Shipping Lawyer Ship Finance and Maritime Mortgages 1 — Questions and Answers
Question 1: Under U.S. law, what statute governs the creation and enforcement of preferred ship mortgages?
- Jones Act
- Ship Mortgage Act of 1920 (now codified in 46 U.S.C. Chapter 313) (Correct answer)
- Maritime Lien Act
- Merchant Marine Act of 1936
Correct answer: Ship Mortgage Act of 1920 (now codified in 46 U.S.C. Chapter 313)
The Ship Mortgage Act, now codified in Chapter 313 of Title 46 U.S.C., governs preferred ship mortgages on U.S.-documented vessels and their enforcement in admiralty.
Question 2: What is a 'preferred ship mortgage' and what priority does it hold over other liens?
- Any ship mortgage regardless of recording
- A ship mortgage that is duly recorded and preferred over all maritime liens except seamen's wages, salvage, and tort liens (Correct answer)
- A government-guaranteed vessel loan
- A mortgage on a U.S.-flagged vessel with Coast Guard priority
Correct answer: A ship mortgage that is duly recorded and preferred over all maritime liens except seamen's wages, salvage, and tort liens
A preferred ship mortgage is one recorded with the U.S. Coast Guard that has priority over all maritime liens except crew wages, general average, salvage, and maritime torts.
Question 3: What is a 'flag state' and why does it matter for ship financing?
- The country where the vessel is operated commercially
- The country of registration that determines the vessel's legal identity and which laws govern its mortgage (Correct answer)
- The country of the mortgagee bank
- The country of the vessel's owner
Correct answer: The country of registration that determines the vessel's legal identity and which laws govern its mortgage
The flag state is the country in whose ship register the vessel is enrolled; it determines which country's laws govern registration, mortgage validity, and crew requirements.
Question 4: What is a 'bareboat charter registry' (BIR) and how does it affect ship mortgages?
- A secondary registry for time-chartered vessels
- A registry allowing a vessel registered in one country to operate under another flag for charter purposes (Correct answer)
- A crew registry for bare boat operators
- A tax classification registry
Correct answer: A registry allowing a vessel registered in one country to operate under another flag for charter purposes
A bareboat charter registry (also called a parallel registry) allows a vessel on bareboat charter to fly the flag of the charterer's country while the primary mortgage registry remains in the home state.
Question 5: What is 'assignment of earnings' in ship finance?
- Transfer of crew wages to the ship manager
- A lender's security interest in the vessel's freight earnings and charter hire payments (Correct answer)
- Distribution of profits to vessel shareholders
- Assignment of insurance proceeds before a loss
Correct answer: A lender's security interest in the vessel's freight earnings and charter hire payments
Assignment of earnings is a security arrangement giving the ship mortgagee a priority claim over freight revenues and charter hire payable to the vessel owner.
Question 6: What is a 'Loan to Value' (LTV) ratio in ship financing and what does it determine?
- The ratio of cargo value to freight costs
- The percentage of vessel value financed by debt, determining leverage and covenants in the loan agreement (Correct answer)
- The exchange rate applied to freight payments
- The ratio of insurance value to market value
Correct answer: The percentage of vessel value financed by debt, determining leverage and covenants in the loan agreement
LTV ratio measures the loan amount against the vessel's market value; lenders set LTV covenants (typically 60-70%) triggering mandatory repayment or additional collateral if exceeded.
Shipping Lawyer Ship Finance and Maritime Mortgages 1
Under U.S. law, what statute governs the creation and enforcement of preferred ship mortgages?