1. An overview of Sale & Leaseback Martin Green November 2010 Law firm of the year

2. Sale & Leaseback  Bank View –Lending to a thinly-capitalised SPV –All operational control is handled by someone other than the Owner, ie the Bank has to “look through” the Owner to a creditworthy operator –The mortgage covenants-  Operation  Repair  Maintenance  insurance –are not in practice in the control of the Owner –Consequently the Bank looks for:

3. Sale & Leaseback Bank Owner Charterer Loan Charter Sale Simple Sale and Leaseback Structure Diagram

4. Sale & Leaseback Back to back obligations from Charter to Loan, with little gap:  Charter hire to meet loan obligations, including floating interest rate  “Hell and high water” hire provisions  Obligation to take delivery when the MOA delivery occurs  Indemnities directly from the Charterer  Subordination of Charterer’s interests to Mortgagee (which the Charterer will want to be conditional upon its breach of the Charter, ie “quiet enjoyment”)  Assignment of the Charterer’s interests in the insurances –This might be “up the chain”  Perhaps a “step-in right”  Agreement of the Charterer to perform mortgage covenants (Clause 12 of the barecon form, probably supplemented by the additional clauses)

5. Sale & Leaseback  A “termination value” mechanism whereby on Charter termination a capital sum is payable that will step down so as to track the loan principal outstanding  Generally any obligation of the Owner to make a payment under the Loan Agreement to be matched by a Charterer obligation, eg:  Value maintenance clause  Indemnities (if not taken directly as mentioned above)  Break costs  Prepayment obligations  If the transaction covers construction, pre-delivery hire to cover pre-delivery interest  Obligation to keep paying hire following Total Loss until insurances received

6. Sale & Leaseback –The Banks will look for termination events in the Charter to track the Events of Default in the Loan Agreement –The Banks may seek financial covenants from the Charterer, or if the Charterer itself is not the main company in its group, a Charter Guarantee from its holding company, to be given to the Owner and assigned to the Security Trustee –Subordination of the Managers (note that “subordination” is a potentially wide terms and it should be established exactly what this means) –Clearly how tightly the Owner/Charterer obligations match can be a function of whether or not the Owner is or is not part of the same group as the Charterer, or unconnected, eg the Owner is private equity/fund –The Banks may or may not look beyond the Owner, to any sub-charters, and if this is the case, it complicates the drafting considerably

7. Sale & Leaseback  Owner view –We assume that the Owner is not connected to the Charterer –The Owner shares the desire of the Banks to ensure  Back to back obligations generally so that it cannot be in a position where it has to make a Loan payment that is not matched by a Charter payment  Minimisation of the circumstances in which a Loan Event of Default can occur which is not caused by a Charter Termination Event  That Charterer’s obligations include the obligation to observe mortgage covenants The above may be mitigated to an extent if Charterer insists on quiet enjoyment

8. Sale & Leaseback –The Owner wishes to ensure that if a Charter Termination Event does occur, not caused by Owner default  The right to cure/restructure before the Loan is defaulted  Perhaps the right to replace the Charterer  Perhaps the right to find a buyer  Perhaps a put option to the Charterer to trigger the capital sum payable (to match the Loan outstanding) –The Owner tries generally to minimise the covenants it gives as to Charterer behaviour/finances as well as the representations it gives as to facts and circumstances relating to the Charterer –In addition to a Charter Termination Event triggering a payment to match the Loan outstanding the Owner may seek to protect its anticipated return by building in an appropriate level of return protection in the number

9. Sale & Leaseback –If, as is common, there is a Seller Credit (sometimes called a Charterer Deposit) the Owner:  Needs clear commercial agreement upon when it is repayable  Looks carefully at how the Seller Credit is treated following a Charterer Termination Event  Wishes it to rank behind the Owner (and its shareholders) following a Charterer Termination Event  May want a waterfall arrangement to order the priorities  May want an independent right to set off against Seller Credit anything owed by Charterer as well as the independent right to seek payment from the Charterer  These concepts may include “flawed asset” provisions

10. Sale & Leaseback –The Owner will want to consider hedging exposures such as currency and particularly interest and to make sure that breakage costs are covered by the Charterer –Charterer view –The Charterer is expected to take all responsibility (and risk) for the design, condition, performance, operation and use of the Vessel –The Charterer should expect a detailed term sheet dealing with allocation of risk and responsibility – it is not unusual for deals to take a long time to complete in part because the term sheet does not deal with important details –The Charterer would want the reach of the Bank finance documents to stop with it (and its Guarantor, if relevant), and not reach down into further chartering/employment levels. –The Charterer wants to ensure that the Seller Credit is protected:

11. Sale & Leaseback  May seek to take a second mortgage/assignment of insurances to protect that credit  Will want to ensure that the Seller Credit is repayable in all circumstances when, commercially, it should be  If return protection is agreed will want to use that as a basis of liquidated damages, ie not be liable for damages for breach of Charter on top and to have the asset value upside on any termination (however caused) –The Charterer will want a purchase option at step down values that reflect the value of hire paid –The Charterer will need to look carefully at any restrictions on employment of the Vessel to ensure it fits operational requirements (eg prohibition on sub-bareboats) –The Charterer will want quiet enjoyment from the Banks  As long as it performs the Charter (this is not just payment), it will not be disturbed in its quiet possession and enjoyment – ie no Bank enforcement

12. Sale & Leasback  It will have to consider a request for step in rights from the Banks, including any commercially necessary restrictions on who is the new owners/its shareholders  It will want the Charter to restrict the number of times the Banks can inspect/survey and for this not to disturb commercial operations –The Charterer will wish to consider what back-to-back obligations are appropriate:  Value maintenance – this is not always appropriate or agreed by a Charterer – the gap could be dealt with by a suspension of dividends by the Owner to build up cash cover  It should only gross up if its hire payments become subject to withholding, not triggered by withholding on Owner payments  It may not be appropriate for the Charterer to be liable for

13. Sale & Leaseback –Break costs, unless its default under the Charter leads to a prepayment on a day other than a Charterhire payment date –Prepayment fees (the Charterer does not control how well the Owner negotiates this) –Swap termination exposures, it being the Owner’s choice whether and at what cost to fix its interest exposure –The Charterer will wish to understand in detail how any manager subordination works, whether the manager is connected or third party  some subordination undertakings mean that the Manager cannot even be paid fees and expenses during the Loan period, which is uncommercial  only a continuing Charter Termination Event should trigger subordination, not a Loan Event of Default

14. Sale & Leaseback  consider whether a higher level of default is needed, eg actual Charter termination, not just an event entitling it, as where there is a manager unless the Charter is terminated management is still necessary  Consider how it affects Manager’s expenses, as opposed to fees –The Charterer will want to look carefully at the hell and high water language:  although somewhat standard it can suffer from “bloat” and cover more than it should  in some cases it can be so broad as, arguably, to indemnify the Owner for the purchase option price being lower than market  in other cases as drafted it could arguably constitute a loan guarantee –It is worth considering the performance of mortgage covenants carefully  Not all mortgage covenants are performable by the Charterer – eg registration and maintenance of title  Avoid undertaking to “ensure” or “procure” that the Owner performs relevant mortgage covenants, and say instead that the Charterer will not, by act or omission, put the Owner in breach  Some covenants, eg information, the Charterer can provide the Owner with the information but not ensure that the Owner passes it on, etc  It is not unknown that the Charter is painstakingly drafted and negotiated, then the mortgage covenants override carefully negotiated charter provisions. Barecon and standard mortgages are different precedents, so consider and agree up front whether the mortgage will conform to the charter or vice versa