Basic information on ship chartering and its risk prevention

A ship chartering involves the lessor purchasing a ship from a shipbuilder based on the needs of the lessee, then leasing the ship to the lessee in instalments as the lessee pays the rent. Charterers will have fulfilled some or all of their contractual obligations upon expiration of the charter and will regain ownership of their vessels once the charter period has expired and the rent has been paid. Consequently, both parties can benefit from an outcome that is win-win for both parties, as the charterer can use the funds in instalments while addressing operational needs, and the financier will be able to receive a fairly generous profit return and more reliable security of claim.

Financing factors for shipping companies

As a sector, shipping involves a large investment and a high level of risk, with a low return on investment. Therefore, the financing for the purchase of ships is an important factor.

Ship quality risk

During the manufacturing process of a ship, quality risk refers to certain defects that are caused by the craftsmanship of the shipbuilder, negatively affecting the quality of the ship. It is common for ship charterers to refuse to lease new building ships or delay payments if there are quality problems with the ship, which creates risk for the shipowner. In order to avoid such a situation and reduce disputes and risks, both charterers should draft a charter contract in advance, in which they should explain their responsibility for the risks and ways of dealing with the defects of the newly-built ship, and specify who and how to pursue responsibility and recover compensation from the ship manufacturer, referred to as the right of claim.

Structural risks in the transaction process

The first direct consequence of market risk is the risk of debt servicing. Market risk in the shipping industry depends primarily on its operating cycle. If the market changes significantly during the execution of a project and falls sharply, a default clause during the charter period can effectively protect the lessor’s earnings, but when a default occurs, the lessee may have long since lost the ability to repurchase and repay. A minimum average operating rate can be derived from data analysis, but in practice, if the market changes significantly and the market deteriorates, then the average operating rate may be lower than that value. And the source of the Vessel chartering in Malaysia is not just the vessel’s own operations, but also the operating income of the group as a whole. 

So at this point, the risk of debt service will be borne by the ultimate guarantor, while also ensuring that rent is paid. The rental payments during the project construction process do not rely solely on the operating conditions and financial capacity of a single lessee; the listed company will adjust all internal earnings and the subsidiary will pay rent to the lessor in a uniform manner. Secondly, it is the residual value risk that is a direct factor causing the risk of eventual asset disposal, as the residual value risk is uncontrollable.