market downturn, investment in
currencies etc.
6) Basic Financial Documents: Almost all investors and lenders want to see similar financial
documents. By preparing a basic financial documents, and ideally, keeping it up-to-date, you'll
be in a better position to act quickly on financing opportunities.
There are two levels of financial documents to prepare, the basic documents needed for most
financial activities, and additional documents needed, especially for large loans or
investments.
a) Balance sheet. Financial report that shows the status of a company's assets, liabilities and
owners' equity; this gives a complete picture of the worth of a company.
b) Income Statement, also called Profit-and-Loss Statement. Summary of a company's
revenues, costs and expenses during one accounting period. This shows how profitable a
company is. If a company is new, these can be projected income statements.

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 Tolani Maritime Institute; B Tech ME, IV th Year
Online learning material for subject: Ship Operation and Management
Number: Ch 7 -02 Prepared By: S K Srivastava
c) Cash flow projections. Estimates of the schedule on which money will actually move into
and out of your company. Cash flow can be very different than income statements,
especially for companies that operate on an accrual basis accounting.
d) Audited financial statements. Financial documents like those listed above, but prepared
by an accounting firm that audits the documents to make certain they are correct.
e) Last two-three years' business tax returns.
Etc.

Lender Security:
Giving money as loan involves risk of return therefore the Lender may like o take security for his
funds. It can be in te form of Mortgage where a property is kept as security. Mortgage means that in
the event of non payment of loan, to our outstanding indebtedness the owner grants the linder the
assment of the whole vessel
Since the ship is mortgaged to Lender, he requires shipowner to:
- Insure the vessel by H&M Insurer
- Insure the vessel for war risk
- Cover Protection & Indemnity risk
- To comply will all requirements of Insurer and pay premium timely
- Owner has to maintain & operate vessel as per various relevant national & international rules
- Owner shall not carry out any alterations to vessel’s structure
- Owner shall not remove any part or equipment of vessel
- Owner shall maintain Class certification
- Owner cannot sell or lease vessel to anyone without consent of Lender
- Owner shall not take loan from anyone else without permission of Lender and total amount
shall not exceed 70 % of value of vessel
Lender has the right to inspect the vessel from time to time.

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