An interview with MJM Barristers & Attorneys discussing Shipping in Bermuda

Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Shipping volume discussing topics including sources of finance, compliance initiatives and foreign court decisions within key jurisdictions worldwide.

1 What is the current state of the shipping industry in your country?

For over 50 years, the shipping industry in Bermuda has played a key role in placing the island on the international business map. Today, Bermuda is a thriving centre for international ship financing and registration. Over the years, many of the world’s leading ship owners, managers and related professionals and financiers have developed close relationships with Bermuda; this collaboration has resulted in creation of financial structures that are tailored to the specific requirements of the shipping industry.

There have been two major developments in Bermuda over the years in relation to shipping – first, Bermuda has been used increasingly as the base for the shipping industry both in terms of incorporation and management, as well as for registration; and secondly, restructuring of shipping groups (both from a corporate and financial perspective) has utilised Bermuda as the jurisdiction of choice.

There are several reasons why Bermuda is a leading centre and a jurisdiction of choice for the shipping industry:

  • Bermuda has a sophisticated and stable regulatory framework;
  • excellent shipping industry expertise in Bermuda;
  • advanced IT and communications infrastructure;
  • a legal system that is derived from English common law, allowing a final appeal to be made to the House of Lords, sitting as the Privy Council;
  • good banking, computer, legal and accounting services;
  • an efficient and well-run shipping registry that can operate on a 24-hour basis to accommodate clients, making Bermuda a very user-friendly jurisdiction for the shipping industry;
  • low port state control detention figures, as Bermuda ships are considered low-risk vessels and, accordingly, are inspected less frequently than others;
  • Bermuda government is committed to the adaptability of Bermuda’s laws so that the requirements and demands of international clients are always met;
  • no income tax or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax is applicable to a Bermuda exempted company; and
  • no exchange controls.

The Bermuda Shipping and Maritime Authority (the BSMA) maintains a high-quality international ship registry that takes pride in the high standard of its fleet and works to provide support and value to its customers. The Authority is certified to ISO:9000:2015 standard.

The Bermuda ship registry accepts vessels on the main register, those registered on the demise register with the underlying registry in another jurisdiction and the ship flying the Bermuda flag (demise ‘in’) and those registered on the demise register with the underlying registry in Bermuda and the ship flying the flag of another state (demise ‘out’). The demise register can be a valuable option for owners as it allows separation between the register of title and encumbrances, and the flag jurisdiction, which can be beneficial for commercial reasons.

The flag of Bermuda has numerous benefits:

  • Bermuda is a well-established international flag of high standing with prolonged membership of the Paris and Tokyo MOU Whitelists as well as the United States Qualship 21 programme, which reduces the likelihood of your vessel being inspected in these jurisdictions;
  • the Bermuda Ship Registry is a member of the Red Ensign Group of ship registries, the world’s ninth largest registry grouping, so vessels enjoy protection of UK and allied navies and ship owners can seek the support of British embassies and consulates;
  • Bermuda has a strong and clear legal system based on English maritime law and has comprehensive maritime legislation, and mortgages are registered with a clear position on priority of mortgages;
  • Bermuda registers vessels of any type, age or size provided that they meet the required standards, the registered owner is not required to be incorporated in Bermuda and a streamlined service is provided with fast turnaround available at all times;
  • our registry aims to ensure that our fee structure and rates remain competitive;
  • statutory surveys can be delegated to classification societies, with audits and inspections carried out by the registry’s own experienced surveyors worldwide, thereby ensuring consistency, high standards, continued safety and a rapid response globally;
  • the BSMA’s in-house expertise across time zones enables it to give timely response to technical queries 24/7, with their focus on assisting the efficient, economic and compliant operation of ships, aware of the commercial and operational requirements of the ship owner; and
  • the BSMA’s expert surveyors are available 24/7 to assist with port state control matters to avoid delay.

2 What are the prevailing shipping market trends affecting your country? What has been the impact of the covid-19 pandemic?

The maritime industry as a whole was affected in different ways by the covid-19 pandemic. Some of those companies whose services were required to transport goods around the world found themselves busier than ever. Others, like the cruise ship companies, have seen their businesses decimated as the tourism industry collapsed and cruises were cancelled en masse, only recently starting to show any signs of recovery, and even then on a carefully controlled basis.

