Banks Insurance

Mortagees interest insurance

Banks or other financial institution´s interests against loss if primary policy fails due to breach of warranty but excluding non- payment of premium thus protecting the Mortgagee in the event that a claim normally recoverable under the Marine Policies is declined by underwriters due to a Breach of Warranty or Deliberate Act.

Mortagees interest - additional perils

As above but in respect of Pollution.

Ship mortgage indemnity (SMI)

This type of Insurance solution indemnifies a bank against financial loss, in the event of the failure of a borrower to repay a loan and the subsequent inability of the bank to recover their debt following sale of the property.

Shipping banks are generally comfortable lending around 60-70 percent of the value of a vessel, leaving the ship owner to find the shortfall by way of equity, secondary debt, mezzanine financing, or by any other means.

The aim of this solution is to increase the lender´s comfortlevel to also include seconday debt, mezzanine financing etc. Generally some portion of equity is required, and a generally accepted trance guaranteed by SMI is 15-20 percent over the banks otherwise normal comfortlevel.

SMI is underwritten on a case by case basis with each transaction being assessed on it’s own merits. Underwriters contractual relationship is with the bank, not the shipowner, and in order to offer terms, underwriters will require total transparency of the transaction and full information. Typically, this will mean being copied-in on the bank’s submission to their credit committee.

Cost

As each transaction is underwritten on it’s own merits and underwriters’ assessment of risk differ, the cost of premiums will vary. As a guideline, underwriters will be looking to price the premium at a level that is cheaper than alternative financing, but more expensive than the bank’s senior tranche.

On very large transactions and historically the premium has been calculated at 25bps over the bank’s own margin, applied to the amortising indemnity limit, multiplied by the number of years the SMI is in force. We would suggest that given the market, and for this particular transaction a budget should be kept for 50-100 bps over the bank´s own margin.

Assuming a 7 year SMI and a 125bps bank margin, the premium would be calculated at 1.75(-2,25)percent x 7 applied to the amortised indemnity limit (20percent x USD 21 million = 4,2 million USD). This will mean an approximate budgetary figure of USD 600,000 +/- USD 100,000.

The net present value of the payment of 7 years premium up front is taken into account in this calculation. The premium is paid in full on first drawdown of the loan, and the premium is fully earned in the event of the refinancing with alternative lenders, or loss or sale of the vessel.

Process

Initial Non-binding indication Before taking a transaction to market we can provide an initial indication on an assessment of your business plan or Executive summary. Please complete the enclosed proposal form. On receipt of this we would be able to identify the likeliness of being able to find underwriting market for the proposal. If so, using our knowledge of the market, we would be able to provide a non-binding indication of the terms that we would expect underwriters to require. At this point we would not have approached any underwriters. Should this indication fall within the bank’s expected parameters, we would expect to receive instructions from the bank to proceed further.

Residual value insurance (RVI)

To guarantee a future value of an insured object. Residual Value Insurance covers the net proceeds of sale of the insured object at a date set in the future (the Residual Value Date.) The payment will be equal to the difference
between
(i) net proceeds received by assured (or its assignee) with respect to the sale of the object and
(ii) the Residual Level (the agreed level).

This type of insurance can be used to secure a future value of a ship at a level which e.g. corresponds to the outstanding loan amount at maturity of a loan.

Mortgage rights (MRI)

The possibility to get financing of marine projects in certain countries has been limited by the difficulty to find sufficient guarantees and liens that are possible to realise for individual and corporate investors outside of such countires. In connection with financing of ships that need to be domiciled in such a country there is a cover available which will protect an investor.
MRI insurance will give the assured full indemnity in case the ship is arrested, confiscated or otherwise detained at least 90 days on political grounds. The indemnity is fixed when the cover is taken out and corresponds to the amount the assured has at risk in the ship or marine intererst (container, cargo carrier, barge etc.)

This is normally quite a complicated placement and Underwriters will require full transparancy of the project to evaluate the risk.

Contract frustration

(sometimes called non-honouring of guarantee insurance) protects against losses arising from the host government´s breach or repudiation of a contract with the investor. In the event of an alleged breach or repudiation, the investor must be able to invoke a dispute resolution mechanism (e.g., an arbitration) in the underlying contract and obtain an award for damages.

If, after a specified period of time, the investor has not received payment or if the dispute resolution mechanism fails to function because of actions taken by the host government, the insurer will pay compensation and may make a provisional payment pending the outcome of the dispute resolution mechanism.

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