IMO 2020 is now in force and the Poseidon Principles, a banking code aimed at integrating climate considerations into lending decisions, have been widely adopted by many of the major ship finance banks. Amy Lindemann explores the implications for the evolution of loan and finance lease documentation in shipping, as well as for commercial elements of deals.

The Loan Market Association, now accepted as the basis for most syndicated ship finance transactions, published its Green Loan booklet last year. It would probably be a stretch for many ship finance loans to fall within the eligible categories of ‘Green Projects’ set out in the Green Loan Principles.

Nevertheless, the industry is drawing on the trend within the wider market to incorporate margin ratchet mechanisms where, with the support of an expert opinion, the loan can be designated a ‘green’ loan facility in accordance with the internal sustainability policies and principles of the relevant lender (or agent bank on behalf of the lenders, as the case may be in the syndicated loan market). This would require the ship operator to take on additional information undertakings to provide the appointed expert with sufficient data to make a determination and deliver the relevant opinion. The upside for the borrower is a margin reduction of in the region of 5 basis points.

Loan market commonplaces

The LMA published its first guidance note on EU and US sanctions in 2014. Provisions in relation to sanctions and use of proceeds are now commonplace and almost boiler plate in ship finance loan documentation. In the same way ‘green’ clauses of this nature are likely to be part of the fabric of ship finance documents going forward.

These may take the form of a general undertaking to supply all information necessary to enable the Lenders to show compliance with the Poseidon Principles. This often includes providing a Carbon Intensity and Climate Alignment Certificate which sets out the average efficiency ratio for all voyages performed by a vessel over a calendar year. That efficiency ratio must be determined in accordance with the relevant IMO Regulation[1] and the certificate must also show ‘climate alignment’ of the Ship for during the past year calculated in accordance with the Poseidon Principles.

Climate obligations

‘Climate alignment’ is a buzz phrase that in this context refers to measuring a lender’s ship finance portfolio against the level of greenhouse gas emissions. Even those institutions not yet formally signing up to the Principles are, as a matter of policy, including provisions in their finance documents aimed at mandatory compliance with the IMO regulations vis à vis fuel sulphur content or shoring up an institutions’ green credentials, or both. At the least, a bank might insist on the more specific obligation to deliver, annually, the fuel oil consumption report as prescribed in the IMO Regulation, including if required by the relevant flag state, the calculated annual average fuel consumption and CO₂ emissions per transport work  on a “per vessel” basis.

French bank Credit Industriel et Commercial (CIC) and Export Credit Norway, Norwegian Export Credit Agency are the latest lenders to the shipping industry reported as having signed up to the new banking code. Not as large as GIEK, ECN still has a lending balance allocated to the shipping industry of just over $4.5bn. CIC, while not the largest of ship finance lenders, was reported at the end of 2018 to have an estimated $2.3bn exposure to shipping, having completed 16 vessel and container financing transactions during that year.

This news came shortly after the announcement that the world’s largest lender to the shipping industry, BNP Paribas, had committed to the code. This still leaves some notable exceptions from the list of signatories to the Principles. However, other financiers, at least outside of Asia, cannot be far behind.

Under the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships 2009 and the EU Ship Recycling Regulation 2013, ships larger than 500 tonnes are required to maintain an inventory of hazardous materials used in the construction of the Ship, and such regulations set out guidelines for the dismantling and recycling of ships in a safe and socially and environmentally responsible manner. Since that Hong Kong Convention has yet to come into force due to lack of adoption by sufficient nations with the requisite tonnage, and given the obvious limited applicability of EU regulations, undertakings to comply with these requirements, notwithstanding their legal status, appear with increasing frequency in loan agreements and finance leases.

The architects of the Poseidon Principles banking code, when discussing in a public forum have been keen to stress the collaborative intention behind the initiative. Far from aiming to place ever more onerous covenants on borrowers or insert easily triggered events of default for non-compliance, representatives of the founding signatories say the Principles seek to share the responsibility for reducing shipping’s greenhouse gas emissions across all industry stakeholders.