Order on a Ship Financing Institute

Order on a Ship Financing Institute 1)

Pursuant to Section 5 and Section 14, Paragraph 2, of the Act on a Ship Financing Institute, cf. Statutory Order No. 646 of 18 May 2022, powers are delegated in accordance with Section 1, No. 5, of Statutory Order No. 44 of 19 January 2015 on the delegation of powers to the Danish Financial Supervisory Authority:

Chapter 1 Scope of Application and Definitions etc.

Section 1. This Order applies to a ship financing institute covered by the Act on a Ship Financing Institute.

Paragraph 2. Where this Order refers to rules in the Act on Financial Business or rules issued pursuant thereto, which apply mutatis mutandis to a ship financing institute, only general rules for financial businesses and special rules for credit institutions in the Act on Financial Business are understood, unless otherwise stated. Credit institutions respectively financial businesses in the Act on Financial Business or rules issued pursuant thereto shall thus be read in relation to this Order as a ship financing institute covered by the Act on a Ship Financing Institute.

Paragraph 3. Where this Order refers to the fact that rules in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, or acts adopted pursuant thereto, apply mutatis mutandis to a ship financing institute, the general rules for institutions and special rules for credit institutions are understood, unless otherwise stated. Credit institutions respectively institutions in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms or acts adopted pursuant thereto shall thus be read in relation to this Order as a ship financing institute covered by the Act on a Ship Financing Institute.

Paragraph 4. Where acts adopted by the European Commission pursuant to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions apply mutatis mutandis, the general rules for institutions and special rules for credit institutions are understood. Credit institutions respectively institutions in these acts shall thus be read as a ship financing institute covered by the Act on a Ship Financing Institute.

Paragraph 5. Mortgage bonds in the Act on Financial Business and in orders issued pursuant thereto shall in relation to this Order be read as cash bonds or ship credit bonds issued by a ship financing institute.

Paragraph 6. The rules in the Order on valuation of pledge and loans in ships as security for the issuance of covered bonds and ship credit bonds apply mutatis mutandis to a ship financing institute.

Section 2. Chapter 2 of the Act on Financial Business on definitions applies mutatis mutandis in this Order.

Paragraph 2. Article 4 and 5 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms on definitions applies mutatis mutandis in this Order.

Section 3. A ship financing institute may temporarily carry out other business to secure or wind down previously incurred exposures. The ship financing institute shall notify the Danish Financial Supervisory Authority thereof.

Section 4. A ship financing institute wishing to establish a branch or a subsidiary in a country other than Denmark must have the Danish Financial Supervisory Authority's permission for this. The Danish Financial Supervisory Authority does not grant permission if the Danish Financial Supervisory Authority assesses that there is reason to doubt that the ship financing institute's administrative structure and financial situation are sound as a basis for the intended establishment.

1. The Order contains provisions that implement parts of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013, OJ 2013, No. L 176, p. 1 (CRR) and parts of Directive (EU) 2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issuance of covered bonds and public supervision of covered bonds and amending Directives 2009/65/EC and 2014/59/EU, OJ 2019, No. L 328, p. 29.

Act Series A 2023 Published on 3 June 2023 1 June 2023. No. 668. Ministry of Industry, Business and Financial Affairs, Danish Financial Supervisory Authority, file no. 23-002253 CQ002584

Chapter 2 Good Conduct, Ownership and Management and Disclosure of Confidential Information etc.

Section 5. Sections 43-48 of the Act on Financial Business on good conduct, price information and contractual relations apply mutatis mutandis to a ship financing institute.

Section 6. Chapter 7 of the Act on Financial Business on ownership applies mutatis mutandis to a ship financing institute.

Section 7. Sections 64-80 c of the Act on Financial Business on management and organization of the business apply mutatis mutandis to a ship financing institute.

Section 8. Chapter 9 of the Act on Financial Business on disclosure of confidential information applies mutatis mutandis to a ship financing institute.

Section 9. Part 8 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms on institutions' disclosure obligations applies mutatis mutandis to a ship financing institute.

Chapter 3 Ship Credit Bonds – Collateral and Maturity

Section 10. This Chapter applies when a ship financing institute finances loans to ships by issuing ship credit bonds.

