In June 2020, Klapton concluded the issuance of a Residual Value Guarantee Cover Note to a privately held ship owning entity. This briefing paper explains the bespoke nature of how the Cover was structured and has been drawn up as a means of assisting our partners, customers and readership in the understanding of the RVG product and its application in real asset investment proposals.
The Client Requirements
Klapton’s client in this case study is an experienced ship-owning entity which had created an investment fund with the objective of acquiring a number of second-hand dry bulk vessels. Investors into the fund were issued with Investment Notes, and the client wanted the means to ensure that the capital value of investments into the Fund were protected from potential falls in the value of acquired vessels.
The Fund identified its first acquisition target in Q3 2019, a 7-year old, 37,000 dwt dry bulk carrier and concluded the purchase shortly thereafter. The relatively young age of the ship and type was conducive in enabling Klapton’s specialist maritime function to carry out an assessment of its suitability for Surety Coverage. Once the vessel was confirmed, work commenced in earnest to agree on bespoke documentation relative to the Surety Cover instrument.
The Klapton Solution
Whilst the objective of the client was to procure investment protection cover, Klapton linked this requirement to the future value of the vessel. The mechanism by which any loss on investment is determined is by reference to a sale of the vessel at various anniversaries of the purchase date. Klapton provides a guaranteed future residual (floor) value for the vessel at these dates and will cover the difference should the eventual achieved sale price be lower than the guaranteed residual value at each of the future dates. Certain deductibles from the guaranteed floor price were agreed as part of the amount covered, such as profit levels generated by the vessel,
The Guarantee Instrument
The insurance cover was documented as an Investment Protection Guarantee, whilst being governed by an underlying Residual Value Guarantee. This mechanism and linkage between an actual sale price, underpinned by a Klapton guaranteed floor price, achieved the client’s objective of a forward-looking capital protection instrument.
Premium Funding Flexibility
Given the larger ticket scale of the maritime sector, Klapton also provided a funding solution for the client in terms of the premium payable for the policy. As opposed to a significant initial outlay, the client was only required to pay a fraction of the premium and other associated fees upfront, with the remainder payable over the period of the Guarantee.
The transaction involved significant cross border legal input given the various jurisdictions governing the Fund; the Client; the vessel SPV; and Klapton itself. This required particular skill and expertise to ensure compliance with each jurisdiction’s requirements and proper registration of interests with the relevant authorities.
Klapton Maritime Expertise
The conclusion of this important transaction in Klapton’s evolution vindicates our investment in the specialist area of marine finance. Klapton’s Maritime Sureties Committee includes combined experience of over 40 years in the ship finance space; and coupled with our partnership with leading risk management firm, Marsoft, provides a strong platform to provide investors in this sector with a number of maritime related risk management solutions.