Khurram Ali
khurram.ali@stephensonharwood.com

Khurram is an English-qualified Partner at Stephenson Harwood with specialist knowledge in the KSA, the UAE, and UK markets. He focuses on dispute resolution in the maritime, transportation, oil & gas, international trade and ports/terminal sectors, as well as general commercial litigation.

With over 20 years’ experience, Khurram advises shipping businesses on disputes involving debt recovery, charterparties, commodities contracts, COA issues, ship arrests, groundings, collisions, and cargo claims. He manages disputes in the KSA Courts, the High Court in London and Courts throughout the UAE, and represents clients before arbitral bodies including LMAA, ICC, LCIA, DIAC and AAA.

In addition to contentious work, Khurram handles transactional matters, drafts and negotiates maritime contracts, and advises on port/terminal agreements. Khurram also supports international businesses with foreign direct investment in the KSA, making him a trusted advisor for Saudi market entry.

Chinar Zaidi
Managing Associate

Chinar is a Managing Associate at Stephenson Harwood with a particular focus on ship finance.

She regularly advises clients on cross-border conventional and Shariah compliant financings of maritime assets. She provides advice to major national and international lenders, financial institutions, ship owners, lessors and operators worldwide, focussing on cross border maritime financing structures, vessel sale and purchase transactions and ship building contracts.

She collaborates extensively with the firm’s global finance teams in London, Singapore, and Paris, contributing to significant international projects and advancing the firm’s Middle East practice.

Chinar is ranked as a “Leading Associate” in the shipping category of the Legal 500 EMEA 2024 Guide, UAE and is also recognised as a “Recommended Lawyer” for Banking and Finance: Corporate Finance (Including Islamic Lending). She is committed to developing the maritime sector and is an active member of the Women’s International Shipping and Trading Association (WISTA UAE).

International Shipping Finance & Law Review

Introduction

Saudi Arabia’s ambitious Vision 2030 has placed strong emphasis on the growth of the maritime and logistics sector, recognising its importance in the country’s broader vision. It is expected that this sector will contribute significantly to Saudi Arabia’s growing non-oil economy as part of Saudi Arabia’s economic diversification initiative. Saudi Arabia seeks to take advantage of its strategic geographical location on the world map and is investing in the maritime sector to reduce reliance on traditional trade routes and position itself as a leading global logistics hub.

Saudi Arabia has also committed to achieving net zero emissions by 2060. Therefore, the country is expected to not only focus on growing the maritime and logistics sector but also to ensure that such growth and development ties in with its environmental strategy. Shipping companies in Saudi Arabia are likely to align their operations with the country’s climate change related goals.

Modernising its shipping fleet, developing and expanding its port infrastructure and logistics facilities in an environmentally sustainable manner will require financing to aid such expansion which includes government investment, lending, leasing and private equity.

This article explores the current landscape of ship finance in Saudi Arabia, some of the common transaction structures and the enforcement of security interests.

Sources of ship finance in Saudi Arabia

A ship owner requires financing for different purposes – to buy a new build or a second hand vessel, to be able to repair or maintain the vessel, to make alterations to the vessel so that the vessel may be aligned with the evolving environmental standards such as installing scrubbers and alternative fuel technologies, or to refinance existing debt.

In general terms, a ship finance transaction is that a financier advances money to a shipowner to assist the owner to be able to carry out the activities mentioned above.

Given the international nature of shipping, it is common for ship owners to obtain finance from all over the world which would include banks from the same country as the ship owners (for example a Saudi-based bank lending to a Saudi-based borrower) but also financiers based in a different country lending to Saudi-based shipping companies.

There are many sources of ship finance that are available to ship owners in the region and sometimes the source of the funds also determines the structure of the transaction. For example, if it is an Islamic bank that is lending, the facility would be structured in a Shariah compliant manner and if it is a leasing house that advances the financing, the financing would be structured as a lease or an Ijara. We will discuss common structures in shipping finance later in the article.

The sources of ship finance in Saudi Arabia have traditionally been commercial banks, both local and international offering a mix of conventional and Shariah compliant finance structures. In the past few years, the market has seen the entry of non-bank lenders such as funds and the sources of finance for ship owners in the region has diversified. In addition to financiers, the region has also seen an uptick in the issuance in bonds, joint ventures and equity transactions with the government also investing in acquiring many shipping companies to support the industry. This has given ship owners a variety of sources of capital – not just different banks or financial institutions but also different structures to be able to select the one that fits best with their business requirements.