Section 11. A ship financing institute may only finance loans by issuing ship credit bonds against registered pledge rights in the financed ship within 70% of the value for which the ship is set for the purpose of providing security, cf. however Sections 12-13.

Paragraph 2. The pledge right may be temporarily waived for up to one year, provided that the borrower provides other security of particularly good credit quality, cf. Section 14. The one-year period may be extended in special cases.

Paragraph 3. A ship financing institute may also grant loans against registered pledge rights within 70% of the value set for the purpose of providing security in other ships than the one or those financed.

Paragraph 4. A ship financing institute must take comprehensive measures to ensure that loans throughout the loan term meet the institute's purpose determination, cf. Section 1 a, in the Act on a Ship Financing Institute.

Section 12. A ship financing institute may only grant loans beyond 70%, but within 100% of the value of the financed ship or the financed ships set for the purpose of providing security, provided that other security is provided for this part of the loan cf. Section 14, Paragraph 1, Nos. 1-5, and that the institute's solvency is additionally burdened, cf. Section 20, Paragraph 4.

Paragraph 2. For loans granted against registered pledge rights in other ships than the one or those financed beyond 70%, but within 100% of the value of the pledged ship or the pledged ships set for the purpose of providing security, Paragraph 1 applies mutatis mutandis.

Section 13. Notwithstanding Sections 11-12, a ship financing institute may grant construction loans for the financing of new or reconstructed ships, which are granted without pledge in the ship, provided that the securities referred to in Paragraphs 2 and 3 are provided. The solvency treatment thereof follows from Section 21, Paragraph 3. If a ship financing institute is to grant construction loans, this can only be done with a requirement for financing of the completed ship.

Paragraph 2. For loans covered by Paragraph 1, assignment and right of entry in the construction contract must be given after careful examination and prudent assessment of the agreement basis in each individual case, and assignment in the security for payments under the construction contract must be given, cf. Paragraph 3. The securities mentioned in the first sentence must be valid until the ship is completed, delivered and duly approved and until the construction loan is paid off.

Paragraph 3. For loans covered by Paragraph 1, security of particularly good credit quality must be provided by the borrower for payments under the construction contract, cf. Section 14, or security covered by Article 129, Paragraph 1, points (a)-(c), and Article 129, Paragraph 1a, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

Section 14. The following may only be used as security of particularly good credit quality:

1. Deposits in or guarantees from central banks with credit quality step 2 or better, cf. Article 114, Paragraph 2, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

2. Guarantees from central governments with credit quality step 2 or better, cf. Article 114, Paragraph 2, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

3. Guarantees from regional or local authorities with credit quality step 2 or better, cf. Article 114, Paragraph 2, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, which meet Article 115, Paragraph 2 or 4, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

4. Bonds and debt instruments issued or guaranteed by central governments with credit quality step 2 or better, cf. Article 114, Paragraph 2, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, within 90% of the security's officially quoted market value.

5. Bonds and debt instruments within 90% of the security's officially quoted market value, issued or guaranteed by regional or local authorities with credit quality step 2 or better, cf. Article 114, Paragraph 2, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and which meet Article 115, Paragraph 2 or 4, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

6. Covered bonds, special covered mortgage bonds, mortgage bonds and other bonds offering equivalent security, issued by a credit institution that has been granted permission in a country within the European Union or a country with which the Community has concluded an agreement in the financial sector, within 90% of the security's officially quoted market value. Securities that are subordinated to other claims cannot be used.

7. Cash bonds, ship credit bonds or covered bonds issued by a ship financing institute or by a credit institution that is a parent or subsidiary of a ship financing institute.

8. Guarantee issued or deposit in a credit institution that qualifies for credit quality step 2 or better, cf. Article 129, Paragraph 1, points (a)-(c), and Article 129, Paragraph 1a, last paragraph, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, after careful examination and prudent assessment in each individual case.

9. Similar security with a corresponding particularly high liquidity and a corresponding particularly low counterparty risk. This includes guarantees issued or deposits in credit institutions that have been granted permission in the USA and have obtained the best or second-best rating from an ECAI, cf. Article 4, Paragraph 1, No. 98 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. Also included are particularly liquid bonds issued by such institutions and listed for trading on a regulated market approved by a competent authority, within 90% of the security's officially quoted market value. Deposits and securities that are subordinated to other claims cannot be used.