In Bermuda, we have many listed shipping companies, mostly of Norwegian origin, and, on the whole, they seem to have weathered the past year in reasonable shape. Those with cash reserves have held onto the funds, and those who are less well financed have sought to go to the banks to extend credit terms or the capital markets to raise funds to bolster their reserves to help to protect against what may be an extended economic downturn. There has been some M&A activity as the strong have eyed up a bargain and looked to pick off the weak. Unfortunately, one or two have slipped into insolvency, unable to negotiate a rescue deal or hold out for long enough for the anticipated recovery to take hold.

Cruise ships, of which a number are registered in Bermuda, suffered greatly due to the pandemic, with many rushing to the financiers to renegotiate financial arrangements and seek debt holidays to enable them to survive the year and look towards a return to their normal schedule as soon as possible.

With liquidity issues caused by a global pandemic, rather than any failure to operate the business in an appropriate manner, most financial institutions are proving to be amenable to reasonable requests for refinancing, extensions and holidays, and we are likely to see a continuity of this type of work for a while longer yet.

Without question, in the years preceding the global pandemic, the shipping market in Bermuda was characterised by the number of new listings of Bermuda-incorporated shipping and shipping-related companies on the Norway Over-the-Counter market and on Oslo Axess or the Oslo Stock Exchange.

The pathway from Hamilton, Bermuda to Oslo, Norway’s capital and financial hub, is a well-trodden one, as evidenced by no less than a dozen new listings in the past five years, and it is good to see we have a new client right now looking to take this route in the near future.

Investors are comfortable with Bermuda because it offers a tax-neutral, business-friendly environment with a strong regulatory framework that protects investor and creditor rights. Bermuda companies are proven vehicles for accessing high quality capital efficiently. A newly incorporated Bermuda shipping company looking for capital turns to Norway as an obvious source to raise funds quickly. Undergoing private placement transactions while at the same time agreeing to list the shares on the N-OTC market is a fast-track way to access fresh capital. Bermuda shipping companies commonly use the N-OTC as a stepping-stone to a full listing on Oslo Axess or the Oslo Stock Exchange.

Over the years, strong working relationships have been forged with Norwegian law firms and financial institutions, which helps to ensure a smooth pathway to accessing capital in Oslo. Also, we have a wealth of experience with New York initial public offerings should a NYSE or Nasdaq listing beckon. There are a number of Bermuda shipping and shipping related companies that maintain New York listings and there is a renewed hope that we will see more doing so, as the global economy bounces back.

3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?

This year, Bermuda saw the first filings of economic substance declarations. Shipping is one of the ‘relevant activities’ within the scope of the economic substance requirements. Accordingly, entities that carry out the relevant activity of shipping must file an economic substance declaration annually, with information provided in relation to the previous financial year, no later than six months after the last day of each relevant financial period. The declaration must demonstrate compliance with the economic substance requirements These filings are required is in response to legislation enacted in Bermuda to address concerns of the European Union that the jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity in the jurisdiction.

The Bermuda Registrar of Companies (the Bermuda Registrar) has revised the guidance notes comprising general principles confirming that relevant activities are being carried on as a business whether or not the entity earns any gross revenue in respect of such activity during the relevant financial period. However, an entity that earns no gross revenue in respect of such activity in any relevant financial period will not be required to satisfy the economic substance requirements in respect of that activity for that relevant financial period.

The assessments by the Bermuda Registrar of the economic substance declarations are ongoing. It is anticipated that as the assessments are completed and the results are made known, this will yield a clearer understanding to shipping entities of the key metrics applied by the Registrar to determine the adequacy of their on-Island presence and, accordingly, their compliance with the economic substance requirements.

We are keeping a careful eye on the accord supporting the outlines of a new global tax system, and a commitment to a minimum corporate tax rate of 15 per cent. issued by the finance ministers of the Group of Seven countries (G7). The G7 accord complements the work around coordinating tax negotiations that has been done for years by the Organization for Economic Cooperation and Development (OECD) in regard to curbing tax base erosion, for example, and including a global corporate minimum tax. Additional details are needed before the extent of any impact on Bermuda can be assessed. However, in response to the announcement of the G7 accord, the Bermuda government has stated that any agreed framework to establish a global minimum tax must respect a country’s right to sovereignty in relation to its tax system and any outcome that impacts this right is outside the original agreed aims of the OECD Inclusive Framework Committee on Base Erosion and Profit Shifting (BEPS) initiative.

