Shipping Finance REVIEW 2011/12

Transcription

1 eur6114 sfa FC 2011 aw:eur4699 sfa cover 08/06/ :37 page 1 Shipping Finance REVIEW 2011/12

2 K-Sure: A new direction in the Korean ECA ship financing By Soo Man Park, Hi Sun Yoon, Young Min Kim and Sang Jin Ahn, Kim & Chang In the current ship finance market conditions where lenders are more stringent in financing and buyers are more keen to reduce their financing costs, increasingly buyers of ships built by Korean shipyards and their lenders look to the Korea Trade Insurance Corporation (K-Sure) to support their ship financing transactions. K-Sure provides the lenders with credit enhancement insurance at a reasonable price, so that the lenders can provide ship financing more readily and the borrowers can reduce their total cost for the financing. An insurance issued by K-Sure serves a function that is similar to a guarantee. The presence of K-Sure in the ship finance market has grown considerably larger because of their proactive approach during the financial market crisis and the recession that followed. In 2009, the underwriting volume of K-Sure hit a record high at W165 trillion, covering 32% of Korea s total exports. 1 In 2010, K-Sure had underwritten trade insurances covering over W187 trillion. K-Sure is a legal entity, established and operating pursuant to the Trade Insurance Act of Korea in K-Sure runs its trade insurance business through management of the Trade Insurance Fund, which is established, owned and ultimately controlled by the Korean Government. Each specific insurance policy issued by K-Sure does not benefit from government support, but the Korean Government is legally obligated to provide financial support to Trade Insurance Fund for the payment of insurance proceeds through allocation of government budget. For this reason, we understand that the risk weight of credit exposure to the borrower covered by K-Sure insurance is treated as the risk weight of credit exposure to the Korean Government. Product: Medium and long term export credit insurance (buyer credit) Generally, in a ship finance transaction, the medium and long term export credit insurance (buyer credit, standard type) is used, which indemnifies the losses suffered by the policyholder (i.e., lender) in the event that the medium and long term loan that financed the export transaction becomes uncollectible. Generally, a K-Sure insurance policy (the K-Sure Insurance Policy ) consists of, (i) the general terms and conditions (the General Terms and Conditions ), (ii) the drawdown and repayment schedule and (iii) the special agreement. The K-Sure Insurance Policy contains basic information such as the insured and the insurance amount, and most of the important terms and conditions are included in the General Terms and Conditions. The special agreement will be prepared on an ad-hoc basis to include terms and conditions that are specific to the relevant transaction. Furthermore, the terms and conditions set forth in the General Terms and Conditions can be excluded by the special agreement. The important point to note is that the K-Sure Insurance Policy is entered into by and between the lender as policyholder and beneficiary and K-Sure as insurer even though insurance premium is usually paid by the borrower. Generally, this means that the actions of the borrower do not affect the relationship between the lender as policyholder and K-Sure as insurer. It should be noted that in case of multiple lenders and in particular if certain intercreditor arrangement is in place, it is common practice that there is an appointment of a K-Sure Agent (who is appointed by the lenders to act on their behalf). The concept of the K-Sure Agent is contemplated for in the General Terms and Conditions, and the K-Sure Agent will be deemed by K-Sure to act for and on behalf of the lenders. Major terms of medium and long term export credit insurance (buyer credit, standard type) Governing law and jurisdiction K-Sure Insurance Policy is issued in Korean language, governed by the Korean law, and Seoul Central District Court has jurisdiction over any dispute between the policyholder and K-Sure. As 40

3 Figure 1: Export coverage by category (W trillion) YoY Growth (2008/2009) Export credit insurance usage rate (%) % Export coverage for major items (semiconductors, IT products, etc.) % Export coverage for SMEs % Export coverage for capital goods (plants, ships, etc.) % Source: K-Sure 2009 annual report Figure 2: Basic transaction structure Exporter Shipment Cash Buyer Buyer s cash payment made through the bank Cover loan Repayment Bank Buyer credit loan K-sure Source: K-Sure website the K-Sure Insurance Policy is similar in function to a guarantee but differ in details, it is very important to obtain legal advice from expert Korean lawyers in this field. Covered risks K-Sure Insurance Policy provides comprehensive cover for political and commercial risks. Political risks covered by K-Sure include (i) declaration of moratorium or debt restructuring by the borrower s country, (ii) political or economic events that results in a delay in payment, (iii) adoption legal or administrative measures by the borrower s country declaring payments made in local currency to be valid discharge of the debt at the date of the payments, (iv) force majeure events such as war, civil unrest, expropriation, rebellion, riot, strike, typhoon, flood, earthquake, eruption of volcanoes, tidal wave, nuclear accident, etc. occurring in the borrower s country, (v) any other measures by the borrower s country which restrict payment under the loan agreement; and (vi) any other events which take place outside of the Republic of Korea and are not attributable to the parties to the loan agreement. Commercial risks include (i) bankruptcy, debt restructuring of the borrower, (ii) court-ordered injunction or other measures preventing payment under the loan agreement, (iii) debt restructuring by the creditor groups of the borrower, and (iv) any payment default for more than two months in spite of the lender s exercise of due diligence and implementation of all necessary measures for the collection of the loan. Insurance payment K-Sure will indemnify the lender of the principal of the loan and the accrued interests thereon up to the scheduled payment date in the currency specified in the insurance policy. Generally, K-Sure makes insurance payments according to original repayment schedule of the loan rather than in a lump sum. The expenses reasonably required for collection are covered by K-Sure. Lender s obligations as policyholder As policyholder of K-Sure insurance, the lenders are required to perform certain obligations to keep the cover in effect. Before entering into the insurance contract with 41

