Shipping finance
Also known as: Ship mortgage, Maritime finance
A mortgage on a moving asset, repaid from freight rates nobody can forecast. The most cyclical lending on this desk.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
Ships are expensive, and the companies that own them are usually small. So almost every vessel is bought with a loan secured on the ship itself, in a company that owns nothing else.
The lender takes a mortgage over the vessel and also takes the right to the money it earns and to the insurance if it sinks. That is a strong package on paper.
The difficulty is what the ship earns. Freight rates — what somebody pays to move cargo — move by multiples, not by percentages, and nobody forecasts them successfully. The same vessel can be highly profitable one year and lose money the next, with no change in the ship or the crew.
And because rates move, the vessel's value moves with them. Which brings in the clause that decides most outcomes here: if the ship's market value falls below a set multiple of the loan, the owner must put up cash or repay part of it. That demand arrives precisely when the market has taken the owner's cash away.
- 1
Order or purchase6–36 mths
A new vessel is ordered at a yard, or an existing one is bought, usually near the top of a cycle.
- 2
Financing2–5 mths
A mortgage over the vessel, plus assignments of the charter, the insurances and the earnings.
- 3
Employment1–15 yrs
The vessel earns on a long charter or in the spot market, and the difference between those is the whole credit.
- 4
Value covenant testedquarterly
If the vessel's market value falls below a multiple of the loan, the owner must post cash or prepay.
- 5
Sale or scrappingmths
The vessel is sold, or sold for scrap, and the residual value is what the lender was really lending against.
Is there a charter — The charterer decides. A long charter to a strong counterparty turns a commodity asset into predictable cash flow, and its absence turns it back.
The value covenant — The valuers, quarterly decides. This is the clause that bites in a downturn, and it bites hardest exactly when the owner has least cash.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The owner | Sell side | Frequently a single-vessel company with no other assets, which is deliberate. |
| The mortgagee bank | Buy side | Holds a mortgage over the vessel plus assignments of the charter, the earnings and the insurances. |
| The charterer | Neither | Employs the vessel, and a long charter to a strong name is most of the credit. |
| The classification society | Neither | Certifies that the vessel meets standards, without which it cannot trade or be insured. |
| The valuers | Neither | Produce the quarterly market value that the loan covenant is tested against. |
- Desk
- Structured & Asset Finance
- Borrower
- Usually a company owning one vessel and nothing else
- Security
- A mortgage plus assignments of charter, earnings and insurances
- The clause that bites
- A quarterly test of the vessel's market value
- Cycle
- Violent, and driven by orders placed years earlier
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricedecides it
- Financingdecides it
- Approvalbarely applies
- Diligencematters
- Executionmatters
What decides it here. Freight rates move by multiples and nobody forecasts them, so the vessel's value moves with them. The clause that decides outcomes is the quarterly value covenant, which requires the owner to find cash at exactly the moment the market has taken it away.
3 · IntermediateHow it runs in practice
Where the cycle comes from
High rates make owners profitable, so they order new ships. Yards take two or three years to build them. The ships arrive together, usually into a market that has already turned, and rates collapse. Owners stop ordering, the fleet ages, capacity tightens, and rates rise again.
The lag is the mechanism. Supply is decided years before it arrives, by people looking at today's rates. It is one of the cleanest examples in finance of a cycle generated by a delay rather than by sentiment.
Chartered or spot
- On a long charter to a strong counterparty, the vessel produces contracted cash flow and the credit is largely the charterer's. Leverage can be higher.
- Trading spot, the vessel earns whatever the market pays that week. The lender is taking full exposure to the cycle, and lends less.
That single distinction changes the loan more than anything about the ship.
The security package
- A mortgage over the vessel, registered in its flag state.
- An assignment of the charter and of the earnings, so revenue is captured directly.
- An assignment of the insurances, including against total loss and against liability.
- A pledge over the shares of the owning company, which is often the fastest route to enforcement.
Why the flag matters
A vessel is registered somewhere, and that country's law governs the mortgage and the enforcement. Registries differ in how quickly a mortgagee can arrest and sell a ship, and lenders price that difference. It is the same principle as the aircraft conventions: the legal regime shows up in the price of the money.
4 · AdvancedThe numbers & the documents
The value covenant, in detail
Typically the vessel's market value, from independent valuers, must exceed a stated multiple of the outstanding loan — tested quarterly. If it does not, the owner must post cash collateral or prepay enough to restore the ratio.
The consequence is procyclical by construction. Values fall with rates; the test is breached; the owner must find money at the point in the cycle when it is earning least. Lenders frequently waive rather than enforce, because enforcing means selling a ship into the same weak market — but the waiver comes with a price, and it is the moment the relationship changes.
Arrest, which makes this jurisdiction unusual
Maritime law allows a creditor to arrest a vessel in port — to have it detained until a claim is dealt with. It is a genuinely powerful remedy and it belongs to more people than the mortgagee: unpaid crew, bunker suppliers, salvors and repairers can all have claims that in some jurisdictions rank ahead of a registered mortgage.
A lender that has not looked at what maritime liens can outrank it has not finished its analysis, and this is one of the few places in finance where an unpaid supplier can genuinely stand in front of a secured bank.
Scrap value as the floor
Every vessel has a steel value, and it is a real floor that other asset classes do not have. In severe downturns that floor is what the loan is actually secured on, and it is why advance rates against older vessels are calculated with a scrapping scenario in view rather than as an afterthought.
Where it connects
The rates that decide everything here are a commodities phenomenon — they follow trade in oil, ore and grain. And the same structural logic, applied to a different movable asset, is aircraft finance: better standardisation, easier repossession, and the same correlation between borrower distress and collateral value.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Shipping finance in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyAircraft financeDealA loan against one machine with a serial number, a lease attached and a resale market