Flagging and the role of the ship registry

Before we discuss the common structures in ship finance and the different types of security usually sought by a lender, it is necessary to consider the importance of the ship registry in a ship finance transaction and the current rules around flagging a vessel with the Saudi flag.

For a vessel to be flagged in Saudi Arabia, it has to be owned by a company incorporated in Saudi Arabia with at least 51% Saudi shareholding in the company. The law also states that no vessels other than Saudi flagged vessels may engage in activities related to towage or pilotage or to offer services in the maritime zones of the country and may not engage in costal transportation between the ports in the country unless specifically permitted to do so by the authorities. However, there is currently an exception in place where the Saudi authorities are allowing foreign flagged vessels to operate in Saudi waters until 09 January 2027. This is the second such exemption that has been granted by the authorities (the previous one expired in 2024). It remains to be seen if a further exemption will be granted beyond 09 January 2027.

A flag is very important in the context of a vessel financing transaction because the governing law of the vessel mortgage is the law of the flag of the vessel. The mortgage is then registered with the ship registry of the flag state and therefore it plays a significant role in any ship financing. A financier will always want to ensure that the owner of the vessel is correctly identified and registered with the ship registry and the ship registry keeps an accurate record of the mortgages and registers the financier’s mortgage so that the mortgage is perfected and enforceable against third parties.

Common structures in ship finance

We will now discuss some of the common structures in ship finance transactions.

(1)Commercial Banks and conventional credit facilities the majority of ship related lending is still carried out by large commercial banks that lend by way of conventional term loans or revolving credit facilities. The loan agreements are usually based on the Loan Market Association (LMA) form of loan agreement and in its simplest form the loan would be made available to the borrower to finance the purchase of a vessel and would be repayable in instalments over a period of time. Under a revolving credit facility, the borrower can re-borrow the funds they have repaid up to the maximum amount of the facility until the facility comes to an end.

Depending on the size of the facility, the facility may have a single bank as the lender (a bilateral facility) or multiple banks as lenders (a syndication) lending to the borrower under the same facility. These loans are typically secured by way of a first priority mortgage over the vessel, an assignment of the insurances, the earnings (and possibly including a specific assignment of any long term charterparties) of the vessel and requisition compensation in relation of the vessel, a corporate guarantee and indemnity (usually by the parent company of the ship owning company) or a personal guarantee, an undertaking from the manager of the vessel, a promissory note, a charge over the shares of the borrower or the vessel owning company and an accounts charge in relation to the accounts where the vessel’s earnings are deposited. This list is not exhaustive and there are various factors that determine the security a financier may request from a borrower as a condition to advancing the funds. The governing law of such loans and security documents is typically English law with English courts or arbitration is commonly seen as the forum to settle disputes arising out of such agreements but if the financing is being provided by a Saudi bank then the governing law and jurisdiction can also be Saudi.. However, the governing law of the mortgage follows the flag of the vessel and the vessel mortgage needs to be registered with the ship registry where the vessel is registered and flagged.

(2)Sale and leaseback In shipping, a sale and leaseback transaction is a transaction where a ship owner sells a vessel to another company (the lessor or the financier). The lessor then leases the vessel to the ship owner (who has complete possession and operational control over the vessel) for lease payments over the course of the lease period (by way of a bareboat charter). Usually, the ship owner has the right to purchase their vessel back from the financier at the end of the lease period. Comparing this structure to a conventional loan, the ship owner is the borrower and the lessor is the financier. The purchase price that the financier pays the ship owner for the vessel is equivalent to the loan under a conventional facility and the hire payments the ship owner makes under the lease is equivalent to the loan repayments (and interest) under a conventional facility. The financier does not have a lot of involvement in the operations of the vessel but is the registered owner of the vessel.

Leasing allows shipping companies to improve their liquidity and gain access to an alternative source of capital which is not from a traditional bank. Sometimes the pricing in sale and leaseback transactions is more competitive than the pricing offered by traditional banks without some of the restrictive covenants typically imposed by banks. Leasing is beneficial for financiers as they are the owner of the vessel during the lease period and even if the lessee is unable to make hire payments, the lessor can terminate the lease and take possession of the vessel from the lessee. This is less expensive and easier than enforcing a vessel mortgage. The security for a sale and leaseback transaction is very similar to that described under the conventional facilities paragraph above with the exception of the vessel mortgage. The vessel mortgage is not required in such transactions as the financier is the owner of the vessel in the lease period. An important consideration under this structure would be that an international financier would need to set up a Saudi incorporated company with at least 51% Saudi shareholding if the vessel is to be flagged in Saudi Arabia.

