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U.S. Private Placements: Secured Notes for Vessel Owners

Simply Speaking
November 30, 2022


In recent years, one of the emerging financing methods for public and private vessel owners has been private placements of debt securities, wherein a company usually owning multiple vessels will sell securities to a select group of qualified investors. In the maritime sector, these securities tend to take the form of notes, with a fixed rate of return over a fixed period of time, and have presented owners with another option for raising capital when access to traditional public markets or bank debt is not available.

What is a Private Placement?

In a private placement, a company, the “issuer”, issues securities to a group of limited number of qualified investors. These “securities”, though similar to traditional bank debt in many ways, require compliance with applicable securities laws. In the United States, private placements are generally subject to an exemption from registration under federal securities laws, provided the investors which are purchasing the securities are “accredited investors”. Accredited investors include high net worth households or individuals, qualified institutional buyers (“QIBs”) with more than $100 million in investable capital, trusts with assets in excess of $5,000,000 and any entity in which all equity owners are accredited investors. Common accredited investors include insurance companies or hedge funds or other asset managers. In the documentation relating to private placements, investors typically are required to make certain representations regarding their status as “accredited investors” for purposes of the Securities Act, as well as their source of funds.

While “private placements” refer to the private offering and sale of any securities, in the maritime sector, these tend to be in the form of secured notes or bonds which are issued by one or more issuers (i.e. a holding company or vessel owners themselves). The issuers issue the notes, and as collateral for the issuers’ performance under the Note Purchase Agreement, they grant mortgages and other security interests in property relating to their vessels, including assignments of each owner’s rights to a vessel’s earnings, any insurance proceeds, and any charter contracts.


In the typical private placement, secured notes are sold pursuant to a note purchase agreement or similar document, which is entered into between the issuer and the purchasers, and where applicable, any entities guaranteeing the issuer’s performance (including subsidiary vessel owners). The securities themselves can have a fixed rate or floating rate of return (i.e., are keyed to a benchmark such as Term-SOFR), can be short term or long term (i.e. are due in less than 5 years or more than 20 years), or can be issued in one or more series, with each series of notes having its own interest rate and tenor.

Similar to secured loan agreements, note purchase agreements can have restrictive covenants (including limitations on paying dividends, incurring other indebtedness, merging or consolidating and selling assets), financial covenants (including liquidity and total equity minimum requirements), mandatory prepayment events, and events of default. Unlike in a typical secured loan agreement, however, upon the acceleration of the notes following the occurrence of an event of default or in the event of a voluntary or mandatory prepayment, the holders of the notes are entitled to a “make-whole amount”. The “make-whole amount” is equal to the present value of the interest that would have accrued on the notes through their originally stated maturity if not prepaid, using a discount factor, referred to as the “reinvestment yield,” equal to the treasury rate corresponding to the remaining maturity of the notes (plus, typically, 25 or 50 basis points). As expected, the purpose of the make-whole is to make the investors whole on their investment, giving them their anticipated returns.

Other key documents involved in a private placement of secured notes can include (1) a security trust deed, whereby the investors appoint a third-party security trustee to hold the collateral on their behalf, (2) a paying agency agreement, between the issuer and the paying agent who receives payments from the issuer and makes subsequent payments to each investor which are due under the note purchase agreement, and (3) collateral documents (including vessel mortgages and other security agreements). Similar to a traditional secured loan for a vessel financing, conditions precedent to closing typically include the production of legal opinions, vessel documents (including trading certificates and evidence of registration and no liens), and corporate approvals.


The attorneys on the Seward & Kissel Maritime Practice Team have extensive experience in negotiating and documenting private placements of debt securities. If there are any questions regarding private placements of or the differences between debt private placements and other debt financing structures, please contact any attorney on the Seward & Kissel Maritime Practice Team.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


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