Bermuda will continue to watch developments closely while maintaining its standards for strong regulation, transparency and international cooperation.

4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?

We are seeing the Poseidon Principles being regularly referenced in ship financing documentation. The aim of this global framework, agreed to, and published by, twelve leading banks who jointly represent approximately 20 per cent of the global ship finance portfolio, is to improve the role of maritime finance in addressing global environmental issues. Signatories to the Poseidon Principles are some of the leading maritime financial institutions that have agreed to annually report the overall climate alignment of their respective shipping portfolios and supporting information each year. ‘Climate alignment’, according to the Poseidon Principles, is the degree to which a vessel’s (or portfolio’s) carbon intensity is in line with the International Maritime Organization (IMO)’s decarbonisation trajectory for the respective ship type and size class.

The Poseidon Principles are incorporated into credit agreements through a covenant whereby owners agree to provide lenders with any information they require to comply with the Poseidon Principles. The Poseidon Principles provision has made its way into loan agreements as a result of maritime lending institutions taking on a larger role in developing solutions for the global environmental issues identified by the IMO.

In practical terms, the provision regarding Poseidon Principles is not particularly burdensome for borrowers, who are generally required through other provisions in their loan agreements to report information regarding vessel operations, IMO compliance and emissions as lenders may reasonably require, but it signals a commitment on all parties to shape a more environmentally responsible shipping industry.

In a similar vein, more than a decade in the making, the IMO 2020 rule mandating lower sulphur emissions from the shipping industry came into effect on 1 January 2020. The new regulations have been the subject of much concern and predictions of vast disruptions and impacts to shippers, customers and producers of diesel fuel since they were first proposed by a United Nations subcommittee, and were subsequently adopted in 2016 by the IMO. Despite those predictions, however, the final implementation of the new rules has resulted in few real disruptions, as extensive planning and preparation has ended up ensuring proper performance in the marketplace.

While most shippers seem to have chosen to use the lower-sulphur fuel option, rather than to instal scrubbers on their vessels, the availability of multiple options for the regulated community to achieve compliance has proven to be helpful in avoiding disruptions in the marketplace.

IMO 2020 deals with the reduction of sulphur only, and that further rule changes governing carbon emissions are under consideration, with changes coming to mandate carbon reductions, and that is the next wave of what we will see influencing the cleanliness of marine fuel.

On the ship finance side of things, the discontinuance of LIBOR at the end of 2021 is now receiving much attention, both from industry participants and the regulators. Shipping being a capital-intensive industry and heavily dependent on LIBOR-based bank debt, LIBOR’s impending sunset will have a major impact. This change will have broad implications, affecting loan agreements, bond agreements, leasing arrangements, derivative products and many more existing transactions.

While the benchmark providers seek to develop a methodology that can be accepted by the market for a forward-looking rate, anybody currently using LIBOR should be preparing for the change. Investors, banks and companies active in the shipping sector are starting to examine their books for transactions using LIBOR that run past 31 December 2021. Many of these deals will have been documented before the replacement of LIBOR was contemplated. Taking loan agreements as an example, if the parties cannot agree to an amendment to a loan agreement to allow for a revised mechanism for rate setting, the market disruption provisions will usually apply. This clause often provides that an interpolated LIBOR is used that, if not available, is replaced by reference bank rates or a bank’s cost of funds. Many banks are now reluctant to act as reference banks and have a strong preference not to reveal their cost of funds. This leaves room for negotiation for borrowers as the clock ticks down to 31 December 2021. Given some of the challenges facing the shipping industry over the last few years, a number of hedge funds have taken positions in loan agreements and also are examining their position and voting power in individual loan agreements to assess their ability to play their position to their advantage.

The loan market will require some more paperwork. We anticipate that amendment agreements for each loan agreement will need to be entered into, with consents potentially required from borrowers, guarantors, export credit agencies, risk insurers and, in some cases, charterers. This will all take time.

As the race continues to find a rate to replace LIBOR that can be adopted by the market, both borrowers and lenders alike are will need to review their loan documentation carefully and keep up to date with the latest market developments in this area, getting ready for the upcoming negotiation, consent and amendment exercise. Given the enormity of the change that affects all elements of their business, shipping company owners will do well to know their voting power, consent rights and potential fallback position, to be prepared.