(3) Shariah compliant structures Shariah compliant structures are those structures of finance that are aligned with the Islamic values and laws. Shariah prohibits the charging or paying of interest and engaging in uncertainty or speculation. Some of the common Shariah compliant financing structures seen in vessel financings are discussed below:

1. Ijara An Ijara is very similar to a sale and leaseback transaction described above. The ship owner transfers the asset to the financier with an undertaking to purchase the asset back from the financer at the end of the lease period. The ship owner leases the vessel from the financier in exchange for hire payments. The security given by the vessel owner to the financier under an Ijara lease is also very similar to that described in the sale and leaseback section of this article.
2. Murabaha In this structure, the financier purchases the vessel on behalf of the borrower. The financier then sells the vessel to the borrower at a higher price than what the financier paid to purchase the vessel. Therefore, there is no interest charged in this structure rather the financier’s profit is the mark up on the sale. The security given to the financiers in such transactions is also similar to conventional financing transactions and includes the vessel mortgage, deed of assignment of earnings, insurances etc. as described under the section on conventional financing.

Although there are various other structures of vessel financing which include bonds, Sukuks, joint ventures etc., we have limited this article to the most common financing structures. It is important to note that Sukuks are also increasingly being utilised as a means to finance vessels in Saudi Arabia.

Some additional considerations for lenders looking to finance Saudi flagged vessels are that:

(a) Under Saudi law, the payment of any type of interest is prohibited and upon enforcement any interest component of the loan may not be awarded by the court and the financier’s recovery may be limited to the principal amount of the loan, although interest (depending on how it is worded in the loan agreement) in certain circumstances may be recoverable but the loan agreement needs to be drafted carefully and even then there still remains the risk that it may not be awarded; and

(B) It is possible that upon enforcement, the courts in Saudi Arabia may not recognise any provisions relating to indemnity of costs, losses and liability and only direct costs, losses or liabilities maybe recognised.

We will now turn to the process of enforcement of security in Saudi Arabia.

Enforcement of security

A key element of any financing provided by a lender is to secure the loan that it has provided in the event of a default. In the context of ship finance, this is typically done by registering a mortgage (in addition to other forms of security discussed above) with the registry where the vessel is registered so that, in the worst case scenario, the lender can take possession of the vessel and sell it.

Traditionally in Saudi, a non-Saudi licensed lender was not able to register a mortgage on a vessel that was Saudi flagged. However, we have seen instances where a non-Saudi based bank was able to register the mortgage with the Saudi registry.

When it comes to enforcing the mortgage, Saudi law recognises a mortgage to be a priority debt but it ranks lower than certain other debts, such as for example judicial fees and expenses, crew claims, cargo claims etc. This means that all of these claims will need to be paid before the mortgagee’s interest takes priority.

In addition, as set out earlier, it is not unusual for Saudi banks to seek other types of security from the borrower such as corporate guarantees from the parent or a group company of the borrower and/or an irrevocable promissory note from the borrower, the parent or a group company and in some instances a personal irrevocable promissory from the ultimate beneficial owner of the borrower. This security can be enforced in the Saudi courts (and in the case of a promissory note, if it is issued in Saudi by a Saudi borrower) separately from the mortgage.

As Saudi Arabia is a signatory to the New York Convention, foreign arbitral awards (issued by a country that is also signatory to the New York Convention) are enforceable in Saudi, subject to reciprocity and the underlying award complying with Shariah principles and public policy. Saudi Courts may foreign judgments if the judgements are issued by countries with which Saudi has a bilateral treaty or in absence of a bilateral treaty, on the basis of reciprocity and if the judgment is not contrary to Shariah principles and public policy but this process is not straightforward compared to enforcing an award issued by state that is a signatory to the New York Convention.

Conclusion

As the maritime sector grows in Saudi Arabia, more capital may be required by ship owners to enable fleet modernization, infrastructure development, and the purchase of new vessels. There is a growing range of conventional, Shariah-compliant, and alternative structures for ship finance available to ship owners and operators in the country. With careful structuring and a clear understanding of the legal environment, lenders and borrowers can successfully navigate the opportunities and challenges of ship finance in Saudi Arabia’s dynamic market.