OAL CVFF BRIEFING: What Shipowners Need In Place Before They Apply

Our last two issues (Issue 1 and Issue 2) set out what the CVFF is and why it treats vessel arrest as a last resort rather than the first point of response, learning from the failure of the Ship Acquisition and Ship Building Fund. This issue is about what an applicant needs to have in place before approaching a Primary Lending Institution. Eligibility is only the starting point. What separates an application that passes the credit committee from one that fails is whether the underlying business the vessel will be engaged in is genuinely bankable.

Here is what shipowners need to have in place before applying for CVFF.

Ownership of the applicant matters

Only Nigerian citizens and shipping companies wholly owned by Nigerians will qualify as eligible beneficiaries under the CVFF. This is not a box-ticking exercise. Prospective applicants must therefore be ready to disclose their ownership structures, shareholder details and corporate filings needed to establish that they meet the applicable ownership requirements. The Primary Lending Institutions will assess the application before it is forwarded to NIMASA, which will separately review the applicant’s eligibility and compliance with the Cabotage regime. Any uncertainty about the ownership structure or the documentation supporting it should therefore be resolved before the application is submitted, rather than during the credit review.

The feasibility report

Every applicant must submit a bankable feasibility report, which is subject to independent verification by both the lending bank and NIMASA. In practice, this is often where applications lose momentum, not because the paperwork is missing, but because the cash flow assumptions behind it do not hold up to scrutiny. A feasibility report built on optimistic freight rates or an assumed charter that does not yet exist will struggle under independent verification. A feasibility report supported by a genuine, identifiable revenue stream; an existing charter contract; a verifiable cargo contract; or credible evidence of spot-market demand for the vessel type in question gives the PLI something concrete against which to test the projections.

A common reason an otherwise eligible applicant fails is a feasibility report that assumes a charter rather than evidencing one.

What is the PLI actually assessing?

The Primary Lending Institution is assessing whether the proposed project is capable of being financed and repaid. That means looking at the borrower, the project, the vessel and the security supporting the facility. Understanding what sits behind each of these areas helps an applicant prepare a stronger file before submission, rather than responding to queries after the fact.

The borrower’s contribution matters

The CVFF financing structure requires the applicant to contribute at least 15 percent of the Project Amount as its contribution. The PLI Fund Financing Agreement with NIMASA also requires the PLI to contribute at least 15 percent of the Project Amount, while NIMASA’s contribution is subject to a maximum of US$25 million or 70 percent of the Project Amount, whichever is lower.

For an applicant, the important point is that the 15 percent is a minimum requirement, not necessarily the amount that will be sufficient for every transaction. The PLI will still assess the applicant’s financial capacity, the project, the vessel and the overall risk of the transaction before determining whether the proposed financing structure is acceptable.

Applicants should therefore be prepared to demonstrate not only that they can provide the required contribution, but also that they have sufficient financial capacity to meet the other costs and obligations associated with the project. The Fund Financing Agreement requires evidence of the Borrower’s Contribution, and before disbursement, evidence that the contribution has been deposited into the borrower’s account maintained with the PLI.

Before you submit

A short, practical checklist for applicants preparing to approach a Primary Lending Institution:

• Confirm that your ownership structure and supporting corporate documents are in order and that you can establish your eligibility under the applicable Cabotage requirements.
• Have your financial information ready, including the most recent audited IFRS financial statements and the other financial information the PLI requires to assess your creditworthiness and cash flow.
• Prepare a bankable feasibility report that is supported by credible assumptions about how the vessel will generate income and repay the facility.
• Have the vessel’s technical, ownership and valuation documents ready, together with the regulatory and insurance documentation required for the transaction.
• Be prepared to demonstrate your required contribution of at least 15 percent of the Project Amount, and your capacity to meet the other costs and obligations associated with the project.
• Make sure the proposed security package can be properly perfected, including the mortgage, insurance and other security required by the PLI.

The more of these requirements an applicant has in place before submitting an application, the less likely it is that the application will fail over issues that could have been resolved at the outset.

In our next issue, we turn to the security package itself: the mortgage, the deed of covenant, the earnings assignment and why a Primary Lending Institution asks for more than just the ship mortgage.