Paragraph 2. The securities referred to in Paragraph 1, No. 9, may collectively for the institute be included for a maximum amount equal to 25% of the capital base, cf. Article 72 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, cf. Section 22, Paragraph 1.

Section 15. The maturity of the loans a ship financing institute grants must not exceed 15 years from the date of disbursement of the loan. The setting of the loan term must take into account the average lifespan of the ship type and the specific ship's age and condition etc.

Paragraph 2. For construction loans, the maturity may not exceed four years calculated from the time of the first disbursement.

Paragraph 3. The size of the loan must be set with regard to the security considerations deemed necessary under the circumstances, including an assessment of the expected depreciation of the collateral.

Chapter 4 Covered Bonds - Collateral

Section 16. A ship financing institute may finance loans by issuing covered bonds against security in the asset types listed in Article 129, Paragraph 1, points (a)-(c) and (g), and Paragraph 2, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, cf. Section 2 d, Paragraph 1, first sentence, in the Act on a Ship Financing Institute. This must be done within the exposure limits in Section 129, Paragraph 1a. Section 11, Paragraphs 2 and 4, apply mutatis mutandis.

Paragraph 2. A ship financing institute may not use covered bonds to grant construction loans for the financing of new or reconstructed ships.

Section 17. A ship financing institute granting loans financed by the issuance of covered bonds against security that exceeds 60%, but is within 100% of the value of the financed ship or the financed ships set for the purpose of providing security, may only be granted provided that the ship financing institute provides security for this part of the loan in the asset types listed in Article 129, Paragraph 1, points (a)-(c) and (g), in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, cf. Section 2 d, Paragraph 1, first sentence, in the Act on a Ship Financing Institute. This must be done within the exposure limits in Section 129, Paragraph 1a.

Paragraph 2. The ship financing institute must include the part of the loan granted between 60 and 70% in the determination of the institute's solvency requirements. For the part of the loan granted beyond 70%, the institute must additionally burden the institute's solvency, cf. Section 20, Paragraph 4.

Chapter 5 Fleet Mortgage

Section 18. A fleet mortgage exists if a borrower provides security for a loan in the form of registered pledge rights in more than one ship, or if several borrowers provide security for one or more loans in the form of registered pledge rights in more than one ship. To the fleet mortgage are included any other asset types than registered pledge in ships that the borrower can provide as security for the loan.

Paragraph 2. A ship financing institute may allocate a fleet mortgage accounting-wise among several capital centers, cf. Section 44, provided the following is agreed in the loan agreements:

1. cross-collateralization, such that all borrowers are liable for all loans covered by the fleet mortgage,
2. cross-default, such that all loans covered by the fleet mortgage fall due if one of the loans is defaulted,
3. cross-pledge, such that all ships covered by the fleet mortgage are provided as security for all loans covered by the fleet mortgage, and
4. the borrower undertakes not to provide security for other loans in the ship or ships covered by the fleet mortgage (negative pledge clause).

Section 19. In the calculation of whether loan limits, cf. Section 11, Paragraph 1, and Section 5 in the Order on valuation of pledge and loans in ships as security for the issuance of covered bonds, are met at the time of establishment and expansion of a loan secured by a fleet mortgage, the ship financing institute may, while observing Section 18, Paragraph 2, Nos. 1-4, perform the calculation by comparing the total value of all ships included in the relevant fleet mortgage with the total value of all loans for which the fleet mortgage is provided as security. In the calculation, only pledge rights that are registered, cf. Section 2 d, Paragraph 1, second sentence, in the Act on a Ship Financing Institute, may be included.

Chapter 6 Capital Conditions and Solvency

Section 20. The capital base in a ship financing institute must meet the requirements in Article 92 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms. The capital base requirement in Article 92, Paragraph 1, point (c), in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms must be met both in the individual capital centers and in the institute otherwise.

Paragraph 2. Section 124, Paragraphs 1-5 and 7, of the Act on Financial Business applies mutatis mutandis to a ship financing institute.

Paragraph 3. The Danish Financial Supervisory Authority may set requirements for which type of capital can be used to meet the individual solvency requirement cf. Section 124, Paragraph 3 in the Act on Financial Business.

