Bailrigg Leasing – Benefits of an SPV Lease Company:
The use of an SPV Leaseco through which to channel asset finance is a well-established process – particularly in aircraft leasing but increasingly for shipping.
The essence of the approach is to give lenders to vessels an enhanced security profile with consistent returns. Because the SPV Leaseco will assume the position of Owner, the vessel will no longer sit in the estate of the shipping company. This is an important distinction because to gives lenders, acting through the SPV Leaseco, the ability to repossess collateral assets directly and immediately on emergence of a default. It means lenders can liquidate their collateral as they see fit, without restriction.
In a traditional situation, where a vessel is owned by the shipping company but subject to a mortgage, lenders will face an arduous and possibly aggravated recovery process as competing creditors haggle over how a vessel collateral should be liquidated, at what price. Local law at the point of recovery, may represent further complications involving time and cost, further diluting the real value of the asset collateral.
By directing funding through an SPV Leaseco, lenders have the remedy rights of an Owner, meaning prompt repossession and sale without reference to any third party. The nature of the security package granted to a lender by an SPV Leaseco provides lenders with effective control over the that entity. The pledge over the shares in the SPV Leaseco means that, in the event of a defaulted lease or charter, lenders can easily take control over the Owner in order to take direct charge over mitigation activity (in most cases the SPV Leaseco will simply take the lenders’ instructions in this event, but the share pledge provide unequivocal control).
Furthermore, the presence of the first mortgage security in favour of the lenders ensures that the SPV Leaseco cannot dispose of a vessel without reference to the lenders.
Of course, each SPV Leaseco has no other trade than that represented by the leasing or chartering of a relevant vessel. In this manner the SPV Leaseco is also “bankruptcy-remote”, which cannot be said of shipping companies, whose business activities are diverse, dynamic and ever-changing. This is also why situating the SPV Leaseco in the Isle of Man is a positive factor for lenders; since there is a zero corporation tax rate, this strengthens the bankruptcy-remote status.
The use of the SPV Leaseco is a well-established and trusted way to provide lenders with the security benefits of Owners in a completely ring-fenced environment.