4 K-Sure, the lenders are required to provide any information or documents which K-Sure requests as well as any information concerning any material facts which may cause losses to K-Sure. For example, if the lender has entered into any other insurance contract, or any security which covers the same risks covered by K-Sure insurance, then the lender shall give K-Sure a written notice thereof. Moreover, if the lender becomes aware that (i) any risk covered by K-Sure, (ii) any event that may damage the ability of the borrower or the party that furnished security to perform the obligations under the loan agreement, or (iii) an event of default under the loan agreement has occurred, the lender is required to give K-Sure a written notice. The lender is required to mitigate the losses by taking all necessary measures in good faith such as preserving the claim for all or part of the suffered losses to a third party and notify the result of such measures to K-Sure. The lender is required to take all necessary measures to collect the principal and interest under the loan agreement, compensation for losses, penalties, or other similar amounts, even after the policyholder has received the insurance proceeds, and notify the result of such measures to K-Sure. The policyholder may deliberate with K-Sure before taking any measures. However, if the borrower s bankruptcy proceeding has commenced or any other event that makes it impossible for the lender to collect the principal and interest has occurred, then the lender is not required to do so. The lenders are required to comply with the instructions by K-Sure to mitigate losses or to collect receivable. However, that this shall not be the case if the Policyholder has a legitimate reason for not complying with such requests. The lender is required to cooperate with K- Sure if K-Sure requests an investigation, report or submission of materials related to any matters pertaining to the insurance as well as the loan agreement, or if K-Sure intends to investigate relevant business records, documents, or other materials. Assuming that they have duly informed K-Sure (e.g., on the relevant event of default) and that they wish to waive the certain event of default, the lenders should deliberate (and justify) with K-Sure that the contemplated event of default waiver has been considered by taking into account all necessary measures in good faith that such would not incur additional losses (i.e., a type of reciprocal prevention or mitigation of losses). The K-Sure Insurance Policy contains a number of time-limits to be adhered to. As for all of the relevant time limits to follow, the adherence/compliance to the time limitations is at K-Sure s discretion. Generally, a reasonable interpretation of the time limits is typical rather than strict interpretation or time of the essence approach. Policy exclusion K-Sure may refuse to pay all or any part of the insurance proceeds, require refund of all or any part of the insurance proceeds which have already been paid, or terminate the insurance contract if (i) losses arise from events which occurred before K-Sure s insurance liability commences, (ii) the lender fails to perform the obligations stipulated in the loan agreement 2, (iii) the lender made substantial changes to the loan agreement or security without the prior written consent from K-Sure, (iv) violation of laws or regulations, (v) the lender fails to make notifications required under the insurance policy to K-Sure or makes misrepresentation to K-Sure, or (vi) the security specified in the insurance application or K- Sure required as a condition for underwriting are not offered or becomes legally invalid. It would be prudent for lenders to notify all proposed actions to K-Sure and to deliberate with K-Sure before actually exercising the relevant measures or their assigned rights. The reason for notification to and deliberation with K-Sure is so that the lenders adhere to their obligations to prevent or mitigate losses. Subrogation Once K-Sure has paid the insurance proceeds, K- Sure can be subrogated into all or any part of the rights of the lender. The lender is required to provide K-Sure with all the necessary cooperation. K-Sure may delegate the policyholder to exercise the rights that K-Sure has obtained by subrogation. Under the General Terms and Conditions, K-Sure may delegate the policyholder instructions related to exercise of its rights under the loan agreement which K-Sure has obtained through subrogation. Transfer and assignment If the lender wishes to transfer his/her rights to the insurance proceeds under the insurance policy or assign such rights as for security purposes, the lender is required to obtain prior written consent from K-Sure. Insurance application procedures In order to provide its cover, K-Sure requires insurance application to provide its cover. Additionally, in order to conclude the insurance 42

5 contract, K-Sure will require review of the draft loan agreement, the security documents (including, related payment guarantee), the relevant export contract and documentary evidence of the completion of the loan agreement, and, if necessary, will comment on the same for the purpose of their issuance of insurance. However, the review of the documents by K-Sure is for reference purposes only, and it will not assume any documentation risk. In other words, the rights and obligations of K-Sure will not be affected by its review of the documentation. Conclusions K-Sure, which enjoys full faith and credit of the Korean Government, provides the lenders with credit enhancement insurance at a reasonable price. Any importer of Korean ships to be built by a Korean shipyard should consider getting a K-Sure insurance for their financings in order to reduce the total cost for the financing, and the lenders should do the same so that they can reduce their risk exposure. However, to fully understand the nature of K- Sure insurance and protect your interest, it is very important to obtain legal advice from expert Korean lawyers in this field. Notes: A typical example would be the failure to advance the loan Authors: Soo Man Park, Partner Hi Sun Yoon, Partner Young Min Kim, Attorney Sang Jin Ahn, Attorney Kim & Chang Seyang Building 223 Naeja-dong Jongno-gu Seoul , Korea Tel: Fax: smpark@kimchang.com hsyoon@kimchang.com ymkim1@kimchang.com sjahn@kimchang.com Web: 43