Paragraph 4. In cases where the institute's solvency is additionally burdened, the institute must ensure that lending is deducted from the core capital in the capital centers or in the institute otherwise in the solvency calculation. If the loan's remaining debt minus security is calculated at realization value less than the additional burden plus write-down, the deduction mentioned in the first sentence may be reduced by the difference.

Paragraph 5. The solvency over-coverage is the share of core capital that exceeds the requirement for the capital base, cf. Paragraph 1 and Section 124, Paragraph 3 in the Act on Financial Business, after deduction, cf. Paragraph 4.

Section 21. Section 125 a-h, Section 128, Paragraphs 3 and 4, and Sections 140-143 a in the Act on Financial Business and Parts 2 and 3 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms on respectively capital base and capital requirements apply mutatis mutandis to a ship financing institute.

Paragraph 2. A capital center may take up hybrid core capital and subordinated loan capital.

Paragraph 3. Construction loans covered by Section 13, Paragraph 1, are included in the calculation of capital base and risk-weighted exposures with a risk weight of 200%, to the extent that the ship financing institute's refinancing of the construction loan is covered by Section 11, Paragraph 1 or 2. The sum of construction loans after the first sentence must not exceed 125% of the solvency over-coverage, cf. Section 20, Paragraph 5.

Paragraph 4. The Ministry of Industry, Business and Financial Affairs may, upon application, exempt from the buffer rate in Section 125 f in the Act on Financial Business and set a new countercyclical buffer rate for a ship financing institute, if deemed necessary due to the ship financing institute's special business model.

Paragraph 5. In the calculation of the secured part of a defaulted exposure, cf. Article 47c in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, the secured part also includes the part of the exposure that is fully and completely secured by pledge in ships, if the following is met:

a) The ship's value does not depend to a significant extent on the borrower's credit quality. When institutions in this connection must determine whether there is significant dependence, they may disregard situations where purely macroeconomic factors affect both the ship's value and the borrower's ability to pay.

b) The requirements in Article 208 and the valuation rules in Article 229, Paragraph 1, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms are met.

Chapter 7 Gearing

Section 22. Part 7 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms on gearing applies mutatis mutandis to a ship financing institute.

Chapter 8 Placement of Funds, Liquidity and Group Rules etc.

Section 23. The Board of Directors in a ship financing institute must set rules for the institute's risk diversification, including rules for monitoring and control of the institute's large exposures.

Paragraph 2. Article 389-394 and Part 5 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms on respectively large exposures and exposures to transferred credit risk apply mutatis mutandis to a ship financing institute.

Paragraph 3. If an exposure exceeds the set limit in Article 395, Paragraph 1, in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, the institute must immediately notify the Danish Financial Supervisory Authority of the size of the exposure upon the exceedance.

Section 24. Sections 146 and 147 a in the Act on Financial Business and Part 6 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms on liquidity apply mutatis mutandis to a ship financing institute.

Paragraph 2. Section 153 in the Act on Financial Business applies mutatis mutandis to a ship financing institute covered by this Order.

Section 25. A ship financing institute's lending must be based on the issuance of bonds, lending of the ship financing institute's capital base, and borrowing on money and capital markets.

Section 26. Article 6-24 in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and Chapter 12 in the Act on Financial Business on group rules, consolidation etc. apply mutatis mutandis to a ship financing institute.

Chapter 9 Ships Registered Outside the Union

Section 27. The Danish Financial Supervisory Authority may allow a ship financing institute to grant loans secured by pledge in ships registered outside the Union provided that Sections 28-30 are met.

Paragraph 2. Permission under Paragraph 1 must not result in reduced protection for bondholders.

Section 28. A ship financing institute must ensure that the loan:

a) constitutes a legally valid payment claim that can be enforced according to its wording if the debtor defaults on the claim, whereby the payment claim falls due for payment immediately or at a later time,

b) has a principal (including interest) that can be set at any time, and

c) is secured by registered pledge in a ship that meets Section 29.

Section 29. A ship financing institute must ensure that registered pledge in a ship securing the loan:

1. constitutes a legally valid pledge right that can be realized through legal enforcement, and

2. enables the ship financing institute to collect the value of the payment claim through enforcement of the pledge right without undue delay.

Section 30. A ship financing institute must ensure:

1. sufficient monitoring of the ship's market value, and

2. that the ship is sufficiently insured against damage.

Chapter 10 Accounting and Audit

Section 31. Chapter