Industry response to the 2020 global sulphur cap is still developing and reveals approaches which are diverse. There are challenges around the financing of retrofitted scrubbers on an asset finance basis. These are not insuperable but there does not currently appear to be a ‘one size fits all’ financing solution which is quick and easy.
Namely, under article 5 of Annex VI of the MARPOL Convention each ship must have an International Air Pollution Prevention Certificate according to the ship’s flag state.
The certificate has a section confirming that the ship burns fuel oil whose sulphur content is within the cap as proved by bunker delivery notes (“BDN”) or has installed an alternative fitting, material, appliance or apparatus which is approved and which has an equivalent effect to that of using a low sulphur fuel oil.
Moreover, for the time being shipowners have three options:
- bunker using low sulphur fuel oil;
- retrofit the ships with exhaust gas cleaning systems (scrubbers);
- retrofit the ships with power units which will use LNG or LPG as fuel.
The compliance verification of each ship will be made by the port state control of each coastal state. Yet, IMO has to decide on the penalties or fixed fines for the vessels who won’t be compliant. It is IMO’s priority to ensure the effective implementation of the 2020 sulphur cap.
Concerning the ‘payment’ of scrubbers there are two possible cases. Firstly, depending on the terms of the charters, owners may not worry and require charterers to use and pay for low sulphur fuel oil.
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Secondly, the impetus to fit scrubbers might come from charterers offering to bear the up-front cost of fitting scrubbers and recovering the outlay from an agreed reduction of hire.
What’s more, the more common external financing option is sellers’ credit and debt financing (either at a corporate level or with the vessel owning SPV) which could be backed by an ECA.
The major problem relating to any type of scrubber financing is the type of security that the creditor will get. A scrubber is likely to become an integral part of the ship. If the ship is mortgaged, the rights and remedies of a scrubber financier will need to be addressed by agreement with the ship mortgagee.
This kind of arrangements with a mortgagee of the ship can be complicated to agree.
Furthermore, even if there is an agreement with the mortgagee of the vessel, when removing a scrubber and realising any substantial recovery from the sale of a second-hand scrubber make financing of scrubbers on an asset-only basis unattractive.
Finally, it is common for owners and potential financiers of scrubbers to focus on the identification of the source of repayment of the scrubber financing.