5 What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?

Historically, particularly with regard to the Europe-based shipping companies, the traditional source of finance was their local banks. While some of those banks are still operating in the shipping space, many of those that remain are doing so in much smaller volume and with increased restrictions and harsher covenants. Others have pulled out entirely, deeming the shipping sector too volatile for their tastes.

What we are seeing coming in to replace them is a blend of various sources of finance. Private equity is prepared to invest on the right terms, even entering into joint ventures for certain projects. Chinese leasing companies are visible in entering into sale and leaseback transactions and those who have gone public have increased their access to fund raising on the capital markets. Others have looked to borrow from non-traditional banking institutions keen to enter the market or expand their customer base into new jurisdictions.

It is thought that any nascent recovery of the global economy may turn out to be volatile and fragile and that, in this recovery period, many banks will be solely focused on their own loan-related issues. Loan requests are expected to increase as the global economy, international trade and the dry bulk market start to recover. It is hoped that equity market investors start to return, as both the economy and the shipping sector bounce back, although the capital markets are bound to reflect the global uncertainty of the post covid-19 world for a while longer yet. As a result, we are likely to see even more creative financing solutions, as the need for new finance outstrips the availability from the usual quarters.

6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?

We cannot recall any one specific judgment delivered recently that has made a significant impact on Bermuda’s shipping market. Most of the shipping documentation involving Bermuda incorporated shipping companies that may be challenged in the courts tends to grant jurisdiction over disputes to the English courts, or sometimes courts in New York or Oslo.

7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?

We have seen fewer shipping companies going public of late, and this is predicted to continue as any economic recovery remains tentative and uncertain for now. More refinancing and restructuring transactions are likely to be on the horizon, as some ship owners struggle to meet the repayment demands of loans entered into before the pandemic when their businesses were in a much better shape. We may even see further recourse to Chapter 11 proceedings, in the hope of using it to agree a negotiated restructuring once all other options have been explored. Some consolidation in the market cannot be ruled out, as those companies that are undervalued in a weak market may find predators keen to swoop.

More diverse and creative forms of ship finance will be used to replace the traditional ship finance banks, while ethical and ‘green’ financing is here to stay. The IMO will, no doubt, continue on its path towards demanding cleaner marine fuel and the digital transformation of the shipping industry, including the use of blockchain platforms for sale and purchase of good and logistics and automated crewless ships controlled from an onshore command centre, gathers pace.

Here in Bermuda, with the first deadline for the economic substance submissions, it will be interesting to see which of the shipping companies seek to bolster their on-Island presence to ensure compliance going forward.

The Inside Track

What are the particular skills that clients are looking for in an effective shipping lawyer?

Given our role as offshore counsel, we must be responsive to the demands of the onshore law firm through which the ultimate client instructs us. A stand-out Bermuda lawyer must have a solid grounding in shipping-related capital markets and bank finance and must be extremely responsive, cognitively dextrous, forward-thinking, capable of advising on local law requirements at short notice and, importantly, flexible, given the time differences that are inherent in our firm’s international shipping finance practice and the critical importance of market timing to our clients.

What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?

As Bermuda is a country of ship registration and domicile to many Bermuda-incorporated parent holding companies of shipping groups, ship financing for Bermuda lawyers usually comprises assisting onshore counsel with implementing the chosen method of finance for a shipping transaction. Most, if not all, of the key considerations would originate in the jurisdiction of the lenders, which, in our experience, has most often been that of the major Nordic banks that traditionally extend financing to the shipping industry.

Mortgages, transfers and discharges of registered mortgages, can be made in prescribed form for registration. Mortgages rank in priority according to the date and time at which they are produced and accepted for registration and not according to the date of the mortgage deeds themselves.

What are the most interesting and challenging cases you have dealt with in the past year?

Due to the pandemic, the majority of our shipping work in the past year has been on the financing side. As predicted, the need for new finance outstripped the availability from the usual traditional sources and we acted for quite a number of alternative lenders, such as hedge funds, to a Bermuda shipping group. Refinancing and restructuring transactions also materialised as anticipated, as some ship owners struggled to meet the repayment demands of loans. The extreme time sensitivity made closing that transaction successfully, and on time, particularly challenging.

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