Alternative lenders have become increasingly prominent in shipping finance as traditional banks continue to retreat from the sector. For private equity (PE) investors engaged in direct lending secured by shipping assets, this expansion brings opportunity but also heightened exposure to enforcement scenarios. Unlike traditional lenders, who can rely on investment-grade borrowers, PE lenders often operate under fund life constraints and investor expectations that demand decisive action when borrowers encounter distress. The question is not whether enforcement rights exist, but whether they are structured to work effectively when called upon.

Taking control of cash flow 

When a borrower is in distress, every day is a day in which cash can leak from the structure. One of the priorities in a default scenario, often before any thought is given to the vessel itself, is to secure control of the cash flow.

A well-structured facility will require each borrower to maintain its accounts with an approved bank, free of third-party security and rights of set-off, with the agent holding electronic viewing rights over those accounts. Upon the occurrence of an event of default, the agent may instruct the account bank to make transfers from any account to facilitate amounts due under the facility and declare that no withdrawal may be made from any account. Where the lender also has co-signing rights over the accounts, or after service of an enforcement notice to the account bank, this control can be exercised with maximum speed and impact.

The practical significance is considerable. By freezing the borrower’s earnings accounts, the lender immediately takes control of operating expenditure payments, preventing leakage to related parties or unnecessary disbursements and potentially bringing the borrower to the negotiation table. Any undistributed earnings sitting in those accounts are effectively captured for the benefit of the secured creditors.

Equally important is the ability to redirect the source of income itself. Under an assignment of earnings, the borrower’s earnings, including all freight, hire, passage moneys, and other sums payable under any charter, are assigned to the security agent. Upon enforcement, notice can be served on the charterers directing them to make all future payments to the agent rather than to the borrower. This is a critical step: By intercepting the cash flow before it reaches the borrower’s estate, the lender avoids the risk of those funds becoming trapped in insolvency proceedings. Once notified, the charterer cannot discharge its payment obligation by paying the borrower.

Timing matters. These steps – serving the acceleration notice, freezing the accounts, and notifying the charterers – should ideally be coordinated and effected simultaneously on the same day. If the borrower is given advance warning that enforcement is imminent, cash sitting in the accounts may quickly disappear.

Location, location, location

With cash flow secured, another priority is the asset itself. The goal at this stage is to take control of the vessel without necessarily taking possession, a distinction that matters both legally and commercially.

As in real estate, the value of your security and the extent of value destruction consequential to enforcement will depend heavily on the jurisdiction in which it takes place. Some jurisdictions allow for a swift judicial auction or private sale in a matter of months. Others will leave you stranded for years, with costs accruing against the vessel – custody fees, port charges, crew wages, and insurance premiums – steadily eroding the recoverable value and depreciating the asset. The choice of arrest jurisdiction can quite literally be the difference between a successful enforcement and a significant haircut.

This is where contractual foresight pays dividends. The facility agreement should include an express right for the lender, upon an event of default, to direct the borrower, the approved manager, and the master to move the vessel to a specific port of the lender’s choosing. Complementary provisions, such as automatic identification system tracking requirements, war zone and excluded area restrictions, and sanctions compliance covenants, give the lender continuous visibility over the vessel’s position and the contractual tools to influence its trading patterns well before enforcement.

Depending on the loan-to-value ratio, directing the vessel to a favorable jurisdiction can go a long way toward ensuring a better outcome for both sides. Borrowers can sometimes be incentivized to cooperate, particularly if a lengthy and hostile arrest in an unfriendly jurisdiction would destroy more of their equity than a swift, orderly process in a more favorable forum where they can participate in the exit scenario. If the managers are arm’s length third parties, the manager’s undertaking should include an express obligation to cooperate with lenders’ directions during an enforcement event. Where the mortgage or deed of covenants grants the mortgagee a power to direct the vessel, this provides an additional contractual basis for repositioning.

Where banditry or non-cooperation by the borrower is expected, inspection rights can also provide a valuable preliminary step. A typical facility agreement will permit the agent or the security agent to board the vessel at all times when an event of default is suspected, to inspect its condition, and will require the borrower to afford all proper facilities for such inspections. This right, often overlooked in favor of more dramatic enforcement tools, can be used to place a lender’s representative on board the vessel, providing real-time intelligence on the crew situation, the physical condition of the asset, and the state of the borrower’s books. It is a quiet but effective tool to establish a presence and deter misconduct before a formal arrest takes place.

The share pledge: Top-down control 

Even with cash flow secured and the vessel positioned in a favorable jurisdiction, maritime arrest remains inherently unpredictable: it can be costly and slow, involve competing claims with varying degrees of priority, and be subject to the procedural idiosyncrasies of local courts. For lenders financing multiple vessels across separate borrower special purpose vehicles (SPVs), the share pledge over the holding company offers a fundamentally different enforcement path.

Where the facility structure contemplates a holding company owning 100% of each borrower SPV, with each borrower in turn owning a single vessel, the share charge creates a single enforcement point, allowing the lender to take control of the entire structure. The lender replaces the directors of each borrower SPV, and the new board has authority to direct the approved managers, control the earnings accounts, and position the vessels for an orderly sale or continue trading to maximize recoveries.

The advantages are significant: operational control within days, the borrower’s ability to dissipate assets substantially curtailed, and maximum flexibility to pursue a sale of the vessels, a sale of the shares, or continued trading as circumstances dictate.

A word of caution, however: By stepping into the shoes of the owner, the lender inherits the owner’s liabilities. Where those liabilities give rise to maritime liens ranking ahead of the mortgage, such as unpaid crew wages, this does not materially change the lender’s position, since those claims would rank in priority regardless. But other third-party liabilities of the borrower SPVs can become directly relevant when the lender takes ownership via the share pledge. This risk must be carefully assessed before enforcement, with thorough due diligence on the borrower’s outstanding obligations.

Throughout this process, the lender’s documentation is its most valuable asset. Rights that are not clearly articulated cannot be reliably enforced. PE lenders entering the shipping finance market should ensure their facility agreements contain the full suite of protections discussed above, and should engage counsel with specialist maritime experience to stress-test the documentation before it is signed.